Investment commentary - 31 August 2013

Provided by Mercer.

All eyes were once again on the US Federal Reserve and the discussion surrounding the eventual withdrawal of Quantitative Easing.

Positive economic news coming out of the US, along with the release of the minutes from the Federal Reserve meeting resulted in speculation that 'tapering' of QE may start as soon as September, which hit both equity and bond markets. Australian equities bucked the global trend, finishing the month higher. Risk aversion engulfed markets towards the end of the month driven by the possibility of US military intervention in Syria following the alleged use of chemical weapons on civilians. The result was a sell-off in risk assets and a flight to safe haven investments including gold and the US dollar.

The weakness in emerging markets continued over the month driven by the rise in developed market yields amid 'tapering' speculation and the encouraging economic news coming out of the US, Japan and Europe. With increasing longer term interest rates on offer in developed markets and the potential withdrawal of very loose monetary policy in the US, capital flows to the higher yielding emerging markets have declined. India and Indonesia were hit particularly hard in August, experiencing a significant depreciation in their currencies and falling stock markets.

Locally, the RBA maintained the official cash rate 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 September meeting. The accompanying statement had no mention of further easing and markets interpreted this as a softening in the easing bias.
  • The Treasury's Pre-Election Economic and Fiscal Outlook showed the expected current financial year budget deficit to be $30.1 billion and forecast that the budget will post a surplus in the 2016-17 financial year.
  • The US economy added 169,000 new jobs in August, falling short of market expectations. Nevertheless, the unemployment rate fell to 7.3%, the lowest level since December 2008.
  • US GDP growth over the June 2013 quarter was revised up to an annual rate of 2.5% from an earlier estimate of 1.7%. The upward revision was driven by stronger exports and lower imports. US manufacturing activity accelerated over August with the ISM Manufacturing PMI rising to 55.7 from 55.4 in July.
  • US house prices continued their ascent, albeit at a marginally slower pace, with the S&P/Case-Shiller House Price Index rising 12.1% for the year to June. Housing starts rose 5.9% over July, while building permits increased 2.7% for the month. Conversely new home sales disappointed, falling 13.4% for July to a seasonally adjusted annual rate of 394,000.
  • Chinese manufacturing returned to growth in August after contracting for three consecutive months, with the HSBC China Manufacturing PMI rising to 50.1, up from 47.7 in July.
  • Chinese trade data in August showed export growth of 7.2% from a year earlier, up from 5.1% in July. Inflation remains subdued with CPI rising by 2.6% for the year to August.
  • The Euro area emerged from an 18 month long recession as the economy grew 0.3% in Q2 2013. Underlying the recovery was growth of 0.7% in Germany and 0.5% in France, the region's two largest economies. The contraction in Spain and Italy slowed to 0.1% and 0.2% respectively, while Portugal soared out of recession with growth of 1.1%.
  • Eurozone manufacturing accelerated over August as the Manufacturing PMI index hit a 26 month high of 51.4, up from 50.3 in July. Euro Area unemployment remained steady at 12.1% in July
  • The Japanese economy grew at an annualised rate of 3.8% in Q2 2013, a sign that the world's third largest economy is beginning to gain momentum, following recent policy stimulus.
  • Commodity prices were generally stronger over the month. Gold prices rose 6.7% in August finishing the month at US$1,397.63/oz. Iron ore prices climbed 6.1% ending the month at US$140.0/MT. The oil price jumped 7.2% to $115.63/bbl, following the tensions in Syria. Although Syria is not a major oil producer, there is potential that the conflict may disrupt supplies in the Middle East.

Australian Shares

Despite the global sell off, Australian Equities managed to post a positive return of 2.5% for the month. The best performing sectors were Energy (+5.2%) followed by Consumer Discretionary (+5.1%) and Industrials (+4.7%). The weaker performing sectors were more defensive in nature and included Property Trusts (-0.1%), Telecom Services (+0.8%) and Financials (excluding property) (+1.1%). Some of the strongest performing stocks included Fortescue Metals (+18.5%), Origin Energy (+11.3%), Santos (+10.3%) and Newcrest Mining (+8.6%). On the other hand, Paladin Energy (-44.0%), Platinum Asset Management (-13.4%) and Spark Infrastructure (-8.8%) were some of the weakest performers. The S&P/ASX Small Ordinaries Index rose 2.9% over the month outperforming the broader index.

Overseas Shares

Global Equity markets were generally weaker over August. The broad MSCI World ex Australia Index fell 1.5% in unhedged terms and 2.0% in hedged terms as the A$ continued to fall against all of the major currencies. More specifically, based on the relative performance of the S&P Developed ex-Australia Large & Mid cap indices, Global Growth (-0.9%) outperformed their Value (-1.8%) counterparts in A$ terms. The strongest performing sectors were Materials (+2.0%) and Information Technology (+0.3%), while Utilities (-3.6%) and Consumer Staples (-2.8%) were the worst performers.

In the US, the NASDAQ returned -1.0% during August, the S&P 500 Composite Index fell 2.9% and the Dow Jones Industrial Average lost 4.1%, all in local currency terms. European markets struggled over the month, with the CAC 40 (France) losing 1.5%, the DAX 30 (Germany) falling by 2.1% and the FTSE 100 (UK) returning -2.4%. Asian markets finished the month in the red, with the Hang Seng declining 0.4%, the Japanese TOPIX losing 2.2%, the Indian BSE 500 falling by 4.5%. The Chinese Shanghai Composite Index was the exception returning 5.2% for the month. In A$ terms, the Global Small Cap sector fell 1.1%, while Emerging Markets dropped 1.0% in August.


Real Estate Investment Trusts (REITs) performed poorly over the month; domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) fell 0.1%, while Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) lost 4.0% on a fully hedged basis.

Fixed Interest

Global Sovereign Bond yields generally rose across the major markets over the month. Ten-year bond yields rose: in the UK (+25 bps to 2.60%), Germany (+18bps to 1.85%) and the US (+16bps to 2.75%); however fell in Japan (-7bps to 0.72%). Two-year bond yields were higher in the US (+8bps to 0.37%) and Germany (+8bps to 0.21%). Global Bond indices saw negative returns over the month, as the Citigroup World Government Bond (ex-Australia) Index fell 0.1% and the Barclays Capital Global Aggregate Bond Index lost 0.2%, both on a fully hedged basis.

The Australian ten-year bond yield rose by 18bps to 3.90% and the two-year bond yield climbed 20bps to 3.20%. Australian Bonds retraced over the month, with the UBS Treasury Bond Index and UBS Semi-Government Index falling 0.5% and 0.3% respectively, while the UBS Credit Index was flat for the month.


The Australian Dollar continued to weaken against all of the major currencies over August. The Australian dollar declined 0.8% relative to the US dollar, finishing the month at US$0.891. Against other currencies, the Australian dollar depreciated 2.7% relative to the Pound Sterling, 1.0% against the Yen and 0.1% relative to the Euro. On a trade weighted basis, the local currency fell 0.3% over the month.



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