Investment commentary - 30 June 2013

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

The 2012/13 financial year ended on a disappointing note as equity markets dropped and bond yields jumped.

This was largely triggered by Fed chairman Ben Bernanke's comments that the central bank may begin to wind back its US$85 billion-a-month bond buying program later this year and perhaps end the purchases in mid 2014. Prospects of slower growth in China and a jump in the interbank lending rate, which prompted fears of a liquidity crisis in the Chinese banking system, further weighed on investor's appetite for risk assets. Despite initial inaction, the People's Bank of China (PBOC) subsequently quelled market fears by announcing that they will ensure stability and provide liquidity to some financial institutions.

The Japanese market continued to suffer from severe volatility due to the uncertainty surrounding the full impact of Bank of Japan's stimulus program.

Locally, the RBA maintained the cash rate at the record low of 2.75% for the second consecutive month, citing the possibility of future cuts should the economy need the support.


Significant developments over the month were:

  • The RBA kept the official cash rate unchanged at 2.75% at their July meeting as the Australian dollar plunged below parity since the May interest rate cut. However, the tone of the minutes suggested an easing bias and the RBA is ready to act should conditions deteriorate further.
  • US GDP over Q1 2013 was revised down to 1.8% from an earlier estimate of 2.4%, largely driven by slower growth in consumption. US CPI edged 0.1% higher in May compared to 0.4% in April.
  • US manufacturing activity expanded in June, following an unexpected contraction in May, with the ISM Manufacturing PMI rising to 50.9 from 49.0. Despite this growth, the survey indicated that employment in the manufacturing sector weakened considerably over the month.
  • The US economy added 195,000 new jobs in June despite the unemployment rate remaining unchanged at 7.6%. The housing market continued its recovery with the S&P/Case-Shiller House Price index rising 12.1% for the year to April, posting the highest annual growth rate since 2006.
  • China's overnight interbank offered rate jumped to a high of over 13% pa in June before retracing towards 5.0% pa after the People's Bank of China (PBOC) announced that they will inject liquidity in an attempt to ease the interbank rate.
  • The HSBC Chinese Manufacturing PMI dropped to 48.2, down from 49.2 in May, signifying a contraction in the Chinese manufacturing sector for the second straight month.
  • Euro Area unemployment increased to 12.1% in May, up from a revised rate of 12.0% in April. The Manufacturing PMI rose to a 16 month high of 48.8 in June up from 48.3 in May, with PMIs rising in all nations except Germany. The ECB kept key interest rates on hold at their July meeting however reassured investors that interest rates will remain 'at present or lower levels for an extended period of time'.
  • Renewed fears surrounding the European debt crisis re-emerged on the back of the resignation of two senior Portuguese ministers.
  • The Bank of Japan's quarterly Tankan Survey showed a big jump in confidence among Japanese manufacturers for the June quarter.
  • Commodity prices were mixed over the month as concerns over the Chinese slowdown persisted. Gold prices dropped 12.7% in June finishing the month at US$1,215.43.74/oz. Iron ore prices partially recovered the large decline last month, rising 4.4% ending the month at US$119.0/MT. Oil price also rose 4.8% to $96.4/bbl.


Australian Shares

The Australian Equity market declined for the second consecutive month with the S&P/ASX 300 Accumulation Index down 2.4%. Most sectors within the index were largely negative with the exception of Healthcare (+1.3%), Telecom Services (+1.0%) and Financials (excluding property) (+0.4%). Materials (-10.3%) was the largest contributor to negative performance followed by Information Technology (-7.0%) and Energy (-5.9%). Newcrest Mining (-31.8%), AMP (-17.6%) and Lend Lease Group (-16.4%) were some of the weakest performers, while Toll Holdings (+10.1%) and ANZ (+4.2%) were among the winners. The S&P/ASX Small Ordinaries Index fell 7.2% over the month underperforming the broader index.

Overseas Shares

Global Equity markets were weaker in June. The broad MSCI World ex Australia Index fell 2.4% in hedged terms but rose 2.3% in unhedged terms as the A$ fell sharply against all major currencies over the month. More specifically, based on the relative performance of the S&P Developed ex-Australia Large & Mid cap indices, global Growth (+2.0%) underperformed their Value (+2.5%) counterparts in A$ terms. The largest contributors over June were Telecommunication Services (+5.8%), Consumer Discretionary (+4.4%), Health Care (+3.5%) and Consumer Staples (3.2%), while Materials (-3.4%) and Energy (+1.2%) were the worst performers.

In the US, the S&P 500 Composite Index was down 1.3% while the more concentrated the Dow Jones Industrial Average fell 1.3% and the NASDAQ lost 1.5%, all in local currency terms. European market fell into negative territory after a positive May with the FTSE 100 (UK) down 5.3%, the CAC 40 (France) declined 4.9%, and the DAX 30 (Germany) fell 4.7%. Asian markets finished June in the red with the exception of the Japanese TOPIX which was flat over the month. The Chinese Shanghai Composite Index plunged 14.0%, marking its largest monthly fall since August 2009 on the back of liquidity issues within the Chinese banking system. Hong Kong Hang Seng fell 5.7% while the Indian BSE 500 lost 3.7% over the month.

In A$ terms, the Global Small Cap sector returned 2.5%, while Emerging Markets lost 1.9%.


Real Estate Investment Trusts (REITs) suffered losses over June; domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) fell 1.0% and Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) lost 2.4% on a fully hedged basis.

Fixed Interest

In June sovereign bond yields generally rose across the major markets. Ten-year bond yields rose: in Australia (+40 bps to 3.76%), UK (+44 bps to 2.44%), US (+32 bps to 2.48%), and Germany (+23 bps to 1.69%); however fell in Japan (-1bps to 0.84%). Two-year bond yields were higher in Europe (+15 bps to 0.28%), Germany (+11 bps to 0.17%), the US (+4 bps to 0.34%), and lower in Japan (-1 bps to 0.11%).

Australian Bonds were weak over the month, as the UBS Treasury Bond Index fell 3.9%, the UBS Semi-Government Index dropped 1.1% and the UBS Credit Index edged 0.6% lower. Global Bonds also saw negative movements over the month. The Citigroup World Government Bond (ex-Australia) Index fell 0.8% and the Barclays Capital Global Aggregate Bond Index dropped 1.3%, both on a fully hedged basis.


The Australian Dollar continued to depreciate against all of the major currencies over the month largely driven by market concerns over the US tapering of stimulus. The Australian dollar fell 4.5% relative to the US dollar, finishing June at US$0.915. Against other currencies, the Australian dollar depreciated 6.1% against the Yen, 4.8% relative to the Euro and 4.6% against the Pound Sterling. On a trade weighted basis, the local currency depreciated 3.5% over the month following the 5.6% drop in May.


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