Investment commentary - 30 November 2010

15/12/2009
? Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
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The global share market finished November higher despite the Dubai debt issue which caused equity markets to tumble around the world. Upbeat US economic data, strong Chinese economic growth and increased demand for commodities provided strong momentum to the markets.

Domestic equity markets also rallied helped by strong local economic readings and higher commodity prices. The domestic yield curve shifted downwards across the maturity spectrum, induced by non-committal comments regarding policy adjustments from the RBA. Global bond yields also fell, largely attributable to safe-haven flows and central banks in the US and Europe holding down rate hike expectations. The Australian Dollar was mixed against all major currencies with increases in market risk aversion creating pressure to sell. Domestic listed property trusts managed to post a small gain.

Significant developments over the month were:

  • Following the 25bp rate hike in October, the RBA raised the official cash rate by another 25bps to 3.50% in early November. The minutes from the board meeting reiterated that "Economic conditions in Australia have been stronger than expected and measures of confidence have recovered" and emphasised the view that "it is prudent to lessen gradually the degree of monetary stimulus."
  • Domestic economic data released over the month was broadly stronger. The level of employment jumped by 24.5k in October following a 40.6k increase in September, while the unemployment rate ended at 5.8%, the same level as seen in August. The housing sector delivered strong results in September with building approvals and housing finance all beating market expectations. The Westpac-Melbourne Institute consumer sentiment index declined 2.5% which, given recent rate hikes, was considered “mild”. Q3 inventories climbed by +0.8% versus the consensus -1.0% drop.
  • US economic data released over the period was mixed. October ADP employment and non-farm payrolls both dropped beyond expectations, whilst the unemployment rate reached a new high of 10.2%. The September trade deficit increased to US$36.5bn. Consumer confidence, industrial production and housing starts were all worse than market forecasts. In contrast, the October ISM manufacturing index finished strongly at 55.7. Housing figures released in late November were surprisingly robust, with October existing home sales going up 10.1% and new home sales gaining 6.2%, both on a month-on-month basis.
  • In late November, Dubai's state holding company Dubai World, which has a liability of US$60 billion, asked creditors for a “standstill” agreement as it negotiated to extend debt maturities.
  • Crude oil finished down -2.4% on the month at US$77.28 per barrel, taking off some of the previous months rise of 12.1% with US inventories at a relatively high level.
  • Gold rocketed up 12.7% to US$1179/oz, fuelled by the continued fragility in the US Dollar and concerns about the inflationary consequences of the stimulatory monetary policies around the world.


Australian Shares

The Australian sharemarket posted a small gain in November following the loss in October. The broadly stronger domestic economic data released over the month provided solid support, while resources stocks were buoyed by continuing strength in the Chinese economy. The Dubai debt issue at the end of the month triggered a sell-off in the local market, but the market bounced back when it became clear that the issue had no material impact on local companies. The S&P/ASX 300 index finished up 1.8% for the month. Mid Cap (+0.4%) stocks underperformed their Large Cap (+2.0%) and Small Cap (+1.8%) counterparts.

Benefiting from strong ongoing Chinese economic data and the weakening US Dollar, Materials (+9.0%) was the best performing sector in November. Telecom Services (+2.2%) followed, largely due to the solid performance of Telstra (+3.4%). Financials ex Prop (-1.4%) provided the biggest drag to the index, while Industrials (-1.4%) was also under pressure. November saw investors switching out of the banking sector and into resource stocks. Major miners, BHP (+10.5%) and Rio Tinto (+12.5%), as well as gold stocks, Newcrest Mining (+13.9%) and Lihir Gold (+18.7%), provided a significant positive contribution to the index, whilst major banks were the hardest hit, with three out of the Big Four banks topping the negative contributors list.


Overseas Shares

The MSCI World ex-Australia index gained 3.1% in local currency terms. Returns for unhedged Australian investors were eroded to 2.8% as the AUD appreciated slightly against the USD and GBP. Small Cap (+1.1%) stocks lagged behind the broader market while Value stocks (+2.7%) underperformed their Growth (+2.9%) counterparts as well as the broad market in AUD terms. In the US, the S&P 500 index returned +6.0%, the Dow Jones +6.5% and the NASDAQ +4.9%, all in local currency terms. In Europe, the FTSE 100 (UK) returned +2.9%, the DAX (Germany) +3.9% and the CAC (France) +5.6% in local currency terms. Results from Asian markets were mixed. The Chinese Shanghai Composite returned +6.7%, Hong Kong's Hang Seng climbed +0.3% and the India BSE 200 Index returned +7.3%, whilst the Nikkei (Japan) lost 6.9%, again all in local currency terms.


Property

Domestic listed property trusts (A-REITs) edged 1.0% higher for the month, following a significant gain over October. Returns over the last 12 months remained negative, returning -5.1%. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) was up by 1.1% for the month and posted a gain of +34.9% over 12 months.


Fixed Interest

The UBS Australia Composite Bond index gained 1.5% for the month and is up 3.4% over the year. The Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index both returned +1.2% and +1.3% respectively, on a fully hedged basis over the month.


Currency

The Australian Dollar was mixed against the major currencies in November. The local currency appreciated +1.3% against the US Dollar and +1.7% against the Pound Sterling, but depreciated -3.6% against the Yen, -0.4% against the Euro, and -1.1% on a trade weighted basis.



 

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