Investment commentary - 30 September 2012

16/10/2012
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

Fresh economic stimulus measures buoyed global markets during September as ECB President Mario Draghi unveiled a new bond-purchasing strategy while the Fed announced a third round of quantitative easing (QE3).

Some of these gains were pared back as lingering sovereign debt issues resurfaced with anti-austerity protests in Spain and Greece, uncertainty over their bail-out terms and secessionist threat by Catalonia, Spain's largest region by output. The record weekly capital injection from China of RMB365bn ($55.9bn) helped investors shrug off some of the European debt fears on the back of soft economic data from the US and China. Locally, the RBA reduced interest rates for the first time in four months by 25bps as concerns over macro events weighed on the domestic economic outlook.

Significant developments over the month were:

  • The Reserve Bank of Australia reduced the official cash rate by 25bps to 3.25% as concerns over the softening global outlook and high currency strength hinders on the near-term prospects for the domestic economy. The latest ABS figures revealed that Australian GDP for Q2 2012 grew at 0.6%, less than half of the upwardly revised 1.4% growth in the previous quarter.
  • US Real GDP growth for Q2 2012 was revised downwards by 0.4% to an annualised rate of 1.3%. However, September saw the lowest US jobless rate since February 2009 down to 7.8% despite a raft of soft economic data from the US over the month.
  • The Fed announced an open-ended third round of easing (QE3) – a plan to purchase US$40 billion Mortgage Backed Securities each month – pledging to keep US interest rates at exceptionally low levels to at least 2015 to further support the US recovery.
  • Chinese manufacturing output continued an eleventh successive month-on-month deterioration as measured by the HSBC PMI Index despite easing marginally to 47.9 from 47.6 in August. New Chinese export orders also fell at the fastest rate in 42 months signalling weakening conditions for the Chinese economy.
  • China's central bank injected RMB365bn ($55.9bn) into the Chinese financial system, the largest injection in China's history, to ease the short-term cash crunch that has been driving up Chinese borrowing costs.
  • ECB president Draghi announced plans to support distressed sovereigns with unlimited purchases of short-dated bonds through the Outright Monetary Transactions program (OMT) aimed at reducing borrowing costs.
  • Spain's proposed 2013 budget pushed forward unpopular austerity measures of both spending cuts and tax increases to pre-empt conditions of a possible bailout package despite violent protests and Catalonia's succession movement for greater independence from Madrid.
  • On a more positive note, the latest stress test conducted by Oliver Wyman revealed that Spanish banks face a shortfall of €59.3bn ($76.3bn) sitting below the June preliminary estimate of €62bn.
  • Commodity prices were mostly stronger in September with iron ore recovering 14.6% over the month to US$110.0/MT and gold spurring 6.0% to finish at US$1,774.45/oz. Oil prices declined by 4.4% finishing at US$92.2/bbl


Australian Shares

The local market finished the month higher in line with buoyed enthusiasm surrounding the announcement of central bank action offshore. The ASX 300 finished the month up 2.2% driven by Materials (+8.3%) and Healthcare (+3.5%). Underlying the performance were strong returns from Newcrest Mining (+18.3%) and Rio Tinto (+8.6%). Small company stocks also delivered strong returns increasing by 4.4% over the month.

Overseas Shares

Global share markets rallied in September, despite some markets giving back towards the end of the month as investors switched their focus back to a weak macro environment. Global shares returned 2.8% in US$ terms, which translated to 2.1% in unhedged Australian-dollar terms in line with a 0.6% appreciation in the local dollar ($A). It was also a strong month for global small companies (+2.9% in A$ unhedged terms) and emerging market shares (+5.4% in A$ unhedged terms). All global sectors finished the month higher, with Materials (+5.4%) and Financials (+3.5%) the strongest performers.

US stocks posted positive returns as central bank action helped share markets rally in September. The S&P500 Composite Index returned 2.6% over the month in local currency terms. The more concentrated Dow Jones Industrial Average and NASDAQ also rallied by 2.7% and 1.6% respectively. In Europe, returns were mixed with the FTSE 100 (UK) 0.7% higher, the DAX 30 (Germany) rose 3.5% and the CAC 40 (France) decreased -1.2% and all in local currency terms. In the Asian markets, there were particularly strong performances in Hong Kong and India with the Hang Seng Index surging 7.5% and BSE 500 rising 8.1%. The Japanese TOPIX also increased 1.8% while the Chinese Shanghai Composite Index rebounded from last month's fall increasing 1.9% over September, in local currency terms.

Property

Real Estate Investment Trusts (REITs) increased over the month. Domestic REITs as measured by the S&P/ASX 300 A-REIT Index and FTSE EPRA/NAREIT Global Developed Index (G-REITs) increased by 1.2% and 1.4% respectively on a fully hedged basis.

Fixed Interest

Sovereign bond yields rose modestly as investors continued to move out of bonds and into equities. Ten-year bond yields rose in the US (+8bps to 1.64%), Germany (+6bps to 1.33%), and in the UK (+7bps to 1.54%), but fell in Australia (-7bps to 2.94%). German two-year yields moved out of negative territory for the first time in over two months (+7bps to +0.01%) as two-year yields also rose elsewhere: US (+1bps to 0.24%) and in the UK (+10bps to 0.21%).

The returns from the domestic bond market were positive over the month, with UBS Credit Index returning +1.2% followed by UBS Composite Bond Index (+1.0%) and the UBS Treasury Bond Index (+0.6%). Global bond returns posted more solid gains. The Barclays Capital Global Aggregate Bond Index and the Citigroup World Government Bond (ex-Australia) Index both rose 0.6% during the month, both on a fully hedged basis.

Currency

The Australian dollar was relatively flat against all major currencies over the month. The A$ rose against the US$ by 0.6%, finishing the month at US$1.04. Against other currencies, the A$ dropped relative to the Euro by 1.4% and 1.0% against the Pound Sterling while the dollar was unchanged against the Japanese Yen over the month. On a trade weighted basis, the local currency depreciated marginally by 0.1% over September.

 

 

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