Investment commentary - 31 July 2012



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

The eurozone’s debt crisis remains one of the most significant threats to the global economy as moderating growth from the US and China continues to weigh on market sentiment.

Investors received mixed signals from equity and bond markets during the month of July, with most global share markets ending the month positive, whilst bond yields fell even further indicating that “risk off” sentiment has yet to dissipate. Chinese authorities eased monetary policy for the second time in two months amid signs of economic weakness.

China’s real GDP release (for Q2 2012) dampened hopes that the world's second largest economy would help to alleviate global woes. Global equity markets rallied late in the month after expectation grew that both the European Central Bank (ECB) and the US Federal Reserve (the Fed) were close to announcing action to stimulate their respective economies.

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 the Australian economy remains strong and expected to track within target bands despite weakening global conditions.

  • The seasonally adjusted unemployment rate edged down by 0.1% to 5.2% from an upwardly revised 5.3% in June. The economy maintained low unemployment despite the participation rate marginally decreasing from 65.3% to 65.2%.
  • China’s real GDP for Q2 2012 grew by 7.6% yoy down from 8.1% the previous quarter, marking the slowest growth since 2009. The People’s Bank of China reduced interest rates for the second time in two months by 25 bps to 3.0% and cut benchmark lending rates by 31 bps to 6.0% to abate slowing growth.
  • Chinese manufacturing activity improved in July despite remaining below 50. The Chinese HSBC PMI Index finished at 49.3 rising from 48.2 in June, contracting to its slowest pace since February.
  • US real GDP grew at an annualised rate of 1.5% in the Q2 2012, down from 2.0% in the previous quarter. This was accompanied by weak US retail sales and the unemployment rate rising to 8.3%. The Fed noted at the July FOMC meeting that they are ready to maintain highly accommodative monetary policy to further support a recovery.
  • Renewed fears over Spain’s troubled banking sector emerged despite Spain successfully securing a bailout loan from the ECB, as Valencia, one of its heavily indebted regions seeks bailout from the central government. This action saw Spanish 10-year
    government bond yields soar above 7.0% in July.
  • Sentiment was buoyed by ECB President Mario Draghi’s speech at the Global Investment Conference in London promising to do ‘whatever it takes’ to ease the European sovereign debt crisis raising expectations of imminent ECB action to contain the
    eurozone crisis.
  • Commodity prices increased over the month barely countering the decline over the last quarter, with oil prices rising to US$88.1/bbl in July, up 3.7% for the month and gold returned 1.5%, settling at US$1,621.25/oz.

Australian Shares

The local share market finished the month higher than overseas share markets, with the S&P/ASX 300 up 4.2%. The high-yielding and defensive sectors of Telecommunications (+8.3%), Financials ex Property (+7.2%), Consumer Staples (+6.8%), Utilities (+5.8%) and Property Trusts (+5.6%) were the strongest performers. Underlying the performance of these sectors, were strong returns from Westpac (+10.5), CBA (+8.3%), ANZ (+7.4), Wesfarmers (+9.5%) and Telstra (+9.1). Small company stocks ended the month lower (-0.2%), with the small resources sector contracting.

Overseas Shares

Overseas shares showed modest signs of improvement over the month as investors continued to search for high yielding stocks. In local currency terms, the MSCI World ex Australia Index returned +1.2% whilst the unhedged index fell 1.6% for the month. In A$ terms and based on the S&P Developed ex-Australia Large Medium Cap value and Growth indices, both Value (-1.6%) and Growth (-1.3%) stocks were down this month. Emerging markets dropped 0.7% in A$ terms over the month (as measured by the MSCI Emerging Markets Index).

US stocks posted positive returns despite falling from the June highs. The S&P500 Composite Index returned 1.4% over the month.

The more concentrated Dow Jones Industrial Average and NASDAQ also rallied by 1.2% and 0.2% respectively. Elsewhere, continued fears surrounding the Spanish banking sector continue to weigh on market sentiment. President Draghi’s speech provided investors with confidence that the ECB may ease the pressure on the crisis-stricken eurozone states. In Europe, the FTSE 100 (UK) returned +1.2%, the CAC 40 (France) increased 3.1% and the DAX 30 (Germany) rose 5.5% all in local currency terms. The performance of Asian markets was mixed over the month with Hong Kong’s Hang Seng Index up 1.8% while the Japanese TOPIX dropped 4.4%. The Chinese markets (Shanghai Composite Index) continued signs of faltering growth declining 5.5% for the month.


Real Estate Investment Trusts (REITs) continued to hold onto strong gains from last month. Domestic REITs as measured by the S&P/ASX 300 A-REIT Index finished the month up 5.6%, while the FTSE EPRA/NAREIT Global Developed Index (G-REITs) returned 3.4% on a fully hedged basis. The unlisted property sector (as measured by the Mercer/IPD Australian Pooled Property Fund Index) rose 0.5% for the month.

Fixed Interest

Sovereign bond yields fell during the month as investors lacked conviction in the central banks’ response to the European crisis.

Spanish 10-year government bond yields, however, hit their highest levels since the Euro was created of above 7% in response to growing concern over Spain requesting a bailout. 10-year yields fell in March: US (-17bps to 1.49%); Germany (-28bps to 1.23%); the UK (-26bps to 1.40%) and in Australia (-3bps to 3.01%). German 2-year yields slipped into negative territory to -0.10% (-21bps) meaning that investors were effectively paying the German government to look after their money at month end. Yields fell elsewhere
in the world: US (-9bps to 0.23%) and UK (-20bps to 0.10%).

The returns from the domestic bond market were relatively flat, with the UBS Composite Bond Index and UBS Credit Index marginally increasing by 0.4% and 0.6% respectively hile the UBS Treasury Bond Index was flat over the month. Global bond returns posted more solid gains. The Barclays Capital Global Aggregate Bond Index was up 1.6% and the Citigroup World Government Bond (ex- Australia) Index rose 1.3% during the month, both on a fully hedged basis.


The Australian dollar increased against all major currencies, despite the observed decline in the terms of trade and the weaker global outlook. The A$ appreciated against the US$ returning 2.7% finishing at US$1.05 while the A$ soared against the Euro returning 6.0%. The A$ rose 2.8% relative to the Pound Sterling, and 0.5% against the Yen. On a trade weighted basis, the local currency appreciated 3.1%.

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