March 2008 quarter

The first three months of 2008 were one of the worst quarters for investors in decades, with many asset classes hurt by the global credit crunch. As a result, borrowing has become difficult and expensive and fears of slowing world economic growth emerged as the US teetered towards recession.

The fallout continues, too, with companies in Australia and abroad announcing losses as a result of the US sub-prime crisis. Even the $160 billion stimulus package from the US Government, along with the US Federal Reserve's interest rate cuts and attempts to prop up troubled investment bank Bear Sterns, did little to lift sliding confidence in international markets.

In Australia, the Reserve Bank's concern over rising inflation led to two interest rates rises, the last to 7.25%. Major banks raised their mortgage lending rates by more than this because the credit crunch has increased their funding costs. The fear now is that higher interest rates could dent economic activity and limit the profits of Australian listed companies.

Australian shares
The Australian share market suffered its fifth consecutive monthly fall in March and ended up having its worst quarter since the 1987 stock market crash. Australian shares were down 14.6% for the quarter and had fallen 21% from their highs in November last year.

Resource stocks (down 6.6%) fared far better than industrial stocks (down 17.5%) as they continued to benefit from solid demand from Asia and strong commodity prices. Some Australian companies, however, such as ABC Learning Centres, MFS and Allco Finance, were stung by the margin lending practices they had picked up during the boom years. These practices involve borrowing money to buy shares, which can be good when share prices rise (above the costs of borrowing), but not when share prices fall significantly, as was the case for these companies.

International shares
Taiwan's Taiex Index beat the world's biggest share markets in the first quarter of 2008. It was boosted by the prospect that the election of a pro-China president would help ease travel and investment restrictions with its fast growing neighbour.

But the Taiex was the only one of the world's 20 largest markets to rise in the March quarter and it rose by only 0.8%. The rest all fell. The MSCI World Index, a broad measure of shares around the world, posted its worst quarterly drop since the "tech-wreck" of 2002, losing 10% over the quarter. Europe's markets were off 16%, Asian shares by 12% and US shares by over 9%.

According to data compiled by Bloomberg, about $3.9 trillion in value had been erased from global share markets by the end of March.

Listed Property Trusts (LPTs)
LPTs have also been through a very difficult period since November 2007. After years of solid gains, investors began fleeing the sector after news broke that some companies had come unstuck because of their heavy borrowing practices. The global credit crunch, for example, made it much harder for a company like Centro to refinance its debts.

Investors started buying some of the LPTs again in March and they rose slightly by 0.4% during the month. However, they were still down 19.1% for the quarter and 24.2% for the financial year to end March.

Fixed interest and cash
Global fixed interest performed strongly over the quarter with a 5.5% gain. When hedged in Australian dollars, it was up 3.4%. In contrast, the 2.2% rise from Australian fixed interest was more modest, but still beat cash's gain of 1.8%.

Government bonds benefited from their status as a safe haven in times of stress. But non-government bonds, such as corporate bonds and asset backed securities, continued to struggle as the global liquidity crisis deepened. Jittery investors avoided them in favour of government bonds due to concern there could still be more losses to come from the US's sub-prime crisis and the credit crunch.