Investment commentary - 31 August 2011

14/09/2011
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

The market sell-off continued in August, with heightened volatility severely hampering the performance of most asset classes. Investors’ risk appetite clearly fell, as they weighed up the uncertain outcomes of sovereign debt woes in the US and Europe. Despite US politicians ultimately reaching a resolution on the debt ceiling, investors were not given respite as S&P announced they were downgrading their rating of US Treasuries (from AAA to AA+) for the first time in history, sending markets further into the red. In very much a ‘risk off’ month, bond markets and safe-haven assets such as gold enjoyed strong returns for the month while sovereign debt issues in the Euro zone emerged as a much greater threat to the global economy.

Significant developments over the month were:

 
  • The RBA held the cash rate at 4.75%. Although the Board remained concerned about the medium-term outlook for inflation, the "acute sense of uncertainty in global financial markets" heavily influenced their decision to keep rates on hold.
  • Local labour force data for July was released. The unemployment rate rose 0.1% to 5.1% mom which surprised to the downside (consensus 4.9%).
  • The RBA released its quarterly Statement on Monetary Policy. The near term GDP forecast was revised down to 3.25% from 4.25% due to a slower than expected recovery in the Queensland coal industry, and weaker exports. The 2012 forecast of 3.75% was unchanged.
  • The US Federal Reserve Chairman, Ben Bernanke gave a speech which outlined the range of monetary tools available to The Fed, leaving the door open for another round of asset purchases and quantitative easing, but hinted towards a desire for fiscal support. The Federal Open Market Committee flagged that they will continue the discussion of possible steps at the September meeting. Markets are looking towards the economic policy speech by President
    Obama in September.
  • At the same time as Bernanke was very publicly discussing the potential easing of monetary policy, the People’s Bank of China embarked on secretive tightening measures by changing the “reserve requirement ratio” calculation which dictates how much banks must hold with PBOC in reserve. This move effectively restricts the level of funds available to lend, and was taken in response to record high inflation levels, which were 6.5% in July.
  • The price of crude oil plunged 7.4% during the month to US$88.9/bbl amid fears that global energy demand will decline, whilst Gold rose 12.5% to US$1,826.6/oz.


Australian Shares

 

The local bourse finished the month down 2.0%, influenced by overseas developments that weighed heavily on market sentiment. Early in the month, the benchmark S&P/ASX 300 Index posted negative returns for eight consecutive days, losing approximately 10%. Volatile global markets and the US debt downgrade created the perfect storm whereby on August 9 the local market initially fell by 6%, only to rally circa 7% from its intraday low. Astute investors called the bottom and significant trading volume from institutional investors forced through this remarkable single-day rally.

As investors sold out of risky positions, Mid caps (-4.6%) underperformed their Small cap (-2.7%) and Large cap (-1.6%) counterparts.

Positive returns of Telstra (+2.2%) ensured that the Telecom Services sector continued the strong performance from July, returning 5.8% for the month. The Utilities and Property Trusts sectors also made gains, returning 4.6% and 2.9% respectively. Continued fears for global economic growth meant Energy (-5.7%) and Materials (-4.7%) stocks suffered the largest losses, driven by BHP Billiton (-3.8%), Rio Tinto (-9.2%) and Alumina (-18.9%).

Overseas Shares

 

In local currency terms, the MSCI World ex Aus index returned -7.0%. A depreciating AUD relative to major currencies saw the unhedged benchmark return -4.8% for the month. Based on the S&P Developed ex-Australia Large Medium Cap Growth and Value Indices, Growth stocks (-4.6%) underperformed Value stocks (-5.2%) in $A terms.

In the US, the S&P 500 Composite Index was down 5.4%, the Dow Jones Industrials Index returned -4.0% and the NASDAQ Composite Index -6.3%, in local currency terms.

Europe was hit hard as debt concerns and liquidity fears drove markets down. The FTSE 100 (UK) returned -6.6%, the DAX 30 (Germany) -19.2% and the CAC 40 (France) -11.3% in local currency terms.

In Asia, the Chinese Shanghai Composite Index returned -5.0%, Hong Kong’s Hang Seng -8.2%, India’s BSE 100 Index -8.5% and the TOPIX (Japan) returned -8.4% in local currency terms respectively for August.

The MSCI Emerging Markets Index was down -6.6 % in A$ terms.

Property

 

Domestic listed property trusts (A-REITs) were the only listed asset class that finished August in positive territory. The S&P/ASX 300 Property Index returned +2.9% for the month. Global listed property (G-REITs) returned -5.8% on a hedged basis, as measured by the FTSE ERPA/NAREIT Global Index.

Fixed Interest

 

A strong month for fixed interest assets saw the local UBS Australia Composite Bond Index up 2.0%, and on a hedged basis, the Citigroup World Government Bond (ex-Australia) up 2.3% and the Barclays Capital Global Aggregate Bond Index was up 1.7%.

Currency

 

The A$ depreciated against all major currencies in August, losing 2.5% against the US Dollar. The Australian dollar returned -1.7% against the Pound Sterling, -2.7% against the Euro and -3.4% against the Yen. The Australian Dollar also depreciated on a trade weighted basis by 2.4%.

This information has been prepared by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. Any advice contained in this document is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek professional advice from a licensed, or appropriately authorised, financial adviser if you are unsure of what action to take. "MERCER" is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2012 Mercer LLC. All rights reserved.
 

LCA Nominees Pty Ltd ABN 61 008 204 939 AFS Licence #240571, as Trustee for Lutheran Super ABN 93 371 348 387.

This website is provided by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. The Trustee pays a fee for the provision of this service, however this fee is not conditional on you using this service or acting on the information or advice provided through this service.