Stronger return to fundamentals
Australian equity markets followed suit with most other global markets, delivering a strong rally in January 2012. The S&P ASX 200 Index was up 5.08% for the month to finish at 4,262. International events and economic data were once again the key drivers for local market performance. Increasingly positive data coming out of the US, with unemployment there now at 3-year lows, and hopes that a negotiated write-down of Greek debt with private investors was close at hand, all drove equity markets higher during the month.

Looking further ahead to the rest of the year, Citi retains a bullish forecast on Australian equities, with a 2012 end of year forecast of 4,750 for the S&P ASX 200. While risks in Europe still remain, with the possibility of further volatility in the first quarter of the year, Citi believes there will be a stronger return to fundamentals in the second half of 2012, which will see Australian equities rally from their current low valuations.

Looking more broadly to the economy, a key focus remains the direction the Reserve Bank of Australia (RBA) will take with interest rates. In January, third quarter 2011 underlying inflation was revised up to 0.4% (from 0.3%) and the fourth quarter result was a shade above expectations of 0.5% (0.55%), leading to underlying inflation sitting just above the mid-point of the RBA's 2%-3% target (2.6%). However, the overall message is still one of a favourable inflation outlook that gives the Reserve scope to deliver a further modest reduction in the cash rate to 4% at some point during the year.

While a February rate cut was widely anticipated, it seems the Reserve Bank Board would rather wait and keep its powder dry given better news and further policy measures in Europe and the US.