Investment commentary - 30 June 2012

16/07/2012

 

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

Market volatility fluctuated over the month as authorities moved to abate concerns about Greece exiting the EU and Spain’s troubled banking sector.

A raft of soft economic data from China and the US further impacted on market sentiment over the month. The midmonth Greek election win by the pro-austerity New Democracy party provided some near-term support for the Euro, while in the US the Fed announced an extension tothe Operation Twist, a bond purchasing program to keep long term borrowing costs low.

Sentiment improved with investors regaining their taste for risky assets at the end of the month as news from the latest European Summit gave investors renewed confidence on the back of promises for more help to the European banks and better than expected results from the US housing market.

Significant developments over the month were:

  • The Board of the Reserve Bank of Australia left the official cash rate unchanged at 3.50%. The minutes suggested that concerns over the European debt crisis have eased in the near term backed by the strength of the economic data released earlier this month.
  • Australian GDP for the quarter to March 2012 expanded by 1.3% and 4.3% over the year, about twice as strong as expected by the market.
  • The seasonally adjusted unemployment rate edged up by 0.1% to 5.1%, maintaining low unemployment figures despite a boost in the participation rate rising from 65.2% to 65.5%.
  • US economic data took a weaker tone with stubbornly high unemployment at 8.2% and a contraction in US manufacturing activity. US Central banks decided to expand operation twist to further stimulate the economy. On a positive note, the US housing market continued to show signs of improvement over the month.
  • Chinese manufacturing remains firmly in contractionary territory with its eighth consecutive month of deterioration, as measured by the HSBC PMI Index, falling from 48.4 in May to 48.2. The data shows the steepest decline in overseas orders since the global financial crisis despite recent interest rate cuts - the first since 2008 in response to softening activity and heightened concern over global conditions.
  • Fears of the eurozone’s deepening debt crisis eased towards the end of the month as the pro-austerity party’s victory in the Greek election allayed fears of an imminent Greek exit from the euro area and the promise of a €100bn bailout fund to assist the Spanish government in recapitalising their troubled banking sector.
  • The latest European Summit exceeded investors’ expectations by allowing the eurozone’s rescue funds to directly recapitalise troubled banks among other initiatives to further assist the European economy.
  • The weakness in the global economy has seen commodity prices continue to fall, with oil prices falling to US$85.0/bbl in June, down -1.8% for the month and silver dropping 3.6% finishing at US$27.1/oz. However, Gold increased during the month, returning 2.0% and settling at US$1,597.36/oz.

Australian Shares

The local market rose, albeit moderately in comparison to global markets. The Australian share market (ASX300) finished the month up 0.5%, with the Telecommunications (+3.6%) and Property Trusts (+4.3%) sectors outperforming as investors sought out highyielding stocks. Resources stocks were again weaker, with Energy (-6.2%) and Materials (-3.6%) performing poorly. Domestic small company stocks ended the month lower (-4.8%) as the small resources sector contracted while domestic mid cap fared slightly better (-3.2%).

Overseas Shares

Global share markets improved over the month as investors began to show renewed confidence. In local currency terms, the MSCI World ex Australia Index returned +4.4%, while significant depreciation in the A$ resulted in the unhedged index returning -0.6% for the month. In A$ terms and based on the S&P Developed ex-Australia Large Medium Cap Value and Growth indices, both Value (-0.2%) and Growth
(-1.0%) stocks were down this month with Value stocks outperforming Growth stocks. Emerging markets returned -1.7% in A$ terms over the month (as measured by the MSCI Emerging Markets Index).

In the US, the S&P500 Composite Index recovered from last month’s fall, returning +4.1%. The more concentrated Dow Jones Industrial Average also gained 4.1%, and the NASDAQ rose by 3.8%.

Elsewhere, there was an improvement in the outlook for the troubled eurozone as authorities are set on bolstering the defenses of the eurozone banks. In Europe, the FTSE 100 (UK) returned +5.0%, the DAX 30 (Germany) rose 2.4% and the CAC 40 (France) increased 6.8%, all in local currency terms. Asian markets ended June higher as global confidence rebounded with Hong Kong’s Hang Seng Index up 5.5% and the Japanese TOPIX gaining 7.2%.

The Chinese markets (Shanghai Composite Index) however, continued signs of faltering growth plummeting 6.2% for the month.

Property

Real Estate Investment Trusts (REITs) performed strongly in June. Domestic REITs as measured by the S&P/ASX 300 A-REIT Index finished the month up 4.3%, while the FTSE EPRA/NAREIT Global Developed Index (G-REITs) returned 5.7% on a fully hedged basis.

Fixed Interest

Sovereign bond returns were slightly negative for the month as investors began to exit out of the “safe-haven” of sovereign bonds and move back into equities. The domestic bond market posted negative returns, with the UBS Treasury Bond Index falling 0.5% and the UBS Composite Bond Index and UBS Credit Index down 0.2% and 0.1% respectively. Global bond returns were mixed with the Barclays Capital Global Aggregate Bond Index appreciating 0.1% while the Citigroup World Government Bond (ex-Australia) Index was down 0.1% during the month, both on a fully hedged basis.

Currency

The Australian dollar recovered after hitting a six month low last month, returning 5.7% against the US$ to end the month at US$1.03. The A$ appreciated against all other major currencies, returning 5.6% versus the Yen, 3.9% relative to the Pound Sterling, and 3.1% against the Euro. On a trade weighted basis, the local currency appreciated 3.9%.

 

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