Investment commentary - 28 February 2014

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

After a rocky start to the year, markets rebounded strongly in February. Dr Janet Yellen was sworn in as the chairman of the US Federal Reserve, taking over the reins from Ben Bernanke.

Markets responded positively to Yellen's first public speech when she pledged “continuity in the FOMC's approach to monetary policy” and stated that the fed funds rate should remain near zero well past the time unemployment falls to below 6.5%. Some weaker economic data emerged from the United States, although so far this has not been a big concern for investors as much of the softness has been attributed to the severe winter.

News out of Europe continues to point to a gradual recovery in the region. Concerns over emerging markets persisted in February, in particular over rising geopolitical tensions in Ukraine and further signs of a slowdown in China. Locally, the release of a number of positive leading indicators suggests that economic conditions have stabilised. The RBA decided to keep the official cash rate on hold at 2.50% and the Board reaffirmed their intention to keep rates stable for some time.


Significant developments over the month were:

  • The RBA left the cash rate unchanged at 2.50% at its March meeting. The Bank expects unemployment to rise further before peaking and for growth to pick up on the back of the current low interest rate environment and the recent falls in the Australian dollar.
  • The Australian economy grew at a faster than expected rate of 0.8% for the December quarter, bringing growth over the past year to 2.8%. Growth for the quarter was driven by net exports and final consumption.
  • National Australia Bank's January data showed further improvement in business conditions with the index approaching a three year high. Business confidence rose over the month and is now above its long run average level.
  • US GDP growth for the December quarter was revised down to an annual rate of 2.4%, from an initial estimate of 3.2%. The downward revision was primarily the result of lower personal consumption.
  • US manufacturing rebounded, with the ISM PMI rising to 53.2 in February from a disappointing 51.3 the previous month. This marks the ninth month of consecutive growth in the sector.
  • US employment data was stronger than expected with 175,000 jobs created in February. The unemployment rate increased marginally to 6.7% and the participation rate remained unchanged at 63.0%.
  • The Chinese manufacturing sector continued to deteriorate in February, with the HSBC China Manufacturing PMI index falling to 48.5 from 49.5 in January. Chinese trade data surprised on the upside in January, with exports rising by 10.6% and imports by 10.0% from a year earlier.
  • Chinese inflation remained subdued in January, with the consumer price index (CPI) rising by 2.5% over the past year.
  • Euro area GDP grew by 0.3% for the December quarter, rising from 0.1% growth in the preceding quarter. This is the third quarter of positive growth in the region. During the quarter, German GDP expanded by 0.4%, France grew by 0.3% and Italy's economy by 0.1%.
  • Euro area unemployment remained steady in January at 12.0%, unchanged since October 2013. Inflation remained stable at 0.8% in February. The Eurozone manufacturing sector continued to expand in February with the PMI at 53.2, down slightly from 54.0 in January. The contraction in the French manufacturing sector continued to slow over the month.
  • Japanese GDP grew at a slower than expected annual rate of 1.0% in the December quarter.

Australian equities

Australian equities rebounded strongly in February with the broad index rising by 4.9%. Strong returns were seen across the market capitalisation spectrum - with Large Caps returning 4.7%, Mid Caps rising 7.0% and Small Caps gaining 5.0%. The best performing sectors were Consumer Discretionary (+6.8%), Information Technology (+6.3%) and Energy (+5.7%). The weakest performing sectors were defensive in nature, being Telecom Services (+1.4%) and Healthcare (+2.9%). The largest contributors to the return of the index were Westpac (+8.9%), BHP (+5.2%) and ANZ (+7.1%). On the other hand, the most significant detractors from the performance of the index were Telstra (-1.3%), Amcor (-5.3%) and Asciano (-3.9%). The Australian earnings reporting season wrapped up in February and the overall results have been quiet positive, with generally strong earnings growth and a higher proportion of companies beating market expectations. Notable developments on the local bourse included solid operating results by the big miners, including BHP, Rio Tinto and Fortescue Metals. Amid a continued deterioration in its financial results, Qantas announced a $2bn cost reduction program including the loss of 5,000 jobs.

Global equities

Global sharemarkets had a strong month and generally reversed January's losses. The broad MSCI World ex Australia Index rose 4.3% in in hedged terms and 2.3% in unhedged terms, as the Australian dollar gained against the major currencies. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (+2.7%) outperformed their Value (+1.8%) counterparts in Australian dollar terms. The strongest performing sectors were Healthcare (+4.3%) and Materials (+3.7%), while Telecommunications Services (+0.2%) and Financials (+1.3%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 2.7%, while Emerging Markets returned 0.7%.

In the US, the NASDAQ gained 5.0%, the S&P 500 Composite Index returned 4.6% and the Dow Jones Industrial Average finished 4.3% higher, all in local currency terms. European markets posted robust returns, with the CAC 40 (France) gaining 5.8%, the FTSE 100 (UK) rising 5.0% and the DAX 30 (Germany) returning 4.1%. In Asia, the Hang Seng gained 3.7%, the Indian BSE 500 rose 2.8% and the Chinese Shanghai Composite Index returned 1.1%. The Japanese TOPIX lost further ground over the month returning -0.7%.

Property and Infrastructure

REITs had a strong month. Domestic REITs rose 4.3% and Global REITs returned 3.6% on a fully hedged basis. The unlisted property sector rose 0.4% in January, with Industrial (+0.7%) funds posting strong returns. Global listed infrastructure (as measured by the UBS Global Infrastructure and Utilities Hedged Index) returned 4.5% for the month.

Fixed interest

REITs had a strong month. Domestic REITs rose 4.3% and Global REITs returned 3.6% on a fully hedged basis. The unlisted property sector rose 0.4% in January, with Industrial (+0.7%) funds posting strong returns. Global listed infrastructure (as measured by the UBS Global Infrastructure and Utilities Hedged Index) returned 4.5% for the month.

Australian 10-year bond yields rose by 2bps to 4.02% and five-year bond yields remained flat at 3.29%. Australian bonds produced positive returns in February. The UBS Credit Index returned 0.5%, the UBS Semi-Government Index gained 0.4% and the UBS Treasury Bond Index finished the month 0.2% higher.


The Australian dollar appreciated against the major currencies in February. The Australian dollar rose 2.1% relative to the US dollar, finishing the month at US$0.895. Against other currencies, the Australian dollar appreciated 1.3% relative to the Japanese Yen, 1.0% against the Euro and 0.8% relative to the Pound Sterling. On a trade weighted basis, the local currency gained 1.8% over the month.


Commodity prices were generally stronger in February. The S&P GSCI Commodity Total Return Index returned 1.9% for the month. Gold prices rose 6.7%, finishing the month at US$1,325.70/oz. The oil price rose 1.2% to $109.29/bbl. Iron ore prices dropped by 6.3% to US$119.0/MT.


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