Investment commentary - 30 November 2014

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

Global equities had another strong month in November 2014, returning 5.3% and 3.4% in unhedged and hedged terms respectively.

Strong economic momentum supported United States (US) equities and the US dollar while monetary easing by the Bank of Japan in late October supported Japanese equities. European equities performed strongly on expectations that the European Central Bank (ECB) will also further ease monetary policy.

In the US, gross domestic product (GDP) growth was revised up from an annualised 3.5% to 3.9% for Q3, partly due to a smaller detraction from inventories and an upgrade in private consumer spending growth. Retail sales rose 0.3% in October unwinding a 0.3% fall in September. Meanwhile real consumer spending rose 0.2% in October and wasweaker than expectations of a 0.3% gain, but reversed a 0.15% fall in September. The Eurozone economy grew 0.2% in Q3, mildly above expectations while Q2's flat result was also revised up to a 0.1% gain.

Locally, Australian equities had a negative month as falling oil and iron ore prices weighed on shares in the energy and material sectors. Lower oil prices also pushed global bond yields lower, while Australian yields and the Australian dollar declined on a softening domestic economic outlook.

Significant developments

  • The Reserve Bank of Australia (RBA) left the cash rate on hold at 2.50% at its most recent meeting in December, retaining a neutral bias. There were limited changes to the statement, which reiterated that the despite the substantial fall in the Australian dollar over recent months, given commodity price declines, the currency remains above estimates fair value.
  • Australian GDP grew 0.3% quarter on quarter (QoQ) and 2.7% year on year (YoY) in September, falling well short of estimates for 0.7% and 3.1% respectively. Net exports provided the most support to quarterly growth, contributing 0.8 percentage points (ppts), followed by household consumption, which contributed 0.3ppts, while private and public Investment detracted 0.5ppts and 0.2ppts respectively. As a result, gross national expenditure (GDP minus net exports) contracted 0.4% in the quarter to be 1.3% higher than a year earlier. The drag on growth from private investment is indicative of the conclusion of the mining investment boom, while soft household consumption is consistent with soft consumer sentiment highlighted by surveys over recent months.
  • Australian retail sales rose 0.4% month on month (MoM) in October, ahead of expectations for a 0.1% decline. This follows a strong 1.2% MoM increase in September. In trend terms, household goods (+0.6%), clothing and footwear and personal accessories (+0.5%) were the strongest sectors, while department stores (+0.2%) were the weakest.
  • US Non-Farm Payrolls increased by 314,000 in November, beating expectations for 225,000 (a strong number in its own right), while positive upward revisions of 44,000 were made to employment over the past two months. Job gains were broad based, with increases across all industries. The unemployment and participation rates were unchanged at 5.8% and 62.8% respectively. Average hourly earnings were also a positive increasing 0.4% MoM and 2.1% YoY. The significant ongoing improvement in the labour market and falling oil prices should support consumer activity going forward.
  • US Q3 GDP was revised up from 3.5% to 3.9% QoQ annualised, ahead of expectations for 3.3% due to positive revisions to business investment and consumption, though offset by declines in net exports, inventories and government spending. Personal consumption contributed 1.5ppts, fixed investment 0.97ppts, government spending 0.87ppts (mostly defence) and net exports 0.78ppts.
  • The US Institute for Supply Management (ISM) Manufacturing Index eased to 58.7 in November from 59 in October, ahead of expectations for 58.0. While the index declined slightly, the release is indicative of the ongoing strength of the US manufacturing sector, with 14 of 18 sectors exhibiting growth.
  • US retail sales rose 0.3% MoM in October, ahead of expectations for 0.2% increase, while retail sales excluding autos and gasoline rose 0.6% MoM, ahead of expectations for a 0.4% increase.
  • The HSBC China Manufacturing purchasing managers' index (PMI) declined to 50 in November from 50.4 in October. Output contracted, while a small increase in new orders and a decline in new export orders suggest that domestic demand has held up. The official PMI also eased, falling to 50.3 in November, from 50.8 in October. Declines in output, new orders and new export orders all declined.
  • The People's Bank of China (PBoC) surprised the markets by cutting the official lending rate by 40bps to 5.6%, and the benchmark deposit rate by 25bps to 2.75% in response to softening economic conditions. The PBoC also raised the ceiling rate for deposits from 1.1 times the benchmark deposit rate to 1.2 times the rate, in light of its ongoing efforts to deregulate interest rates gradually.
  • Euro area GDP grew 0.2% QoQ in Q3, ahead of expectations for a 0.1% increase, while Q2 GDP was revised up to 0.1% from 0.0%. Spain grew 0.5%, France 0.3%, Germany 0.1% and Italy contracted 0.1%. YoY Euro area GDP rose 0.8%, ahead of expectations for 0.7%.
  • Euro area headline CPI rose 0.3% YoY, while core CPI rose 0.7% YoY in November, signalling the challenges the ECB faces in pushing inflation towards its 2.0% target. The result was in line with expectations, though headline inflation eased slightly from 0.4% YoY in October.
  • Japanese GDP contracted by 0.5% QoQ, pushing Japan into a technical recession, following 1.7% QoQ contraction in Q2. GDP contracted 1.3% from a year earlier. The Q3 GDP print fell well short of expectations for 0.5% growth. Private consumption contributed 0.2ppts to growth, and government consumption and net exports each contributed 0.1ppts, while, private investment subtracted 0.3ppts from growth and inventories 0.6ppts, suggesting there should be a bounce back next quarter.


Australian equities

Australian equities fell in November with the S&P/ASX 300 Accumulation Index returning -3.2%. Across the market cap spectrum, large cap returned -3.5% meanwhile small caps returned -3.8%. Healthcare (+1.2%) and Telecom (+1.2%) were the strongest performing sectors, while Energy (-13.1%) and Consumer Staples (-8.1%) were the weakest sectors.

Global equities

Global equities returned 3.4% in hedged (Australian dollar) terms and 5.3% in unhedged (Australian dollar) terms, as the Australian dollar depreciated during the month. Global small caps returned 3.5%, while emerging markets returned 1.9% (both in unhedged Australian dollar). In the US, the S&P500 returned 2.7%, while the NASDAQ returned 3.5%. Outside of the US, China (+10.9%) and Germany (+7.0%) were strong performers, while Hong Kong (0.1%) and the UK (3.1%) were weak performers (returns in local currency terms).

Property and infrastructure

The performance of the real assets sector was positive in November, with global listed infrastructure returning 3.4% in unhedged terms and global listed property returning 2.3% (in Australian dollar hedged terms). Domestic Real Estate Investment Trusts (REITs) were flat in November, while Global REITs returned 2.3% on a fully hedged basis.

Fixed interest

Ten-year sovereign bond yields declined in the US (-14bps to 2.20%), UK (-32bps to 1.93%), Germany (-14bps to 0.70%) and Japan (-4bps to 0.42%). Two year bond yields remained flat in the US (0.47%), decreased in the UK (-14bps to 0.52%) and Japan (-3bps to 0.01%) and increased in Germany (+3bps to -0.02%). Australian yields declined across the curve, with the two-year (-11bps to 2.44%) five-year (-24bps to 2.57%) and 10-year all decreasing (-26bps to 3.03%). As a result, both global sovereign bonds (Australian dollar hedged) and Australian sovereign bonds returned 1.5%.


The Australian dollar depreciated -2.9% against the US$ in November. The Australian dollar fell against most major currencies including -2.5% against the Euro, -1.9% against the Pound Sterling and increased by 3.5% against the Japanese Yen. On a trade weighted basis, the local currency lost 1.7% over the month.


Commodity prices continued to weaken in November. The broader S&P GSCI Commodity Total Return Index fell by 8.3%and gold prices rose 1.4%, finishing the month at US$1,181.97 per ounce. Meanwhile the oil price fell by a further 14.8% to US$71.95 per barrel. Iron ore prices fell by 13.6% to US$70 per metric tonne.


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