Investment commentary - 30 April 2016

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
March market sentiment carried through to April as most major developed equity markets delivered modest but positive returns for the month.

The MSCI World ex Australia returned 0.9% in hedged Australian dollar terms. On the back of a strong surge in commodity prices, Energy (+9.4%) and Materials (+9.1%) were the best performing international market sectors.

In the United States (US), labour figures showed signs of slowing as the US Non-Farm Payrolls increased by 160,000, well below expectations for 200,000. Accompanying this release for the month was an adjacent decline in the Institute for Supply Management (ISM) Manufacturing Index to 50.8, also below expectations. Initial estimates for Q1 2016 gross domestic product (GDP) were below historical levels, with a Q1 estimation of 0.5% annualised following 1.4% the previous quarter. The S&P 500 Index returned a modest 0.4% for the period following a downturn late in the month.

Conversely, European markets benefitted from continued employment momentum and economic growth figures. The Europe region of the MSCI World Index returned 3.3% for April following an unemployment rate decline of 0.1% to 10.2% for March.

It was a relatively muted month for government fixed income markets as yields finished higher in most developed countries. Domestically, a negative inflation reading for Q1 of -0.2% released late in the month caused yields to fall sharply from mid-month highs.  Ten-year Australian bond yields rose three basis points (bps) to 2.52% over the period.


  • The Reserve Bank of Australia (RBA) cut interest rates by 25bps to 1.75% in May, despite a majority of economists expecting no change. The cut was primarily driven by below target inflation over the year to March, while lower house price and credit growth also curbed fears that an interest rate cut would lead to excessive pressures in the housing sector. The RBA also released its Quarterly Statement on Monetary Policy, where consumer price index (CPI) forecasts were revised down by 1.0% to 2% to 3% in calendar year (CY) 2016, and further justification for the cut was provided. Finally, the RBA also announced that Deputy Governor, Phil Low, will succeed Glenn Stevens as Governor in September.
  • Australian Inflation declined to -0.2% quarter on quarter (QoQ) and 1.3% year on year (YoY) in Q1, from 0.4% and 1.7%, respectively. This was well short of market consensus for 0.2% QoQ and 1.7% YoY. The trimmed mean which excludes volatile items rose only 0.2% QoQ and 1.7% YoY, falling outside of the RBA’s 2% to 3% target band, leading to markets pricing in a higher probability of a cut to the cash rate prior to the RBA’s May meeting.
  • The 2016-17 Australian Budget was released on 3 May 2016. The Government has forecast a $37.1 billion underlying cash deficit in FY2016-17 (2.2% GDP), with the deficit expected to then decrease to 1.4%, 0.8% and 0.3% of GDP over each subsequent year of the forward estimates. Real GDP is expected to be 2.5% in 2016-17, and 3% each year thereafter, while unemployment is expected to remain at 5.5%. CPI is expected to increase to 2% in 2016-17, before returning to 2.5% in 2017-18.
  • Australian seasonally adjusted employment rose 26,100 in March, ahead of expectations for 17,000 while February employment was revised down from 300 to -700. The unemployment rate fell to 5.7% from 5.8% in March, better than market expectations for 5.9%, as the participation rate was 64.9%, below consensus for 65%. However, part time jobs rose 34,900 while full time jobs declined 8,800. In trend terms employment increased by 7,700 while the unemployment rate and participation rates were unchanged at 5.8% and 65.0%, respectively.
  • Australian Retail Sales rose 0.4% month on month (MoM) in seasonally adjusted terms in March, ahead of expectations for 0.3%, and the 0.1% increase in February. The strongest gains were in clothing, footwear and personal accessories (+0.7%) and the weakest was takeaway food (flat). In trend terms, retail sales rose 3.6% YoY, down from 3.8% over the year to February.
  • US Non-Farm Payrolls increased by 160,000 in April, below expectations for 200,000 while there were 19,000 of downward revisions to the prior two months employment. The unemployment rate was unchanged at 5.0%, but behind expectations for 4.9%, as the participation rate fell to 62.8% from 63.0%. Wages rose 0.3% MoM and 2.5% YoY, from 0.2% and 2.3% over the month and year, respectively to March.
  • The ISM Manufacturing Index declined to 50.8 in April, behind consensus for 51.4, and 51.8 in March. Production, New Orders and Inventories all declined, while employment increased, but remained in contractionary territory. The ISM Non-Manufacturing Index increased to 55.7 in April from 54.8 in March, and expectations for 54.5. New orders and employment increased, while output declined, but remained in expansionary territory.
  • The initial estimate of Q1 2016 US GDP was released. GDP was estimated to have grown 0.5% QoQ annualised, below expectations for 0.7%, and 1.4% growth recorded in Q4 2015. Personal consumption contributed 1.3 percentage points (ppts) and government contributed 0.2ppts, while fixed investment, inventories and net exports all detracted 0.3ppts each.
  • US headline CPI rose 0.1% MoM and 0.9% YoY to March, behind expectations for 0.2% and 1.0%, respectively. Core CPI rose 0.1% MoM and 2.2% YoY, below expectations for 0.2% and 2.3%, respectively.
  • The China Caixin Manufacturing purchasing managers’ index (PMI) printed 49.4 in April, below expectations for 49.8 and 49.7 in March. Production was broadly unchanged, while new orders declined. Meanwhile, the official PMI edged down to 50.1 in April from 50.2 in March, below expectations for 50.3. All sub-indices declined slightly, except for prices, which increased.
  • Chinese GDP grew 6.7% YoY to Q1, in line with expectations and below the 6.8% recorded over the year to Q4. The contribution from the services sector to GDP was 56.9%, compared with 54.9% a year earlier, indicating ongoing rebalancing of activity from investment to consumption. However, QoQ seasonally adjusted grew just 1.1% QoQ, behind expectations for 1.5% and the prior 1.6%.
  • European Core CPI declined to 0.7 % over the year to April, from 1.0% in March and was below estimates for 0.9%.
  • The Eurozone composite PMI was unchanged and in line with expectations for 53. Activity accelerated in Germany, France and Italy, though the largest increases were witnessed in Spain.


March momentum continued into April, with the S&P/ASX 300 Accumulation Index returning 3.3% for the month. There were positive returns across the market spectrum, with the best performer being the ASX 50, returning 3.5% for the month. The best performing sectors were Materials (+14.3%) and Energy (+7.5%). The weakest performing sectors were Consumer Discretionary (-1.7%) and Utilities (-0.3%). The largest positive contributors to the return of the index were BHP, Rio Tinto and NAB, with absolute returns of 23.3%, 21.4% and 4.2% respectively. On the other hand, the most significant detractors from performance were Qantas, CBA and Macquarie with absolute returns of -20.9%, -1.4% and -3.5% respectively.


The broad MSCI World ex Australia Index was up 0.9% in hedged terms and 2.4% in unhedged terms over the quarter, as the Australian dollar depreciated over April. The strongest performing sectors were Energy (+9.4%) and Materials (+9.1%), while IT (-3.5%) and Utilities (+0.4%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 3.2% while Emerging Markets returned 1.3%.

Over April, the NASDAQ returned -1.9%, the S&P 500 Composite Index returned 0.4% and the Dow Jones Industrial Average returned 0.6%, all in local currency terms. European markets experienced modest returns, with the FTSE 100 United Kingdom (UK) up 1.4%, DAX 30 (Germany) 0.7% and the CAC 40 (France) returning 1.4%. In Asia, equity markets saw mixed results, with the Indian BSE 500 up 2.2%, the Hang Seng Index returning 1.5%, the SSE Composite (China) returning -2.2% and the Japanese TOPIX falling 0.5%.



The Real Assets sector saw mixed returns over April with Global Core Infrastructure returning 0.5%, and Global REITs returning -0.7% (both in Australian dollar hedged terms). Domestic REITs posted a return of 2.8% in April to be up 15.6% for the previous 12 months, while Australian Direct Property returned 1.7% on a lagged basis.


Global sovereign bonds produced relatively modest returns over April for hedged Australian investors, with yields rising marginally over the period. Ten-year bond yields broadly rose across most developed economies with Germany (+13 basis points (bps) to 0.28%), the US (+3bps to 1.82%), and the UK (+19bps to 1.60%) all experiencing rises which Japan yields fell modestly (-3bps to -0.07%). Two-year bond yields saw mixed results with the UK (+7bps to 0.52%), Germany (+1bps to -0.47%) and the US (+1bps to 0.77%) all experiencing rises, while Japan’s (-3bps to 0.23%) fell marginally. Global Bond indices were relatively flat for hedged investors, with the Barclays Capital Global Aggregate Bond Index returning 0.3% and the Citigroup World Government Bond (ex-Australia) Index returning 0.0% over the month, both on a fully hedged basis.

Domestically, Australian 10-year bond yields rose 3bps to 2.52% while five-year (-3bps to 2.05%) and two-year (-3bps to 1.87%) bond yields fell marginally. As a result, Australian bond returns were relatively modest for the month. Australian Government Bond Index returned 0.3% while the Australian Composite Bond Index also returned 0.3% for the month.


The Australian dollar depreciated against most major currencies over April, finishing at US$0.763 with a Trade Weighted Index of 63.8. The Australian dollar depreciated 0.7% against the Euro, 2.1% against the Pound Sterling, 4.4% against the Japanese Yen and 0.8% against the US Dollar. On a trade-weighted basis, the local currency fell 0.9% over the month.


In commodities, the S&P GSCI Commodity Total Return Index rose 11.0% for the month. This rise was broadly shared across the board in commodities, as the prices of Iron Ore, Gold and Oil all rose individually.

Gold prices finished the quarter at US$1,292.34 per ounce for a 4.7% increase over the period. The oil price rose strongly over April, by 18.9% to $47.49 per barrel – rebounding from its 10-year low in January. Iron ore prices also rose over the month, by 17.7% to US$64.5 per metric tonne.


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