Investment commentary - 30 June 2015

21/07/2015
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

Over the month of June 2015, some volatility was observed in global share markets as investors reacted to the unresolved situation in Greece as well as a slowing Chinese economy.

The United States (US) share market produced a negative return over the month despite the Atlanta Federal Reserve's quantitative real-time 'GDPNow' model estimating a second quarter gross domestic product (GDP) increase of more than 2.2%. This aligns with market expectations of a rate increase in 2015 from the Federal Reserve (Fed).

The People's Bank of China (PBoC) cut interest rates as well as the Required Reserve Ratio for Banks, seeking some balance amid a struggling housing market and recent falls in equity markets. Japanese GDP figures indicated a continuing recovery with March quarter GDP growth of 1.0% coming in above estimates.

World credit markets generally weakened in June as concern over the Greek debt negotiations for a
Eurozone bailout extension heightened. Global market volatility created by these unresolved negotiations was shared amongst both equity and bond markets as both experienced sharp falls late in the month.
 
International share market volatility was also a concern for domestic investors as the ASX 300 returned -5.3% for the month despite some positive economic indicators locally. Australian business confidence strengthened further in June on the back of the Federal Budget while positive signs were also observed in labour markets as unemployment fell from 6.2% to 6.0% with an estimated 42,000 jobs added in May. The Reserve Bank of Australia (RBA) held interest rates on hold
in early July but did not specify whether a further cut could be expected in 2015.

SIGNIFICANT DEVELOPMENTS

  • The RBA left interest rates on hold at 2.0% in July, as expected by financial markets and all economists polled by Bloomberg. The statement accompanying the decision was broadly unchanged from June, with the RBA indicating that while it retains an easing bias, it is in no rush to cut interest rates. Meanwhile, the RBA continued to indicate that further depreciation of the Australian dollar is required, particularly against currencies other than the US dollar.
     
  • Australian seasonally adjusted employment increased by 42,000 in May, ahead of estimates for a 15,000 increase, while the April employment decline was revised from -2,900 to -13,700. Employment gains were split between full time (14,700) and part time (27,300). The participation rate was unchanged from a revised 64.7%, while the unemployment rate declined to 6.0% from 6.2%. Trend employment increased by 15,700, while the trend unemployment rate declined to 6.0% from 6.1% and the participation rate was unchanged at 64.8%. Some analysts pointed to the release to indicate that unemployment in Australia has peaked and momentum in the labour market is improving.
     
  • Australian retail trade rose 0.3% in seasonally adjusted terms in May, trailing expectations for a 0.5% increase. In trend terms retail trade rose by 0.2% in the month and 4.4% from a year earlier. Clothing, footwear and personal accessories was the strongest sector, with sales rising 0.8%, while Cafes, restaurants and takeaway food, and Department stores were the weakest, unchanged in the month in trend terms.
     
  • Developments in Greece continued to be a focus for markets. Greece became the first developed nation to miss a debt payment to the IMF, and subsequently implemented capital controls following the European Central Bank (ECB) freezing its Emergency Liquidity Assistance facility to the Greek banks. At a referendum on 5 July 2015, Greek citizens rejected a conditional bailout package offered to the Greek government by its creditors. Latest developments concluded at the EuroSummit meeting between Greece, Euro agencies and creditors with an agreement being reached on a third Greek bailout and aid programme. The details of which include a €50 billion trust fund set up from the privatising of Greek assets and a €86 billion bailout from the European Stability Mechanism (ESM) and IMF for the recapitalisation of banks and repayments of debts.
     
  • US non-farm payrolls rose by 223,000 positions in June, behind expectations for a 233,000 increase, while the prior two months gains were revised downward by a collective 60,000 positions. The unemployment rate declined to 5.3% from 5.5%, ahead of expectations for 5.4%, though this was largely driven by a fall in the participation rate to a multi-decade low of 62.6%. Average hourly earnings were flat in June, and up 2.0% from a year earlier, also falling short of expectations for 0.2% and 2.2%, respectively. While the survey was on the whole less positive than expected, it is worth considering this in the context of the substantial improvement in labour market conditions over recent quarters.
     
  • The US Federal Reserve (Fed) left monetary policy on hold at its June meeting, as widely expected, though provided limited information on when it intends to raise interest rates. The meeting was accompanied by a quarterly update of Fed members' economic projections. Following the soft Q1 GDP release, expectations for GDP growth in 2015 were revised lower, while inflation was revised higher. 2016 and 2017 economic forecasts were broadly unchanged, though Fed members' indications of the appropriate levels of monetary policy at the end of 2016 and 2017 were revised lower by 15 and 25bps to 1.625% and 2.875%, respectively. 
     
  • The US Institute for Supply Management (ISM) Manufacturing Index increased to 53.5 in June, from 52.8 in May and was ahead of expectations for 53.2. The increase was driven higher by new orders and inventories, though partially offset by lower production and new export orders. 11 of 18 industries in the survey reported growth, down from 14 in May.
     
  • The US consumer price index (CPI) rose 0.4% in May and was unchanged from a year earlier, below expectations for a 0.5% increase in the month and 0.1% over one year. Core CPI, which excludes volatile items such as food and energy, was also below estimates for a 0.2% increase in the month, and 1.8% increase from a year earlier, and was flat in the month and 1.7% higher than a year earlier.
     
  • The PBoC cut interest rates by 25bps, lowering the benchmark lending rate to 4.85% and the benchmark deposit rate to 2.0%. Meanwhile, the Reserve Requirement Ratio, the proportion of reserves that banks must hold against deposits, was cut by 50bps for banks that meet certain lending criteria for the agricultural sector and SMEs. While it is understood that recent Chinese equity market falls may have influenced the PBoC's decision, though it is worth noting low inflation and slower growth are probably front of mind for officials.
     
  • The China HSBC Manufacturing Purchasing Managers' Index (PMI) declined to 49.4 in June, ahead of 49.2 in May, though below the early "flash" reading of 49.6. While the survey indicated that manufacturing activity was still in contractionary territory, new orders and new export orders both rose. The official PMI was unchanged in June from 50.2 in May, though was behind market expectations for 50.4.
     
  • Euro area core CPI rose 0.8% from a year earlier in June, slightly lower than the 0.9% increase recorded over the year to May.
     
  • The Euro area composite PMI rose slightly to 54.2 in June, from 53.6 in May and was ahead of expectations for no change from the earlier "flash" estimate of 54.1. The survey continues to point to expansion in both services and manufacturing activity in the euro area.
     
  • The Bank of Japan's Tankan Index, a key leading indicator of business sentiment, showed that business conditions for large manufacturers rose to +15 in Q2 from +12 in Q1, ahead of estimates for no change, while for large non-manufacturers, conditions rose to +23 from +19, ahead of expectations for +22. The survey also indicated that Japanese companies intend to increase capital expenditure by 9.3%, well ahead of market expectations for 5.3% and a decrease of 1.2% in the Q1 survey.
     
  • The Reserve Bank of New Zealand (RBNZ) cut interest rates in June by 25 basis points to 3.25% in response to lower export prices, particularly for dairy goods, and expectations that demand and inflation will slow. The RBNZ also noted that the New Zealand dollar appears overvalued.
     

AUSTRALIAN EQUITIES

Australian Equities produced a negative absolute return in June as the S&P/ASX 300 Accumulation Index returned -5.3%.
From a sector perspective; Telecom Services (-1.3%), Financials ex Prop (-2.9%) and Property Trusts (-4.0%) were the better performers, while Consumer Discretionary (-10.9%), Materials (-8.3%), Industrials (-7.8%) and Consumer Staples (-7.8%) were the weakest.
 
The Australian Small Companies Index underperformed Australian large caps, with a return of -7.8% for the month.

GLOBAL EQUITIES

Global Equities returned -2.74% in hedged (Australian dollar) terms, and -2.66% in unhedged (Australian dollar) terms as the Australian dollar depreciated slightly against most major currencies over the month. Global Small Caps outperformed the broad cap index returning -1.3%, while Emerging markets returned -3.0% (both in Australian dollar unhedged). In the US, the S&P500 returned -1.9%, while the NASDAQ returned -1.6%.

Outside of the US, Japan (-2.4%), the UK (-6.4%) and Germany (-4.1%) all fell in local currency terms. In other regions, China (-7.3%), India (-1.1%) and Hong Kong (-3.0%) also experienced falls over the month of June (returns in local currency terms).

Across the sectors, Telecommunication Services (-1.0%), Consumer Discretionary (-1.3%), Healthcare (-1.6%) and Financials (-1.6%) were the better performers, while Utilities (-5.9%), Materials (-4.7%) and IT (-4.6%) were the weakest (all in A$ terms).

REAL ASSETS

The Real Assets sector produced mixed performance in June, with Global Core Infrastructure falling -4.2% (on 50/50 hedged terms) and Global Real Estate Investment Trusts (REITs) returning -4.3% (in Australian dollar hedged terms).
 
Domestic REITs posted a negative market return of -4.0% in June while Australian Direct Property returned +1.8%.

FIXED INTEREST

Ten-year sovereign bond yields increased in the US (+24bps to 2.33%), Japan (+5bps to 0.44%), Germany (+28bps to 0.77%) and the UK (22bps to 2.03%). Two-year sovereign bond yields increased in the US (+1bps to 0.58%), Japan (1bps to 0.01%) and the UK (5bps to 0.57%) but decreased in Germany (-2bps to -0.24%).  Overall, hedged Global Fixed Income returned -1.1% for the month.
 
Australian bond markets saw increases in the ten-year (+28bps to 3.01%), five-year (+20bps to .32%) and two-year yields (12bps to 2.02%). The Australian Composite Bond Index returned -0.9%.

CURRENCY MARKETS

Over June, the Australian dollar depreciated against most major currencies with falls of -1.1% against the Japanese Yen, -2.3% against the Pound, -1.9% against the Euro whilst appreciating 0.4% against the US Dollar to finish at US$0.769 on June 30. On a trade-weighted basis, the Australian dollar rose 0.2% for the month.

COMMODITIES

Commodity prices were generally stable in June. The broad S&P GSCI Commodity Total Return Index fell -0.5% following a modest increase in May. The price of oil fell (-4.8% to US$61.20 per barrel), while gold also fell, (-1.7%) finishing the month at US$1,169.4 per ounce. Iron ore prices continued to steady, rising by 1.7%, finishing the month at US$60 per metric tonne.





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