Investment commentary - 31 July 2014

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

Global share markets showed resilience in June 2014 with the developed index and emerging markets rising 0.4% and 1.2% respectively, despite uncertainty associated with escalating sectarian violence in Iraq.

Despite these geopolitical risks, economic data has generally been positive, particularly out of the United States (US).

The release of US national accounts data revealed that economic activity rebounded strongly in the June quarter with real gross domestic product (GDP) rising to 4.0% (annualised), above expectations of 3.0% while the March quarter fall of 2.9% was revised again, to a smaller fall of 2.1%.

The US labour market is showing signs of steady improvement and pick up in the labour market is boosting prospects for the household spending and the consumer confidence index has risen to its highest level since October 2007.

This more timely data out of the US suggests that the recovery should continue over the remainder of the year. The US Federal Reserve (Fed) continued to taper its asset purchase by another $20 million to $25 million while the ECB left rates on hold following a cut last month.

Locally, the Australian market finished ahead of the overseas market, up 4.4%. The key domestic release was the Q2 Consumer Price Index (CPI), with core inflation stronger than anticipated, and the headline CPI reaching the top of the target band of the Reserve Bank of Australia (RBA) for the first time since 2011. The trimmed mean rose 0.8% in Q2, 0.2% above expectations, despite general weakness in consumer confidence and rising unemployment that characterised the Australian economy in the second quarter of the year. The Australian dollar finished the month at US$0.93.


Significant developments

  • The RBA board kept the cash rate unchanged at 2.50% at its July meeting, continuing its accommodative monetary policy stating "on present indications, the most prudent course is likely to be a period of stability in interest rates." The RBA also expects inflation to be consistent within the 2% to 3% target over the next two years.
  • According to the Australian Bureau of Statistics (ABS), Australian retail sales grew by 0.6% (seasonally adjusted) in June 2014. In trend terms, Australian turnover rose 5.5% in June 2014 (seasonally adjusted) compared with June 2013. Revisions to last month's seasonally adjusted retail sales saw a fall of 0.3% in May 2014 as opposed to the originally reported relatively unchanged 0.0%.
  • Australia's seasonally adjusted unemployment rate increased to 6.4% in July 2014, from 6.1% in June 2014, according to the ABS. Labour force participation increased to 0.1% to 64.8% in July 2014.
  • The US real GDP growth for the June quarter increased to an annual rate of 4.0% - according to the advance estimate released by the Bureau of Economic Analysis based on source data that is subject to further revision. In the advance estimate, personal consumption expenditures increased to 2.5%, (as compared to 1.3% in the first quarter) and there was a steep increase in real exports of goods and services.
  • The July ISM Purchasing Managers' Index (PMI) registered 57.1, an increase of 1.8 percentage points from June's reading of 55.3, indicating expansion in US manufacturing for the thirteenth consecutive month. Of the 18 manufacturing industries, 17 reported growth in July.
  • US unemployment remained relatively stable at 6.2% in July 2014 (compared to 6.1% in June 2014) and total nonfarm payroll employment increased by 209,000. Job gains were led by growth in professional and business services, manufacturing, retail trade and construction.
  • The HSBC China Manufacturing PMI posted at 51.7 in July, up from 50.7 in June, the highest since early 2013, and signalled a second successive monthly improvement in business operating conditions. This was the strongest rate of improvement for one and a half years and signals a further improvement in the health of China's manufacturing sector. Output and total new orders rose at the strongest rates since March, and new export work increased at the secondfastest pace in over three and a half years.
  • The Euro area unemployment rate was 11.5% in June,
    stable compared to 11.6% in May 2014 but down
    from 12.0% in June 2013.
  • The Eurozone manufacturing PMI held steady at June's seven month low of 51.8, extending the region's improvement in operating conditions to a 13 successive month. Across the nations, Ireland and Spain saw the sharpest rate of expansion in July, whilst the Netherlands, Germany and Austria saw a modest acceleration in their rate of improvement. PMI indices fell in all of the other nations, with France and Greece reporting the deepest contractions, the sharpest for seven and nine months respectively.
  • Japan's manufacturing PMI fell to 50.5 in July, from 51.5 in June, a sign that domestic demand has not fully recovered from a sales tax increase at the start of April. The tax hike caused a drop in consumer spending and policymakers have been counting on an export rebound to help ease the economic pain. However, new orders expanded in July but at a slower rate than in June, while new export orders grew for the first in four months, although only modestly. The index remained above the 50 threshold that separates expansion from contraction for the second consecutive month, but the slowdown in activity could be a source of concern for policymakers.


Australian equities

Australian Equities rose by 4.4% in July. Positive returns were recorded across most of the market capitalisation spectrum - with Large Caps returning +4.4%, Mid Caps +4.6% and Small Caps +4.9%. The best performing sectors were Materials (+3.3%) and IT (+1.3%). The weakest performing sectors were Utilities (-3.6%) and Energy (-2.2%). The largest contributors to the return of the index were BHP Billiton (+8.1%), National Australia Bank (+8.3%) and Commonwealth Bank of Australia (+3.6%). On the other hand, the most significant detractors from the performance of the index were Navitas (-30.4%), ALS Ltd (-11.5%) and AGL Energy (-4.2%).

Global equities

The broad MSCI World ex Australia Index returned -0.7% in hedged terms and -0.2% in unhedged terms. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (-0.02%) outperformed its Value (0.11%) counterparts in Australian dollar terms. The strongest performing sectors were Information Technology (+2.8%), Telecommunication Services (+2.0%) and Materials (+1.1%), while Utilities (-3.3%), Energy (-2.5%) and Industrials (-1.8%) were the worst performers. In Australian dollar terms, the Global Small Cap sector fell -2.6%, while Emerging Markets rose by +3.5%.

In July, the NASDAQ fell -0.87%, the S&P 500 Composite Index returned -1.4% and the Dow Jones Industrial Average also returned -1.4%, all in local currency terms. European markets showed negative returns, with the FTSE 100 (UK) down -0.12%, DAX 30 (Germany) -4.3% lower, and the CAC 40 (France) returning -4.0%. In Asia, the Chinese Shanghai Composite Index rallied +7.5% while the Japanese Topix gained +2.1% and the Indian BSE 500 returned +0.41%.

Property and infrastructure

Domestic Real Estate Investment Trusts (REITs) returned 5.0% in July, while Global REITs returned 1.3% on a fully hedged basis. The unlisted property sector rose 1.4% in June, with Industrial (+1.3%) and Retail (+0.6%) funds posting strong returns. Meanwhile, global listed infrastructure returned (-2.0%) for the month.

Fixed interest

Global sovereign bond yields had mixed results over the month. Ten-year bond yields fell in Germany (-8 bps to 1.17%), Japan (3bp to 0.54%) and in the UK (5bps to 2.62%), and rose in the US (+4bps to 2.56%). Two-year bond yields were higher in the US (+9bps to 0.51%) but closed unchanged from the end of June in Germany (0.03%). Global Bond indices rose higher, with the Barclays Capital Global Aggregate Bond Index gaining 0.5% and the Citigroup World Government Bond (ex-Australia) Index returning 0.6%, both on a fully hedged basis. Australian 10-year bond yields lost 3bps ending July at 3.51%, while five-year bond yields rose one basis point to 3.00%. Australian bonds posted modestly higher returns in July. The UBS Credit Index returned 0.4%, the UBS Semi-Government Index gained 0.1% while the UBS Treasury Bond Index finished the month also 0.3% higher.


The Australian dollar depreciated against the USD finishing July at US$0.93. Against other currencies, the Australian dollar depreciated 0.4% against the Pound Sterling meanwhile appreciating 0.8% against the Euro and 0.4% against the Japanese Yen. On a trade weighted basis, the local currency lost 0.7% over the month.


Commodity prices were generally weaker in July. The S&P GSCI Commodity Total Return Index fell 3.9% for the month. Gold prices fell 2.3%, finishing the month at US$1,286.06 per ounce. The oil price fell more dramatically by 7.23% to $104.63 per barrel and iron ore prices rose by 1.1% to US$96.0 per metric tonne.

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