Investment commentary - 31 May 2010

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.


The month of May saw global equity markets generally suffer the biggest falls since the GFC in local currency terms.

European sovereign debt concerns were magnified in May, reflecting instability in the European banking sector and lack of confidence in the IMF/Eurozone bailout package. Global and domestic bonds yields fell as risk averse investors sought safer havens in May. Listed Property Trust returns fell for the first time since January.

Significant developments over the month were:

  • The Reserve Bank of Australia raised (for the sixth time in seven meetings) the official interest rate by 25bps to 4.50%. However the RBA commentary said that this hike would leave policy “well placed”.
  • Domestic economic data released over the month was mixed. Employment increased by 33,700, resulting in a steady unemployment rate of 5.4%. Consumer confidence (as measured by the Westpac-Melbourne Institute) slumped 7.0%% in May, its largest fall since October 2008, whilst housing finance commitments fell 3.8% in April reflecting the phasing down of the First Home Buyer Grant.
  • US economic data released was generally positive. April non-farm payrolls posted the biggest gain since March 2006 increasing by 290,000. Conversely, the unemployment rate increased from 9.7% to 9.9%. The ISM manufacturing index rose from 59.6 in March to 60.4 in April, the highest reading since July 2004. The Conference Board consumer confidence index rose for the third month to 63.3, its highest level since March 2008. Retail sales rose 0.4% in April, down from 2.1% in March.
  • In Spain, the Bank of Spain was forced to seize control of Cajasur, a Roman Catholic Church run savings bank, resulting in Spain's second credit downgrade in as many months, now rated AA+.
  • The People's Bank of China announced a rise in the deposit reserve requirement ratio by 50 basis points to 17% for larger institutions in an attempt to slow credit growth.
  • The Australian Government proposed a 40% resource super profits tax on current and future mining projects.
  • Crude oil (WTI) fell by 14.7% for the month to finish at US$73.11 per barrel. Gold gained 3.1% to finish at US$1,216/oz.

Australian Shares

Discussion around the RSPT and continued concern over global growth saw the Australian market fall for the second consecutive month. The 7.5% fall in the market was the worst monthly performance since October 2008, when the market fell by 12.6%. Small cap stocks under performed their large cap counterparts (-7.5%), while mid-cap stocks fell 7.0% for the month. Over financial year to date the S&P/ASX 300 is up 16.1%.

All sectors produced negative returns for the month. The fall in Industrials (-11.4%) was the most significant, while Financials (-10.6%) also performed poorly. Despite the ongoing discussions regarding the mining tax, the Materials sector performed better than the market, falling by 5.8% for the month. The defensive sectors of Consumer Staples and Healthcare reported the smallest declines.

With less than a month to go of the financial year, the Australian market is approaching a 20% return for the year, compared with a 20.3% fall in 2008/09. Over the eleven months, the average manager underperformed the benchmark S&P/ASX 300 Index by 60 basis points before fees.

Overseas Shares

In aggregate, overseas shares returned 0.7% for the month for an unhedged Australian investor. This reflected a drop in overseas markets of 7.6% in local currency terms offset by a -9.9% in drop in the AUD relative to the USD. Returns from Value stocks (+0.7%) were in line with Growth (+0.7%) in AUD terms. In the US, the S&P 500 Index returned -8.0%, the Dow Jones -7.9% and the NASDAQ -8.3%, all in local currency terms. In Europe, the FTSE 100 (UK) returned -6.6%, the DAX (Germany) -2.8% and the CAC (France) -8.1% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned -9.7%, Hong Kong's Hang Seng -6.4%, India BSE 100 Index -3.5% and the Nikkei (Japan) had the largest fall of 11.7%, again all in local currency terms.

Emerging markets posted a gain of 1.2% in the month resulting in a gain of 19.6% for the financial year on an unhedged basis for an AUD investor.


Domestic listed property trusts (A-REITs) returned -4.3% for the month, bringing the 12 month return to 27.5%. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) fell by 6.9% for the month but has gained 30.5% over 12 months.

Fixed Interest

The UBS Australia Composite Bond index gained 1.7% for the month. The Citigroup World Government Bond (ex-Australia) Index gained 1.7% and the Barclays Capital Global Aggregate Bond Index rose 1.2% on a fully hedged basis over the month.


The AUD lost ground against all major trading partner currencies in May, ending a 3 month rally. The local currency depreciated 9.9% against the US Dollar, 12.7% against the Yen, 2.4% against the Euro, 5.1% against the Pound Sterling and 6.9% on a trade weighted basis.


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