Investment commentary - 31 March 2013

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

Global markets were predominately stronger over March despite the familiar headwinds from the Eurozone and increased geopolitical tensions with North Korea.

Risks in Europe continued to drive volatility following the Italian political deadlock and the emergency of the Cypriot banking crisis setting off a new round of depositor and bond holder contagion. This rattled investors' confidence in European policy makers to tame the Eurozone debt situation. In the US, even with sequestration spending cuts, the US economy showed resilience particularly with a steady increase in the US housing market and continued support from the Fed's asset purchasing program. Economic indicators continued to point to a noticeable pick-up in the Chinese economy while conditions around Europe continued to face stagnating conditions. Locally, the RBA kept interest rates on hold at 3% as it is increasingly comfortable with the domestic and international outlook.

Significant developments over the month were:

  • The RBA kept the official cash rate steady at 3% at the March and April monetary policy meeting. The commentary suggested an easing bias may remain, but markets have pushed out expectations for rate cuts to mid-year.
  • Australian unemployment hit its highest level in more than three years at 5.6% in March from 5.4% in February as the
    participation rate fell 0.2% to 65.1%.
  • Although US GDP was revised 0.3% upwards to 0.4% from the second estimate, results still imply a sluggish economy over Q4 2012. This is mainly attributable to a fall in government expenditure particularly in federal defence and private inventory investment.
  • On a more positive note, US housing markets, as measured by the S&P/Case-Shiller House Price index, rose at its fastest pace since 2006 at an annualised rate of 8.1% to January 2013. In addition, there was much lower than expected US unemployment over February down to 7.7% from 7.9% in January, indicating a modest recovery in the US economy.
  • Chinese annual inflation rose 3.2% in February up from 2.0% in January as Lunar New Year festivities drove up food prices. The recovery in China continues to be supported by improving domestic demand conditions. The HSBC Chinese Manufacturing PMI Index posted 51.6 up from 50.4 in February, marking its fifth consecutive month above the 50.0 mark.
  • The initial bailout offer by European policy makers was rejected by the Cypriot parliament as it proposed a heavy levy on all existing bank account depositors on top of the €10 billion bailout. A final agreement was reached where a revamped bailout package towards the end of the month was replaced by one that targets only larger account holders.
  • Although Cyprus accounts for less than 0.25% of Eurozone GDP, fear of contagion and speculations that the conditions imposed in Cyprus could become a new precedent for other countries in the future.
  • Eurozone unemployment reached a record 12.0% in February from 11.9% the previous month, as the ailing European economy continued to weigh on the job market. The contraction in Eurozone manufacturing sector deepened in March from 47.9 in February to 46.8.
  • Commodity prices rose modestly over the month. Oil prices rose 5.7% to $97.2/bbl, while gold prices was up 0.8% finishing the month at US$1,595.8/oz. Iron ore prices receded 9.2% to US$138.0/MT driving the mining and resource stocks lower over March.

Australian Shares

After three strong months the Australian equity market declined in March predominately led by the Resource sector. The S&P/ASX 300 Accumulation Index fell 2.3%. By sector, Consumer Discretionary (+2.6%), IT (+0.8%), Financials ex Property (+0.7%) and Utilities (+0.6%) were the positive contributors while Materials (-9.6%) and Energy (-3.7%) were the worst performing sectors within the index. Underlying the market's performance were Fortescue Metals Group (-16.5%), Rio Tinto (-14.5%), BHP Billiton (-11.4%), Newcrest Mining (-11.4%) and Orica (-10.2%). The S&P/ASX Small Ordinaries Index fell 3.3% over the month, once again underperforming the large cap index.

Overseas Shares

Global equity markets were predominately stronger in March. The broad MSCI World ex Australia Index rose 0.6% in unhedged terms and 3.0% in fully hedged terms as the A$ rose 1.8% against the US$ in the month. More specifically, based on the relative performance of the S&P Developed ex-Australia Large mid cap indices, global Growth (+0.9%) outperformed their Value (+0.3%) counterparts in A$ terms. Most global sectors with the exception of Materials (-4.4%), Energy (-0.8%) and Industrial (-0.3%) finished the month higher with Healthcare (+3.6%), Telecommunication Services (+2.8%) and Consumer Staples (+2.4%) outperforming the broader market.

US stocks surged this month with the S&P 500 returning 3.8% over March surpassing the record high during 2007 despite federal budget cuts triggered by sequestration and the potential for additional fiscal tightening this year. The more concentrated Dow Jones Industrial Average and NASDAQ also rose 3.9% and 3.4% respectively in local currency terms. Performances in European markets were less attractive compared to other regions as concerns within the Eurozone, in particular the Cypriot banking crisis, resurfaced.

The FTSE 100 (UK) 1.3% higher, the CAC 40 (France) and DAX 30 (Germany) rebounded 0.4% and 0.7% all in local currency terms. Markets saw mixed returns in Asia. The Japanese TOPIX continued its rally (+7.0%) on the back of expectations for more aggressive monetary policy easing while other major markets fell over the month in response to uncertainties in the Eurozone. The Chinese Shanghai Composite Index (-5.5%), the Hong Kong Hang Seng Index (-2.8%) and the Indian BSE 500 (-1.1%) were all lower over the month in local currency terms.

In A$ terms, the global small cap sector was stronger, rising 1.6%, while emerging markets fell 3.5%. The performance of emerging market equities was again weaker than the developed markets in March, marking its third consecutive month of underperformance.

Property Real Estate Investment Trusts (REITs) were mixed over the month; Domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) fell 2.6% and Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) gained 2.6% on a fully hedged basis.

Fixed Interest

Sovereign bond yields fell across the major markets but rose in Australia as heightened contagion risks continued within the Eurozone underpinned the attractiveness of Australia. Ten-year bond yields fell: in the US (-4 bps to 1.85%), UK (-20 bps to 1.76%), Germany (-11 bps to 1.28%), Japan (-10 bps to 0.56%) but increased in Australia (+7 bps to 3.42%).

Australian bonds fell over the month, with the UBS Treasury Bond Index and UBS Semi-Government Index returned 0.2% and 0.4% respectively while the UBS Credit Index rose marginally. Global Bond returns saw positive movements over the month. The Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index rose 1.0% and 0.7% respectively both on a fully hedged basis.


The Australian dollar appreciated against the major currencies during March. The Australian dollar appreciated 1.8% relative to the US dollar, reversing the decline in February finishing at US$1.043. Against other currencies, the A$ also appreciated 3.8% against the Yen, 3.7% relative to the Euro and 1.8% against the Pound Sterling. On a trade weighted basis, the local currency appreciated 2.2% over March.


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