Investment commentary - 31 July 2011

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

The 2011/12 financial year began with equity markets posting negative returns for the month of July. Although the US reporting season generally surprised, risk aversion in the second half of the month rose as the US congress struggled to resolve the debt ceiling issue. In early July, market gains were on the back of the Greek parliament's agreement to support austerity measures allowing Greece to receive funding from other larger European countries. China continues to defy global conditions by offering a source of stability apart from some level of inflation risk.

Significant developments over the month were:

  • Australia's two-speed economy was further highlighted with consumer and business confidence levels at lows not seen since Lehman's collapse, however there was strong M&A activity in resources.
  • The RBA decided to leave the cash rate unchanged at 4.75 per cent. The move came as no surprise as consumers continued to be cautious, spending less and saving more.
  • Strong domestic inflation numbers indicated broad based inflation mainly driven by growth in the mining sector.
  • Consumers remained relatively cautious as household savings continued to build up.
  • Latest domestic CPI figures beat expectations and again temporarily stirred calls for rate rises instead of previous predictions of a decrease.
  • During the month, the Australian Gillard Government released details of the proposed carbon tax. The tax (set at $23 per metric tonne) is forecast to raise prices modestly with inflation expected to grow an additional 0.7 percent in 2012/13 and 0.2 per cent in 2015/16.
  • Weaker than anticipated GDP data and a soft labour market in the US undermined confidence in the US recovery.
  • In addition to the lower level of US output in the first half of 2011, forward indicators such as the ISM index suggested that manufacturing slowed in July.
  • China's central bank announced its third interest-rate hike this year, signalling it remains more worried about inflation than the risk of a slowdown in the world's second-largest economy.
  • The price of crude oil rose marginally (0.9%) during the month to US$95.94 bbl while Gold rose (7.5%) to US$1,623.56 oz.

Australian Shares

The local market fell for the fourth consecutive month, with the S&P/ASX 300 index down 3.8% for the month largely based on fragmented confidence driven by deteriorating financial conditions in Europe and policy uncertainty in the US. The benchmark index finished the quarter down 7.6%, but +3.0% for the 12 months to 31 July.

In contrast to last month investors appeared to favour smaller stocks, with Small caps (+1.4%) outperforming their Mid cap (1.2%) and Large cap (-4.8%) counterparts.

Telecom Services (+3.5%) was the only sector to post a positive return, driven heavily by the good performance of Telstra (+4.2%). All other sectors posted negative returns, with Consumer Discretionary (-7.2%) and Property Trusts (-6.5%) the worst performing.

Overseas Shares

In local currency terms, the MSCI World ex Aus index returned -2.6%. A slight appreciation of the AUD relative to major currencies saw the unhedged return (- 4.3%) lower. For the fourth month running, Growth stocks (-3.5%) outperformed Value stocks (-4.8%) in $A terms, based on the S&P Developed ex-Australia Large Medium Cap Growth and Value Indices.

In the US, the S&P 500 Composite index was down 2.0%, the Dow Jones Industrials Index returned -2.0% and the NASDAQ Composite Index -0.6%, in local currency terms. In Europe, the FTSE 100 (UK) returned -2.1%, the DAX 30 (Germany) -3.0% and the CAC 40 (France) -7.7% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned -2.2%, Hong Kong's Hang Seng +0.2%, India's BSE 100 Index (-2.7%) and the TOPIX (Japan) returned -0.9% in local currency terms respectively for July.

The MSCI Emerging Markets Index was down -3.0% in A$ terms.


Domestic listed property trusts (A-REITs) were down for the month, with the S&P/ASX 300 Property Index returning -6.4% for the month, underperforming the equities index by 2.6%.

Fixed Interest

The UBS Australia Composite Bond Index returned +1.7% during July. On a hedged basis, the Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index returned +1.3 and 1.5% respectively.


The A$ appreciated (+2.6%) against the US Dollar, the Pound Sterling (+0.3%) and the Euro (+3.5%) while depreciating against the Yen (-1.9%). The Australian Dollar rose on a trade weighted basis by (+0.8%).

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