Investment commentary - 31 August 2014

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

Significant developments

  • Australian gross domestic product (GDP) rose by 0.5% in the second quarter, and 3.1% from a year earlier in seasonally adjusted terms, slightly ahead of expectations for growth of 0.4% and 3.0% respectively. Over the year to June, mining has been the biggest contributor to growth. Construction and financial and insurance services have also been positive, while professional scientific and technical services; and transport postal and warehousing have detracted from growth.
  • The Reserve Bank of Australia (RBA) left the cash rate on hold at 2.50% at its August meeting, indicating that it expects the cash rate to remain unchanged for some time, and for inflation to be consistent with the 2% to 3% target over the next two years. The RBA also released its quarterly Statement on Monetary Policy, which lowered the Australian 2014 GDP forecast by 0.25% to 2.5%, its consumer price index (CPI) forecast by 0.75% to 2%, and its underlying inflation forecast by 0.25% to 2.25%.
  • In seasonally adjusted terms, domestic employment in July was flat, falling behind estimates for growth of 13,200. Full-time employment grew by 14,500, while part-time employment declined 14,800. Private capital expenditure rose 1.1% in the second quarter, ahead of expectations, while first quarter capital expenditure was revised upwards from -2.5% to 4.2%. The current estimate of capital expenditure estimates for 2014-15 rose 5.1% to $145.2b, driven by sectors other than mining and manufacturing.
  • The second estimate of second quarter United States (US) GDP growth was released, which indicated that the US economy grew at a seasonally adjusted annualised rate of 4.2%, above the previous estimate of 4.0%. Compared to the first estimate, upward revisions were made to business investments and net exports, and downward revisions were made to inventories.
  • The ISM Manufacturing Index indicated that activity in the US manufacturing industry rose to its highest level since 2011. The Index rose to 57.1, exceeding expectations for 56.0, and the prior month's 55.3 read. Consistent with the previous month, 17 of 18 industries in the sample reported growth.
  • The Federal Reserve Bank of Kansas City's Jackson Hole Symposium was held, and hosted major central bank heads and economists. The Chair of the US Federal Reserve, Janet Yellen, focused her speech on developments in the labour market and noted that while US labour market conditions of late had improved much more rapidly than previously expected, some measures of labour market conditions are yet to fully recover from the global financial crisis. The speech also focused on the challenges distinguishing between structural and cyclical labour market changes, presenting a balanced perspective that provided few new insights to monetary policy direction. European Central Bank (ECB) head Mario Draghi and Bank of Japan head Haruhiko Kuroda also delivered speeches, which elevated market expectations that the ECB and the Bank of Japan (BoJ) may engage in further monetary easing in the near term.
  • Euro area GDP growth was flat in the second quarter, falling behind expectations for 0.1% growth. The German and Italian economies contracted, while French growth was flat and the Spanish economy grew by 0.6% in the quarter. The survey was indicative of the loss of momentum from the European economy, particularly Germany, which until recent quarters had been a key source of growth in the region. Euro area CPI rose 0.3% from a year earlier in August, in line with expectations, but rising at a slower pace than in July. Core CPI, which removes volatile items, rose 0.9% from a year earlier. The low level of inflation highlights concerns over the poor health of the European economy.
  • The HSBC Manufacturing China Purchasing Managers Index (PMI) declined to 50.2 in August, from 51.7 in July, following a drop a new orders and new export orders. The flash estimate of the HSBC PMI came as a surprise to markets, well below expectations for 51.5.
  • Japanese GDP fell in the second quarter, declining at a 6.8% annualised pace. The economy was negatively impacted by the increase in the consumption tax from 5% to 8% on 1 April, as consumers stockpiled goods ahead of the increase in the tax, and reduced consumption following its impact. However, growth is expected to bounce back in the third quarter, as consumers and businesses adapt to the higher tax rate.


Australian equities

Australian Equities rose 0.6% in August. Mixed performance was recorded across most of the market capitalisation spectrum - with Large Caps returning -0.5%, Mid Caps +0.9% and Small Caps +2.3%. After being the best performing sector in July, Materials struggled underperforming all other sectors (-3.7%) followed by IT (-0.8%) and Consumer Staples (-0.4%).

The strongest sectors were Healthcare (+6.5%), Telecom Services (+4.3%) and Energy (+4.0%). The largest contributors to the return of the index were CSL (+9.1%), Westpac Banking Corporation (+1.7%) and Origin Energy (+8.7%). Conversely, the most significant detractors from the performance of the index were BHP Billiton (-4.9%), Rio Tinto (-5.4%) and Fortescue Metals Group (-14.9%).

Global equities

The broad MSCI World ex Australia Index returned +2.9% in hedged terms and +1.6% in unhedged terms. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (+1.8%) outperformed its Value (+1.3%) counterparts in Australian dollar terms for the second consecutive month. The strongest performing sectors were Healthcare (+3.1%), Information Technology (+2.7%) and Consumer Staples (+2.3%), while Telecommunications Services (-1.5%) and Materials (-0.7%) were the worst performers. In Australian dollar terms, Global Small Caps and Emerging Markets rallied in August by 2.5% and 1.6% respectively.

Across the major regions, in the US the NASDAQ was 4.8% higher, the S&P 500 Composite Index returned 4.0% and the Dow Jones Industrial Average returned 3.6%, all in local currency terms. European markets also produced healthy returns, with the FTSE 100 (UK) up 2.1%, the DAX 30 (Germany) 0.7% higher, and the CAC 40 (France) returning 3.2%. In Asia, the Chinese Shanghai Composite Index rallied 0.7%, the Hang Seng rose 0.2%, and the Indian BSE 500 returned 2.7% while the Japanese TOPIX was the only exchange to lose ground posting -0.9% in August.

Property and infrastructure

Domestic Domestic Real Estate Investment Trusts (REITs) returned 1.7% in August, while Global REITs returned 2.0% on a fully hedged basis. The unlisted property sector rose 0.5% in July, with the Industrial (+0.6%) and Office (+0.5%) sector funds posting the strongest returns. Global listed infrastructure returned (+1.9%) in August in unhedged terms.

Fixed interest

Global sovereign bonds performed well in August. Ten year bond yields fell across all major markets during the month, in particular German bonds (-28 bps to 0.88%), Japanese bonds (-4bp to 0.50%) UK bonds (-36bps to 2.25%), and US bonds (-21bps to 2.35%) all moved in the same direction. In addition, two-year bond yields were lower in the US (-4bps to 0.47%) and in Germany (-6bps to -0.3%) during August. Global Bond indices crept higher during the month, with the Barclays Capital Global Aggregate Bond Index gaining 1.4% and the Citigroup World Government Bond (ex-Australia) Index returning 1.5%, both on a fully hedged basis.

Australian 10-year bond yields fell 21bps ending August at 3.30%, while five-year bond yields fell 13bps to 2.88%. As expected, Australian bond indices also posted positive returns in August. The UBS Credit Index returned 0.7%, the UBS Semi-Government Index gained 1.1% while the UBS Treasury Bond Index was also higher (+1.1%).


The Australian dollar appreciated slightly against the US dollar finishing August at US$0.935. Against other currencies, the Australian dollar rose 2.3% against the Pound Sterling, 2.0% against the Euro and 1.3% against the Japanese Yen. On a trade weighted basis, the local currency gained 0.6% over the month.


Commodity prices were generally weaker in July. The S&P GSCI Commodity Total Return Index fell 2.2% for the month. Gold prices rose 0.15%, finishing the month at US$1,287.93 per ounce. The oil price fell for the third consecutive month (-2.95%) to $101.54 per barrel and iron ore prices fell dramatically by 7.3% to US$89.0 per metric tonne.

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