Investment commentary - 30 April 2015



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

In April 2015, United States (US) equities were a relatively weak performer with growth slowing substantially following an adverse winter along with a weaker US dollar (annualised gross domestic product (GDP) rose 0.2% over the March quarter).

The US Federal Reserve (Fed) is expected to hold off increasing the official cash rate until late 2015, with the US dollar expected to continue to strengthen against most major currencies. In Europe and Japan, positive signs were observed with markets continuing to react to the early-March commencement of the Quantitative Easing program of the European Central Bank (ECB), as well as the Bank of Japan's own ongoing easing program. Locally, inflation is forecast to remain consistent with the target over the next few years despite the pressure from a lower exchange rate. The Reserve Bank of Australia (RBA) expects that the Australian economy will continue to operate with some spare capacity over the near term.

For these reasons, it decided to further reduce the cash rate by 25 basis points (bps) to a new low of 2.0% in early May. This easing is expected to reinforce recent encouraging trends in household demand. The International Monetary Fund (IMF) appears confident in the global growth profile as indicated by its recent world growth forecasts of 3.5% in 2015 and 3.8% in 2016. Consistent with this view, bond market yields rose by month end as investors unwound long bond positions and global equity markets were broadly positive.

Significant developments

  • The RBA cut interest rates by 25bps to 2.0%, citing ongoing spare capacity in the economy and the need for further depreciation of the Australian dollar. While the decision was correctly anticipated by a majority of economists surveyed by Bloomberg and the markets, the omission of the RBA's easing bias from the statement surprised many. Nevertheless, the easing bias was included in the RBA's quarterly Statement on Monetary Policy, which was released three days after the cut. The Statement also indicated that the RBA reduced its 2015 and 2016 GDP growth forecasts by 25bps, and its 2016
    inflation forecast by 25bps
  • Australian seasonally adjusted employment decreased by 2,900 in April, behind expectations for a 4,000 gain. Fulltime employment declined by 21,900 in February, while part-time employment increased by 19,000. The unemployment rate increased by 0.1% to 6.2%, while the participation rate was unchanged at 64.8%. In trend terms, employment increased by 19,100, while the unemployment rate declined by 0.1% to 6.1%, while the participation rate was unchanged at 64.8%.
  • The Australian consumer price index (CPI) rose by 0.2% in the March quarter, ahead of expectations for 0.1%, and was 1.3% for the year ending March. The trimmed mean rose 0.6% in the quarter, in line with expectations. The trimmed mean was 2.3% for the year ending March, up slightly from 2.2% for the December year end, although still within the RBA's 2% to 3% inflation target band. Annual inflation was the highest in Education (+5.4%) and Alcohol and Tobacco (+5.2%), and the lowest in Transport (-6.2%) and Communication (-4.5%).
  • Australian retail trade rose by 0.3% in seasonally adjusted terms in March, behind expectations of a 0.4% gain. In trend terms Australian turnover rose by 4.3% in March 2015 compared to March 2014. Clothing, Footwear and Personal Accessories was the strongest sector, with sales rising 0.8%, while Department Stores were the weakest, rising 0.1% in the month in trend terms.
  • US Non-Farm Payrolls increased by 223,000 in April, slightly behind expectations of a 228,000 gain, while payrolls for the prior two months were revised down by 39,000. The participation rate increased marginally from 62.7% to 62.8%, while the unemployment rate declined from 5.5% to 5.4%. The disappointing payrolls were somewhat offset by better than expected wages data. Average hourly earnings rose 0.1% in April and 2.2% from a year earlier, below expectations for gains of 0.2%
    and 2.3% respectively.
  • The first estimate of Q1 2015 US GDP was released. GDP was estimated to have risen at an annualised quarterly pace of 0.2%, well below expectations for a 1.0% increase, and the 2.2% annualised growth reported in Q4. Consumption contributed 1.3 percentage points (ppts) and inventories 0.7ppts to growth. Meanwhile, the impacts of lower energy prices were visible in slower investment, which detracted 0.4ppts from growth, while the impact of the long-running west coast port strike and the higher US dollar saw net exports detract 1.3ppts from growth. Bad weather is also likely to have weighed on growth, while some residual seasonality issues may be present in the data.
  • The US ISM Manufacturing Index was unchanged at 51.5 in March, although below expectations for 52.0. The new orders, exports and production sub-components of the index all increased, while inventories declined.15 of 18 industries in the survey reported growth, up from 10 in March.
  • The US CPI rose 0.2% in March (seasonally adjusted) and declined 0.1% from a year earlier (before seasonal adjustment), below expectations for 0.3% and no change, respectively. Core CPI, which excludes volatile items such as food and energy, posted 1.8% for the year ending March.
  • Chinese GDP rose 7.0% over the year to March, in-line with market expectations, though below the 7.3% growth recorded over the year to December. Nominal growth rose only 5.8% over the year, indicating deflationary pressures present in the Chinese economy. Nevertheless, the release contained some positives, including the services sector increasing its share of output to 51.6% of GDP from 48.2% in 2014, providing an indication that efforts from the Chinese authorities to transition from investment-led to consumption-led growth are bearing fruit.
  • In response to slowing growth, the People's Bank of China cut interest rates by 25bps to 5.1% for the benchmark lending rate and 2.25% for the benchmark deposit rate. Despite easing rates, the move was accompanied by ongoing efforts to liberalise interest rates, which resulted in the deposit rate ceiling being raised from 1.3 times to 1.5 times the benchmark deposit rate.
  • The HSBC China Flash Manufacturing purchasing managers' index (PMI) declined to 48.9 in April from 49.2 in March, led by decreases in output and new orders. The official PMI was unchanged at 50.1, slightly ahead of expectations for 50.0, as output rose.
  • Euro area CPI was flat in April, from -0.1% in March and was in line with expectations. Core CPI rose 0.6% from a year earlier, also in line with expectations.


Australian equities

Australian equities fell marginally in April with the S&P/ASX 300 Accumulation Index returning -1.6%. Energy (+8.5%), Utilities (+2.2%) and Materials (+1.2%) were the strongest performing sectors, while Financials ex Prop (-4.7%), Healthcare (-3.9%) and IT (-2.9%) were the weakest sectors. Australian Small Companies (small caps) outperformed Australian large companies (large caps), with the Small Ordinaries Accumulation Index returning +1.7%.

Global equities

Global equities returned -0.8% in unhedged (A$) terms and +1.3% in hedged (A$) terms, as the Australian dollar appreciated during the month. Global small caps underperformed the broad cap index returning -2.2%, while emerging markets returned +4.3% (both in A$ unhedged). In the US, the S&P500 returned -2.2%, while the NASDAQ returned +0.8%. Outside of the US, Japan (+3.2%) and the United Kingdom (UK) (+3.2%) were strong performers, while Germany (-4.3%) lagged (returns in local currency terms). Energy (+5.3%), Telecommunication Services (+2.3%) and Materials (+0.7%) were the strongest performing global sectors, while Healthcare (-3.2%), Consumer Discretionary (-2.1%) and Consumer Staples (-2.0%) were the weakest (all in A$ terms). Among emerging market shares China (+18.5%) and Hong Kong (+13.0) were strong performers, while India (-3.2%) was a weak performer (returns in local currency terms.)

Property and infrastructure

Real asset sector performance was relatively weak in April, with Global Listed Infrastructure returning -0.52% (in unhedged terms) and Global Listed Property returning -2.3% (in A$ hedged terms). Domestic Real Estate Investment Trusts (REITs) posted negative returns of -1.0% in April while Australian direct property returned 1.3% in March 2015.

Fixed interest

Ten-year bond yields increased in the US (+11bps to 2.04%), UK (+26bps to 1.84%), Germany (+18bps to 0.36%) but decreased in Japan (-7bps to 0.33%). Two-year sovereign bond yields increased in the US (+2bps to 0.56%), the UK (+11bps to 0.53%) and Germany (+2bps to -0.22%), but decreased in Japan (-4bps to 0.01%). Australian yields rose across the yield curve, with the two-year (+27bps to 1.98%), five-year (+27bps to 2.11%) and the 10-year (+33bps to 2.65%) all increasing. As a result, the Australian composite bond index returned -1.1% while overseas fixed income returned -0.4% (A$ hedged) during April.


In April, the Australian dollar appreciated against most major currencies with increases of +3.2% against the US dollar, +3.2% against the Japanese Yen, +0.3% against the Pound and +1.8% against the Euro. On a trade-weighted basis the A$ rose 3.2% for the month.


Commodity prices generally rebounded in April. The broad S&P GSCI Commodity Total Return Index rose 7.6% following a smaller decrease the previous month. The price of oil rose by 18.3% to US$ 64.57 per barrel, while gold prices fell by 0.6% finishing the month at US$ 1,180.7 per ounce. Iron ore prices steadied, rising by 9.4%, finishing the month at US$58 per metric tonne.


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