Investment commentary - 30 September 2013

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

In a major surprise, the US Federal Reserve decided to delay tapering the size of its monthly asset purchases, which currently runs at US$85 billion.

The market anticipated that the Fed would scale back the size of the asset purchases by $10 billion each month beginning in September, a move foreshadowed by Ben Bernanke in May as a step to curb the very loose monetary policy in the US. However the Fed acted contrary to market expectations deciding that recent economic data, which has been generally mixed, does not yet warrant a reduction in QE. The announcement sent equities and bonds surging while the US Dollar depreciated, although equities pulled back in the following days. The optimism eroded towards the end of the month due to the political gridlock concerning the federal budget and the possible shutdown of the US Government. In Europe, Angela Merkel was re-elected for her third term, a signal that German voters support the preservation of the Euro. The European economy continues to show signs of a gradual recovery. Locally, the Australian housing market has been in the spot light with speculation that record low interest rates have the potential to push house prices into bubble territory. At its last meeting the RBA left the official cash rate unchanged at the record low of 2.50%.

Significant developments over the month were:

  • The RBA left the cash rate unchanged at 2.50% at their October meeting. Once again there was no mention of further monetary easing, suggesting that the earlier easing bias has softened. The accompanying statement reiterated that further falls in the currency are desirable as they would help rebalance the economy in the wake of lower levels of mining investment.
  • The Coalition won the Australian Federal election. The new government's 'plan' focuses on reducing taxation and regulation (particularly for smaller companies), maintaining responsible public finances, enhancing Australia's transport infrastructure, and strengthening productivity growth. Despite earlier rhetoric, returning the budget quickly to surplus is not on the policy agenda.
  • The NAB Business Confidence Index surged for the second straight month, hitting a three and a half year high in September of +12 points. The NAB Business Conditions Index improved marginally, however still remains muted at -4 points.
  • US manufacturing activity continued to accelerate over September with the ISM Manufacturing PMI rising to 56.2 from 55.7 in August.
  • The US housing market continued its recovery, with the S&P/Case-Shiller House Price Index rising 12.4% for the year to July, up from 12.1% a month earlier. Housing starts rose 0.9% over August, while building permits declined 3.8% for the month. New home sales rose 7.9% in August to a seasonally adjusted annual rate of 421,000.
  • Chinese manufacturing grew modestly in September with the HSBC China Manufacturing PMI rising to 50.2 up from 50.1 in August, representing expansion in the sector for the second consecutive month.
  • Euro area inflation remains subdued, falling to an annual rate of 1.1% in September down from 1.3% in August.
  • Eurozone manufacturing expanded for the third straight month, with the Manufacturing PMI index posting a reading of 51.1 in September. Euro area unemployment remained steady at 12.0% in August following a slight drop in July. The highest unemployment rates were recorded in Greece and Spain.
  • Japanese inflation accelerated over August to an annual rate of 0.9%, evidence that the recent policy stimulus is on the way to overcoming deflation. The Bank of Japan's quarterly Tankan Survey showed that confidence among Japanese manufacturers has soared to the highest level since the start of the GFC.
  • Commodity prices were generally weaker over the month. Gold prices fell 4.8% in September finishing the month at US$1,330.84/oz. Iron ore prices dropped 4.3%, ending the month at US$134.0/MT. The oil price weakened by 6.6% to $107.98/bbl, as tensions over Syria faded.


Australian Shares

The Australian Equity market returned 2.2% for the month, buoyed by the continuation of Quantitative Easing. The more cyclical sectors continued to outperform more defensive sectors over September, as investors continued to move away from the yield focussed style of investing. The best performing sectors were Industrials (+5.6%), Information Technology (+3.6%) and Consumer Discretionary (+3.0%). The weaker performing sectors included Healthcare (-1.8%), Consumer Staples (+0.3%) and Property Trusts (+0.9%). Someof the strongest performing stocks included Fortescue Metals (+9.9%), Macquarie Group (+9.5%) and Origin Energy (+6.7%). On the other hand, Resolute Mining (-32.5%), Newcrest Mining (-11.7%) and Treasury Wine Estates (-6.9%) were some of the weakest performers. The S&P/ASX Small Ordinaries Index rose 1.7% over the month underperforming the broader index.

Overseas Shares

Global Equity markets were generally stronger over September. The broad MSCI World ex Australia Index rose 3.9% in hedged terms, owever fell 0.1% in unhedged terms as the Australian dollar gained against all of the major currencies. More specifically, based on the elative performance of the S&P Developed ex-Australia Large & Mid cap indices, Global Growth (+0.2%) outperformed their Value -0.2%) counterparts in A$ terms. The strongest performing sectors were Industrials (+2.2%) and Consumer Discretionary (+1.8%), hile Energy (-2.2%) and Consumer Staples (-1.7%) were the worst performers.

In the US, the NASDAQ returned 5.1% during September, the S&P 500 Composite Index rose 3.1% and the Dow Jones Industrial verage gained 2.3%, all in local currency terms. European markets were stronger, with the DAX 30 (Germany) jumping 6.1%, the AC 40 (France) gaining 5.5% and the FTSE 100 (UK) returning 0.9%. Asian markets also advanced, with the Japanese TOPIX oaring 8.7%, the Hang Seng returning 5.7%, the Indian BSE 500 rising 5.2% and the Chinese Shanghai Composite Index advancing .6%.

In A$ terms, the Global Small Cap sector rose 1.9%, while Emerging Markets returned 1.4% in September.


Real Estate Investment Trusts (REITs) performed well over the month; domestic REITs (as measured by the S&P/ASX 300 A-REIT Idex) advanced 0.9%, while Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) gained 4.7% on a fully edged basis. The unlisted property sector (as measured by the Mercer/IPD Australia Monthly Property Fund Index) returned 0.6% ver August on the back of solid returns from Office, Retail and Industrial funds (all +0.6%).

Fixed Interest

Global Sovereign Bond yields generally fell across the major markets over the month following the Fed's decision to delay tapering. en-year bond yields fell: in the US (-13bps to 2.62%), Germany (-13bps to 1.73%), the UK (-6bps to 2.54%) and Japan (-3bps to .69%). Two-year bond yields were lower in Germany (-7bps to 0.14%) and the US (-6bps to 0.32%). Global Bond indices saw positive eturns over the month, as the Citigroup World Government Bond (ex-Australia) Index rose 0.9% and the Barclays Capital Global Agregate Bond Index gained 1.0%, both on a fully hedged basis.

The Australian ten-year bond yield fell by 9bps to 3.81% and the two-year bond yield dropped 3bps to 3.17%. Australian Bonds produced positive returns over September, with the UBS Credit Index returning 0.6% and the UBS Treasury Bond Index and UBS Semi-Government Index rising 0.5% and 0.4% respectively.


The Australian Dollar reversed the recent down trend and appreciated against all of the major currencies over September. The

Australian Dollar jumped 5.0% relative to the US Dollar, finishing the month at US$0.935. Against other currencies, the A$ appreciated 5.0% against the Yen, 2.3% relative to the Euro and 0.3% versus the Pound Sterling. On a trade weighted basis, the local currency gained 2.9% over the month.


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