Investment commentary - 30 November 2012



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

Following the US presidential election in early November, global equity markets fell sharply as investors’ attention turned to how the re-elected Obama Administration would negotiate the so-called ‘fiscal cliff’ of tax hikes and government spending cuts scheduled to take effect at the start of the new year.

However, equity markets staged an impressive recovery over the second half of the month as confidence grew of a fiscal cliff resolution by year end. Bond markets remained more cautious, with yields falling during the month.

Economic data over the month suggested that the picture in Europe started to brighten somewhat, although the ongoing uncertainty caused by the region’s debt crisis suggests a robust recovery is still a long way off. Positive data out of China continues to suggest that the economy is picking up again after seven consecutive quarters of slowing growth. Locally, the RBA cut interest rates by 25 bps at the December monetary policy meeting on the back of a softer than expected outlook for growth.

Significant developments over the month were:

  • The RBA cut the official cash rate by 25 bps down to 3.00% at the December monetary policy meeting, after keeping the interest rate steady at 3.25% in November. The cut came on the back of a softer than expected outlook for growth and the need to offset the impact of high funding costs and the continuing strength of the Australian dollar.
  • The Australian unemployment rate (seasonally adjusted) fell well below economists’ consensus of 5.5% to 5.2% in November, down from 5.4% in last month.
  • Figures released by the ABS showed that Australia's economy grew a moderate 0.5% on a seasonally adjusted basis over the September quarter due to weaker consumption levels taking the annualised growth to 3.1%.
  • US GDP was revised upward from a better-than-expected initial estimate of 2.0% to 2.7% over Q3 2012, according to the Bureau of Economic Analysis. The increase primarily reflected positive contributions from personal consumption expenditures, private inventory investment, federal government spending, residential fixed investment, and exports.
  • Following the US presidential election in early November, investors’ attention turned to the uncertainties surrounding the fiscal cliff as U.S. law makers struggled to reach agreement on budget revisions needed to avert the $607 billion of automatic spending cuts and tax hikes scheduled to take effect at the start of the New Year.
  • China’s inflation rate accelerated slightly in November to 2.0%, up from 1.7% in October, as economic growth picked up and food prices rose. This was the first increase in the CPI since August 2012.
  • Chinese manufacturing output saw improvements over November as the HSBC PMI Index posted 50.5 up from 49.5 in October. This was the first time in 13 months the index increased above 50 indicating growth in the Chinese manufacturing sector.
  • Manufacturing conditions within the Eurozone deteriorated further during November, albeit at the slowest rate for eight months with an overall PMI of 46.2, but the downturn remains severe with the shrinking manufacturing sector falling for a 16th consecutive month.
  • Commodity prices generally climbed during November as oil prices rose 2.7% to US$88.5/bbl while gold prices dropped 0.4% finishing the month at US$1,717.96/oz. Importantly for Australia, the price of iron ore stabilised after a turbulent few months, returning -1.6% to end November at US$120.0/MT.

Australian Shares

Australian shares finished the month marginally higher, recovering the initial sharp falls early in the month to rebound on the back of renewed optimism that China (Australia’s largest trading partner) has avoided a ‘hard landing’. The S&P/ASX 300 Accumulation Index finished the month higher (+0.4%), driven by the outperforming Healthcare (+6.1%) and Telecommunications (+3.8%) sectors.

November, however, proved to be a testing month for small company stocks which finished the month down 2.4%, while investors also shied away from the Energy (-2.7%), Property Trusts (-1.3%) and Industrials sectors (-1.1%). Underlying the market’s performance were strong returns from Ramsay Health Care (+12.1%), APA Group (+9.1%), CSL (+9.0%), Telstra (+4.7%), Commonwealth Bank (+3.4%) and Rio Tinto (+3.4%).

Overseas Shares

Overseas share market gains were modest in November with markets focused on the US presidential election, the subsequent fiscal cliff negotiations, the leadership handover in China and the ongoing European debt crisis. Overseas shares returned 1.3% in US$ terms (which translated to +0.7% in unhedged A$ terms in line with a 0.6% appreciation in the A$ against the US$). Growth stocks (+1.2%) outperformed Value stocks (+0.2%) in A$ terms based on the S&P Developed ex-Australia Large Medium Cap Growth and Value indices over the month. Global small caps also fared well (+0.4% in A$ unhedged terms) as did Emerging Market equities (+0.7% in A$ unhedged terms). Sector performance was mixed in November as Consumer Discretionary (+3.2%) and Consumer Staples (+1.9%) performed strongly, while the Utilities (-3.4%) and Energy (-2.1%) sectors lagged the broader market.

US stocks posted positive returns yet lagged most other regions, with the S&P500 Composite Index up 0.6% over the month in local currency terms. The more concentrated Dow Jones Industrial Average lagged the broader index, returning -0.1% for the month, while the NASDAQ rose 1.1%. In Europe, returns were more positive as Europe continued to benefit from the reduction in tail risk following the ECB’s bond purchasing program with the FTSE 100 (UK) 1.9% higher, the DAX 30 (Germany) up 2.0% and the CAC 40 (France) increased 3.9% all in local currency terms. Asian markets were mixed over the month. The Chinese Shanghai Composite Index continued to post negative returns, plunging 4.3% over November in local currency terms. There was however strong performance in Japan and India, as the Japanese TOPIX and Indian BSE 500 surged 5.3% and 5.0% respectively, while performance was more moderate in Hong Kong as the Hang Seng Index gained 1.9%, all in local currency terms.


Real Estate Investment Trusts (REITs) had mixed performance over the month, with domestic REITs as measured by the S&P/ASX 300 A-REIT Index falling 1.3% and Global REITs as measured by the FTSE EPRA/NAREIT Global Developed Index gained 1.4% on a fully hedged basis.

Fixed Interest

Sovereign bond yields declined over the month in most major economies, with Australia being the exception. The ten-year yield rose in Australia by 3bps to 3.09%, while ten-year yields declined in Germany (-10bps to 1.25%), the UK (-8bps to 1.77%), Japan (-6bps to 0.71%) and the US (-7bps to 1.62%). Two-year yields also declined in both the US (-4ps to 0.25) and Germany (-3bps to 0.01%).

Australian sovereign bonds were relatively negative over November, with the UBS Treasury Bond Index flat while the UBS Semi- Government Index was down 0.2%. Meanwhile, the UBS Credit Index climbed 0.2% over the month. Global bond returns posted more solid gains. The Barclays Capital Global Aggregate Bond Index and the Citigroup World Government Bond (ex-Australia) Index rose 0.7% and 1.0% respectively during the month, both on a fully hedged basis.


The Australian dollar rose against all major currencies over the month. The A$ gained 0.6% against the US$, finishing the month at US$1.04. Against other currencies, the A$ appreciated 0.2% relative to the Euro, 1.1% against the Pound Sterling, and by 3.8% against the Japanese Yen over the month. On a trade weighted basis, the local currency appreciated 0.9% over November.


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