Investment commentary - 31 May 2015


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

The prospects for global equities recovered in May with developed economies contributing to a fairer outlook. In particular, United States (US) equity markets improved with expectations of positive momentum through Q2 and Q3 in 2015 as well as continual improvement in housing and labour markets.

Elsewhere, accommodative monetary policy continues to be a theme, with equity markets for the Eurozone and Japan continuing to react to expanding central bank balance sheets. Unemployment in the Euro zone fell ahead of expectations to 11.1% while core inflation reached a nine-month high. Long-term borrowing rates for sovereigns and creditworthy private borrowers remain low despite improving conditions and inflationary pressures resulting in a recent spike in bond yields.

Returns from Australian shares were more subdued with continuing concerns about whether the economy can successfully shift away from being resources-driven. Economic data releases showed reductions in mining-related investment and engineering offset by rises in exports, household spending and housing construction. Overall, the Australian economy continues to grow at below trend.

Significant developments

  • The Reserve Bank of Australia (RBA) left interest rates on hold at 2.0% in June, following a cut of 25 basis points (bps) in May. Although the RBA did not rule out further cuts to interest rates, the statement accompanying the decision seemed to indicate that the RBA is less likely to cut rates in the near future than previous statements have suggested.
  • The Australian Government released its 2015-16 Budget with a forecast deficit of $35.1bn or 2.1% of gross domestic product (GDP). Net debt to GDP is forecast to peak at 18% of GDP in 2016-17. GDP is forecast to growth at 2.75% and 3.25% in real and nominal terms respectively while unemployment is expected to peak at 6.5% in the 2015-16 fiscal year.
  • Australian GDP rose 0.9% quarter-on-quarter and 2.3% year-on-year in seasonally adjusted terms in Q1, ahead of expectations for 0.7% and 2.1% respectively. Net exports was the key growth engine, contributing 0.5 percentage points (ppts) to quarterly growth, while household consumption and inventories both contributed 0.3ppts and dwelling investment 0.2ppts. Business investment detracted 0.5ppts. The terms of trade, declined 2.9% in the quarter to be -11.4% for the year ending April 2015. The release provides further evidence that domestic demand remains under pressure from declining mining related capex and tepid consumer activity, offset by strong and potentially unsustainable growth in export volumes.
  • Australian retail trade was flat in seasonally adjusted terms in April, behind expectations for a 0.3% increase, while March sales were revised down to 0.2% from 0.3% month-on-month. In trend terms, retail trade also rose by 0.3% in the month and 4.4% for the year ending April 2015. Clothing, Footwear and Personal Accessories was the strongest sector rising 1.0%, while Household Goods and Department Stores were the weakest, both rising 0.2% (trend estimate) in April.
  • US non-farm payrolls rose by 280,000 in May, ahead of expectations for 226,000. April payrolls were revised marginally lower by 2,000 to 221,000, while March payrolls were revised up by 34,000 to 119,000. The unemployment rate ticked up to 5.5% from 5.4% due to a 0.1% rise in the participation rate to 62.9%. Average hourly earnings rose 0.3% in May, ahead of expectations for 0.2%, to be 2.3% higher than a year earlier, providing evidence that strong employment growth over recent quarters is finally resulting in higher wages.
  • US GDP was revised downwards to -0.7% in the first three months of 2015, though was better than estimates for -0.9%. Several of the contributors were also revised from their original estimates, with Net exports detracting 1.9ppts, personal consumption contributing 1.2ppts, inventories contributing 0.3ppts and private fixed investment being revised to a detraction of 0.2ppts. The annual US GDP change to Q1 2015 was 2.7%.
  • The US Institute for Supply Management® (ISM) Manufacturing Index rose to 52.8 in May from 51.5 in April, and was ahead of expectations for 52.0. The index rose on stronger new orders, employment and inventories, partially offset by lower production. 14 of the 18 industries included in the survey reported growth in May.
  • The US consumer price index (CPI) rose 0.1% in April, in line with expectations, to be 0.2% lower than a year earlier. Core CPI, which excludes items with volatile prices, rose 0.3% in April to be 1.8% high than a year earlier, ahead of expectations for 0.2% and 1.7% respectively.
  • The China HSBC Flash Manufacturing Purchasing Managers' Index (PMI) rose slightly to 49.2 in May from 49.1 in April and was in line with expectations. The official PMI rose to 50.2 in May, from 50.1 in April, though was slightly below expectations for 50.3. The higher reading was driven by an increase in output, new orders and prices.
  • Euro core CPI rose 0.9% from a year earlier in May, ahead of expectations for 0.6%. This is also higher than the 0.6% annual rise recorded in April as improving economic conditions and monetary easing from the European Central Bank (ECB) appear to be finally pushing inflation higher.
  • European GDP rose 0.4% in Q12015 and 1.0% from a year earlier, in line with expectations. Over the quarter France grew 0.6%, while Germany and Italy grew 0.3% and Spain 0.9%. Over the year to March, France grew 0.7%, Germany 1.0% and Spain 2.6% while Italy was unchanged.
  • Japanese GDP grew 1.0% in Q12015, up from a prior reported 0.6% growth figure and ahead of  expectations for a 0.7% increase. Consumption contributed 0.2ppts to growth, private investment 0.4ppts and inventories 0.6ppts, while net exports detracted 0.2ppts. The release is indicative that growth is finally turning around following a prolonged slump and an increase in consumption tax on 1 April 2014.

Australian equities

Australian Equities recovered with a positive absolute return over May as the S&P/ASX 300 Accumulation Index returned 0.4%. From a sector perspective; Industrials (+5.4%), IT (+4.0%) and Property Trusts (+2.7%) were the strongest performers, while Consumer Staples (-2.1%), Financials ex Prop (-1.7%) and Telecom Services (-0.2%) were the weakest. The Australian Small Companies Index outperformed Australian large caps, with a return of 2.3% for May.

Global equities

Global Equities returned +1.4% in hedged (Australian dollar) terms, and +3.5% in unhedged (Australian dollar) terms as the Australian dollar depreciated over the month. Global Small Caps outperformed the broad cap index returning 4.6%, while Emerging markets returned -1.1% (both in Australian dollar unhedged). In the US, the S&P500 returned 1.3%, while the NASDAQ returned +2.6%. Outside of the US, Japan (+5.1%) continued its strong performance and the UK (+0.7%) was also a positive performer, while Germany (-0.4%) fell in local currency terms. in other regions, China (+3.8%) and India (+3.1%) were positive performers, while Hong Kong (-2.2%) was a relatively weak performer (returns in local currency terms). Across the sectors, Healthcare (+6.0%), Information Technology (+5.2%) and Consumer Discretionary (+4.0%) were the strongest performers globally, while Energy (-2.5%), Telecommunication Services (+1.5%) and Materials (+2.7%) were the weakest (all in Australian dollar terms).

Real assets

The Real Assets sector produced mixed performance in May, with Global Listed Infrastructure rising 2.9% (in unhedged terms) and Global Real Estate Investment Trusts (REITs) returning -0.2% (in Australian dollar hedged terms). Domestic REITs posted a positive market return of 2.7% in May while Australian Direct Property returned +0.5% in April 2015.

Fixed interest

Ten-year sovereign bond yields increased in the US (+5bps to 2.09%), Japan (+6bps to 0.40%), Germany (+12bps to 0.49%) but decreased in the UK (-3bps to 1.81%). Two-year sovereign bond yields increased in the US (+1bps to 0.57%), were unchanged in Germany (-0.22%) but decreased in Japan (-1bps to 0.00%) and the UK (-2bps to 0.51%). Overall, hedged Global Fixed Income returned -0.3% for the month. Australian yields saw increases in the 10-year (+8bps to 2.73%) and five-year (+2bps to 2.12%) measures, while the two-year bond yields decreased (-8bps to 1.90%). The Australian Composite Bond Index returned +0.1%.


Over May, the Australian dollar depreciated against most major currencies with falls of -3.0% against the US dollar, -3.5% against the Pound Sterling, -2.8% against the Euro while appreciating 0.3% against the Japanese Yen. On a trade-weighted basis the Australian dollar fell -2.5% for the month.


Commodity prices were generally stable in May. The broad S&P GSCI Commodity Total Return Index rose 1.0% following a large increase in April. The price of oil fell marginally (-0.5% to US$64.26 per barrel), while gold rose by 0.8% finishing the month at US$1,190.00 per ounce. Iron ore prices steadied, rising by 1.7%, finishing the month at US$59 per metric tonne.



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