Investment commentary - 30 June 2014


Provided by Mercer.

Global share markets showed resilience in June 2014 with the developed index and emerging markets rising 0.4% and 1.2% respectively, despite uncertainty associated with escalating sectarian violence in Iraq.

In the United States (US), the contraction in March quarter gross domestic product (GDP) was revised down yet again to -2.9% from the second revision of -1.0% (and an advance estimate of 0.1%). The slump, however, still reflects temporary factors,
notably bad weather, difficulties in measuring healthcare reforms, inventory adjustment and weak exports. Hence market expects that
significant rebound in growth will unfold over the remainder of the year. As anticipated, the US Federal Reserve (Fed) continued on its course of tapering the pace of asset purchases by US$10

Not surprisingly given the unexpected weakness in the March quarter, the GDP growth for 2014 was revised down from 2.9% in March to 2.2%. However, the growth outlook for the later years
remains unchanged at 3.1% in 2015 and 2.75% in 2016.

Australian shares were unable to keep pace with the large cap index dropping 1.4% over the month. Weaker consumer confidence following the Federal Government's May Budget drove a number
of profit warnings from retailers, however, the ANZ Roy Morgan weekly consumer confidence index slowly rose over the last four weeks indicating that consumer sentiment continues to slowly recover post budget. However, Sentiment remains 8% below its mid-April level. The Australian dollar ended the month above US$0.94 and was supported by improving signs in the Chinese
economy and the general increase in risk aversion.

Significant developments

  • Australian GDP grew by 1.1% in the March quarter (seasonally adjusted) bringing Australia's annual growth to 3.5% over the 12 months to March, according to the Australian Bureau of Statistics (ABS). The terms of trade decreased 1.2% and real gross domestic income increase 0.8%.
  • The above-trend expansion of the Australian economy in the March quarter provided some evidence that the economy can transition away from mining investment towards other sources of demand; however, more recent data indicates a loss of momentum since then. In particular, consumer spending is observed to have slowed in recent months reflecting a drop in confidence following the Budget and trade balance has returned to deficit.
  • The Reserve Bank of Australia (RBA) board kept the cash rate unchanged at 2.50% at its July meeting, continuing its accommodative monetary policy stating "on present indications, the most prudent course is likely to be a period of stability in interest rates." The RBA also expects inflation to be consistent with the 2% to 3% target over the next two years.
  • According to the ABS, Australian retail sales fell 0.5% (seasonally adjusted) in May 2014. In trend terms, Australian turnover rose 5.3% in May 2014 compared with May 2013. Revisions to last month's seasonally adjusted retail sales saw a fall of 0.1% in April 2014 as opposed to the originally reported positive 0.2%.
  • The US real gross domestic product growth for the March quarter was revised down further to an annual rate of -2.9%- according to the third estimate released by the Bureau of Economic Analysis based on a more complete source data than were available for the second estimate. In the second estimate, real GDP was estimated to have decreased 1.0%. With the third estimate for the first quarter, a smaller increase in personal consumption than previously estimated was noted, and the decline in exports was larger than previously estimated.
  • The June purchasing managers' index (PMI) registered 55.3, a decrease of 0.1 percentage point from May's reading of 55.4, indicating expansion in manufacturing for the thirteenth consecutive month. Of the 18 manufacturing industries, 15 reported growth in June.
  • The US unemployment rate declined to 6.1% in and
    total nonfarm payroll employment increased by 288,000 in June. Job gains were led by growth in professional and business services, retail trade, food services and drinking places, and health care.
  • The HSBC China Manufacturing PMI posted at 50.7 in June, up from 49.4 in May and signalled the first improvement in business conditions since last December. Output rose modestly first time since January, the strongest expansion of total new work was observed since March 2014 and new export orders rose for the second consecutive month. However, the rate of improvement was modest and
    weaker than average.
  • The Euro area unemployment rate was 11.6% in May,
    stable compared to11.7% in April 2014 but down from 12.0% in May 2013.
  • The recovery in the Eurozone manufacturing was extended to a twelfth successive month in June. Evidence that the upturn is losing momentum is still seen with the PMI at 51.8 in June down from 52.2 in May. This is the lowest reading in seven months and growth of both output and new orders slowed since May. Across the nations, only Ireland and Spain saw
    their PMI readings improve. PMI indices fell in all of the other nations, although only France and Greece signalled outright contractions.
  • Japan's manufacturing PMI rose to 51.5 in June, from 49.9 in May, a sign that domestic demand has quickly recovered from a sales tax increase at the start of April. The tax hike caused a dip in consumer spending and factory output but the economy is showing signs that it will quickly bounce back, with index rising above the 50 threshold that separates expansion from contraction for the first time in three months.

Australian equities

Australian Equities fell by 1.4% in June. Negative returns were recorded across most of the market capitalisation spectrum - with Large Caps returning -1.5%, Mid Caps and Small Caps both falling 1.1%. The best performing sectors were Property Trusts (+3.3%) and Utilities (+1.1%). The weakest performing sectors were Consumer Staples (-4.5%) and Healthcare (-3.2%). The largest
contributors to the return of the index were Newcrest Mining (+8.0%), Tatts Group (+7.6%) and WorleyParsons (+8.9%). On the other hand, the most significant detractors from the performance of the index were BHP Billiton (-2.7%), Woolworths (-6.2%) and CSL (-5.6%).

Global equities

The broad MSCI World ex Australia Index returned 1.7% in hedged terms and 0.4% in unhedged terms. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (0.63%) outperformed its Value (0.36%) counterparts in Australian dollar terms. The strongest performing sectors were Energy (+3.5%), Utilities (+2.0%) and Information Technology (+1.0%), while Telecommunication Services (-1.5%), Consumer Staples (-1.4%) and Industrials (-0.7%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 2.5%, while Emerging Markets rose by 1.2%.

In June, the NASDAQ gained 3.9%, the S&P 500 Composite Index returned 2.1% and the Dow Jones Industrial Average returned 0.75%, all in local currency terms. European markets showed negative returns, with the FTSE 100 (UK) down 1.2%, DAX 30 (Germany) 1.1% lower, and the CAC 40 (France) returning -1.7%. In Asia, the Indian BSE 500 (+6.4%) continued to lead the region significantly higher while the Chinese Shanghai Composite Index rose +1.3% and the Japanese Topix gained 5.3%.

Property and infrastructure

Domestic Real Estate Investment Trusts (REITs) returned 3.3% in June, while Global REITs returned 1.1% on a fully hedged basis. The unlisted property sector rose 0.6% in May, with Industrial and Retail (+0.6%) funds posting strong returns. Meanwhile, global listed infrastructure returned 2.2% for the month.

Fixed interest

Global sovereign bond yields had mixed results over the month. Ten-year bond yields fell in Germany (-6 bps to 1.25%), Japan (-1bp to 0.57%), and rose in the US (+6bps to 2.52%) and in the UK (10bps to 2.67%). Twoyear bond yields were higher in the US (+9bps to 0.42%) and lower in Germany (-4bps to 0.03%). Global
Bond indices rose higher, with the Barclays Capital Global Aggregate Bond Index gaining 0.5% and the Citigroup World Government Bond (ex-Australia) Index returning 0.6%, both on a fully hedged basis.

Australian ten-year bond yields and five-year bond yields lost 12 bps, with the 10-year bond yield at 3.54% and the five-year bond yields at 2.99%. Australian bonds posted modestly higher returns in May. The UBS Credit Index returned 0.7%, the UBS Semi-Government Index gained 0.9% while the UBS Treasury Bond Index finished the month also 0.9% higher.


The Australian dollar appreciated against the major currencies in May finishing the month at US$0.944. Against other currencies, the Australian dollar depreciated 0.7% against the Pound Sterling meanwhile appreciating 0.8% against the Euro and the Japanese Yen. On a trade weighted basis, the local currency gained 0.7% over the month.


Commodity prices were generally stronger in June. The S&P GSCI Commodity Total Return Index rose 0.7% for the month. Gold prices rose 5.8%, finishing the month at US$1,316.93 per ounce. The oil price rose modestly by 2.0% to $112.79 per barrel and iron ore prices rose by 2.2% to US$95.0 per metric tonnes.

This information has been prepared by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. Any advice contained in this document is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek professional advice from a licensed, or appropriately authorised, financial adviser if you are unsure of what action to take. "MERCER" is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2014 Mercer LLC. All rights reserved.


SA Metropolitan Fire Service Superannuation Pty Ltd ACN 068 821 750 as Trustee for the SA Metropolitan Fire Service Superannuation Scheme ABN 99 439 309 855.

This website is provided by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. The Trustee pays a fee for the provision of this service, however this fee is not conditional on you using this service or acting on the information or advice provided through this service.