Investment commentary - 31 March 2015

16/04/2015

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


March 2015 ended with muted performance across most asset classes, but exhibited some volatility during the month on the back of macro policy events and economic data releases.

The start of March saw the European Central Bank (ECB) launch its Quantitative Easing Program, initiating its purchase of EUR60 billion of government and private assets per month over a minimum period to September 2016. Markets reacted strongly despite the program being announced in January. European markets were boosted by the start of the ECB's program, which helped drive bond yields and the Euro lower.

Meanwhile, the following week all eyes were focused on the forward guidance of the United States (US) Federal Reserve (Fed) and a sharp reaction to the Fed's more dovish stance was evident in global financial markets.

Expectations of less aggressive tightening saw 10-year government bond yields drop 15 basis points (bps) in the US (ending the month 7bps lower), 21bps lower in the United Kingdom (UK) and16 basis points lower in Australia. Equity markets rallied over the week, however, quickly retreated by the end of March on the back of disappointing US economic data, coupled with escalating tensions in the Middle East.

Locally, the Australian unemployment rate dropped in February. Real gross domestic product (GDP) growth remains below trend while consumer confidence remains below average. The Reserve Bank of Australia (RBA) left interest rates on hold at 2.25% in April, despite interest rate markets and a majority of economists expecting a cut of 25bps.

Significant developments

  • The RBA left interest rates on hold at 2.25% in April, despite interest rate markets expecting a 25bp cut. The RBA retained an easing bias, indicating that cuts to interest rates may be appropriate in coming months.
  • Australian seasonally adjusted employment increased by 15,600 in February, slightly ahead of expectations for a 15,000 gain, while January employment was revised down to a 14,600 loss from the prior reported 12,200 loss. Full-time employment rose by 10,300 in February, while part-time employment rose by 5,300. The unemployment and participation rates both decreased by 0.1% to 6.3% and 64.6%, respectively. In trend terms, employment increased by 14,000, while the unemployment rate and participation rates were unchanged at 6.3% and 64.7% respectively.
  • Australian retail trade rose by 0.7% in seasonally adjusted terms in February, ahead of expectations for a 0.4% gain, while January sales were revised up to 0.5% from 0.4%. In trend terms retail trade rose by 0.3% in the month, and 4.0% from a year earlier.
    Household goods and clothing, footwear and personal accessories were the strongest sectors, both rising 0.6% in February, while other retailing and department stores were the weakest, both declining by 0.1% in trend terms.
  • US Non-Farm Payrolls increased by 126,000 in March, well below expectations for a 245,000 gain, while payrolls for the prior two months were revised down by 69,000. The participation rate declined to 62.7% from 62.8%, while the unemployment rate was unchanged at 5.5%. The disappointing payrolls were somewhat offset by better than expected wages data. Average hourly earnings rose 0.3% in February and 2.1% from a year earlier, ahead of expectations for gains of 0.2% and 2.0%, respectively.
  • The third estimate of Q4 US GDP was released. GDP was estimated to have risen at an annualised quarterly pace of 2.2%, unchanged from the prior estimate, though below expectations for a 2.4% increase. Consumption contributed 3.0 percentage points (ppts) to growth and investment 0.7ppts, while inventories, the government sector and net exports detracted 0.1ppts, 0.3ppts and 1.0ppts respectively.
  • The US Institute for Supply Management (ISM) Manufacturing Index eased to 51.5 in March from 52.1 in February, and was below expectations for 52.5. The new orders, new export orders and employment subcomponents of the index all declined. 10 of 18 industries in the survey reported growth, down from 12 in February.
  • The US consumer price index (CPI) rose 0.2% in February and was flat from a year earlier, broadly in line with expectations. Core CPI, which excludes volatile items such as food and gasoline rose by 0.2% in February to be 1.7% higher than a year earlier, which was also in line estimates.
  • The HSBC China Manufacturing purchasing managers' index (PMI) declined to 49.6 in March from 50.7 in February, led by decreases in output and employment. The official PMI rose to 50.1 from 49.9, ahead of expectations for 49.7, as output, employment and prices increased, in contrast to the HSBC survey.
  • In February, Euro area CPI rose to -0.1% from -0.3% in March 2014, and was in line with expectations. Core CPI rose 0.6% from a year earlier, also in line with expectations.
  • In Japan, the Tankan Index indicated that business conditions for large manufacturers were unchanged at 12 in Q1 from the prior quarter (a positive number indicates optimists outnumber pessimists), though below expectations for 14. Sentiment for large non-manufacturers increased to 19, ahead of expectations for 17, while Q4 sentiment was revised up to 17 from 16. The survey also indicated that large companies intend to decrease their capital investment by 1.2% in the 2015 financial year, which was below expectations for a 0.5% gain, and below the 8.2% forecast increase in capex in the prior financial year.

 

Australian equities

Australian equities fell marginally in March with the S&P/ASX 300 Accumulation Index returning -0.1%. Information Technology (+3.7%), Healthcare (+2.4%) and Financials ex Property Trusts (+2.0%) were the strongest performing sectors, while Energy (-5.7%), Materials (-4.5%) and Property Trusts (-2.0%) were the weakest sectors. Australian Small Companies (small caps) underperformed Australian large companies (large caps), with the Small Ordinaries Accumulation Index returning -1.9%.

Global equities

Global equities returned 0.9% in unhedged (A$) terms and -0.2% in hedged (A$) terms, as the Australian dollar fell marginally during the month. Global small caps outperformed the broad cap index returning 2.7%, while emerging markets returned 1.0% (both in A$ unhedged). In the US, the S&P500 returned -1.6%, while the NASDAQ returned -1.3%.

Outside of the US, Germany (+5.0%) and France (+1.8%) were strong performers, while the UK (-2.0%) lagged (returns in local currency terms). Healthcare (+3.8%), Financials (+2.0%) and Consumer Discretionary (+1.8%) were the strongest performing global sectors, while Materials (-2.9%), Telecommunications (-1.5%) and Energy (-1.2%) were the weakest (all in US$ terms).

Among emerging market shares China (+13.2%) was a strong performer, while India (-3.1%) and Hong Kong (0.8%) were weak (returns in local currency terms).

Property and infrastructure

Real asset sector performance was muted in March, with Global Listed Infrastructure returning 0.4% (in unhedged terms) and Global Listed Property returning 0.9% (in A$ hedged terms). Domestic Real Estate Investment Trusts (REITs) posted negative returns of
-2.0% in March while Australian direct property returned 0.5% in February 2015.

Fixed interest

Ten-year bond yields decreased in the US (-07bps to 1.93%), UK (-21bps to 1.58%), Germany (-10bps to 0.18%) but increased in Japan (+6bps to 0.40%). Twoyear sovereign bond yields decreased in the US (-4bps to 0.54%) and the UK (-3bps to 0.42%), Germany (-3bps to -0.24%), but increased in Japan (+2bps to 0.04%). Australian yields fell across the yield curve, with the two-year (-9bps to 1.71%), five-year (-9bps to 1.84%) and the 10-year (-15bps to 2.32%) declining. As a result, Australian sovereign bonds returned 0.8% while Global credit returned 0.8% (A$ hedged).

Currencies

In March, the Australian dollar fell 2.4% against the US dollar and also fell 1.2% against the Japanese Yen, but appreciated against the Pound (+2.3%) and the Euro (+1.7%), to end the month 1.2% lower on a tradeweighted basis.

Commodities

Commodity prices fell in March. The broad S&P GSCI Commodity Total Return Index fell 4.5%, almost reversing the gain it experienced last month. The price of oil fell by 10.7% to US$54.56 per barrel, while gold prices fell by 2.9% finishing the month at US$1,187.6 per ounce. Iron ore prices fell by 17%, finishing the month at US$53 per metric tonne.



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