2014 in review, 2015 preview

2014 in review, 2015 preview

Iron ore almost halved in 2014, but where will prices go in 2015?

The All Ordinaries did very little for the year, closing 2014 on 5,388 points, a rise of only 1.1% for the year. This comes after a 15% gain in 2013 for Australian stocks. In comparison, the global MSCI index excluding Australia grew by 3.3%.

Despite the lack of overall growth, 2014 has been a story of divergent fortunes for different industry sectors. The healthcare sector was the stand-out performer, growing by over 22% for the year. The telecommunications, utilities and industrial indexes also showed strong growth.

Despite some mixed results amongst the major banks, the financial sector pulled its weight, growing by over 5% for the year. Commonwealth was the best performer of the big four banks, adding 10% for the year, whereas NAB dropped nearly 4%.

Unsurprisingly, the biggest falls were recorded in resources stocks, as iron ore prices almost halved for the year, and oil slumped to below $70 a barrel. Despite rallying late in the year, energy stocks fell by more than 12% and materials fell by over 11%. FMG’s share price matched the fall in iron ore, finishing at $2.74, close to half of its starting value for the year.

The Australian Dollar pulled back against the greenback over 2014, falling 9% to buy 82 US cents at year’s end, and even flirting with parity against the Kiwi Dollar. In contrast, the Aussie appreciated against the Euro and the Japanese Yen for the year.

The Reserve Bank left interest rates at 2.5% for the entire year in response to sluggish employment growth. If this trend persists through 2015, the chances of rate cuts will rise considerably. Some banks are already pricing in rate cuts, taking the unusual step of setting their fixed rates lower than variable rates.

Another key consideration for the Australian share market will be how far commodities like iron ore and oil can fall in value, and for how long. In both cases, it appears to be a question of how long the major producers are willing to maintain higher supplies at lower prices.

Investors will also be closely observing how the US economy handles the end of quantitative easing, and the potential for interest rate rises starting as early as April. The success of China’s adjustment away from fixed-asset investment and towards consumption as a driver of growth will also have a significant bearing on the global and Australian economies. If you add in fresh concerns over the stability of the European Union, the global picture is looking more and more uncertain.

Kelly Pillay is the Managing Director of KLI and a representative of Australian Financial Services Licence: 452054. This information is based on historical performance which is often not a reliable indicator of future performance. You should not rely solely on this material to make investment decisions.