Investment commentary - 31 August 2015

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
August 2015 was a relatively turbulent month for global equity markets as investors’ confidence levels declined amidst global growth concerns.

Fears over softer economic conditions in China heightened following a shift in China’s foreign exchange policy during the month, which triggered a further sell-off of Chinese shares. These fears took their toll on developed markets including Europe and the United States (US), where share markets suffered losses over the month.

In the US, a rate hike is still expected before the close of 2015 given a strong revised Q2 gross domestic product (GDP) figure of 3.7% as well as positive capex data releases, creating concerns about a hike adding to an already volatile climate. This uncertainty about global growth and the continued decline in commodity prices have led to some fears of global deflation risks in the coming periods.

Domestically, the Australian share market also felt the negative effect of economic uncertainty in China as well as global deflationary concerns. Relatively weak corporate profit results driven by poor resources earnings from the recent reporting period also contributed to weak share market returns, as the S&P/ASX 300 returned -7.7% for the month. The Australian economy remains in a difficult period as the mining boom unwinds while non-mining activity has been unable to offset the effect.

The September statement from the Reserve Bank of Australia (RBA) indicated an ongoing neutral bias while keeping the cash rate unchanged at 2.0%, noting that the economy is likely to remain operating with a degree of spare capacity for some time yet. On the positive side, the RBA now appears to be more comfortable that the currency has fallen enough to stimulate demand for exports.


  • The RBA left interest rates on hold at 2.0% in September as widely expected by all economists sampled by Bloomberg. The statement was broadly similar to the prior month with the RBA retaining a neutral policy bias, with inflation expected to remain within its target range for some time, though growth below its longer term averages.
  • Australian seasonally adjusted employment increased by 17,400 in August, ahead of estimates for a 5,000 increase. Employment gains were split between full time (11,500) and part time (5,900). The participation rate eased to 65.0% from 65.1%, prompting the unemployment rate decline to 6.2% from 6.3%. Trend employment increased by 15,300, while trend unemployment was unchanged at 6.2% and the participation rate increased from 64.9% to 65.0%. The release followed a quarterly re-benchmarking of the labour market data by the ABS, where recent employment gains were modestly revised downwards.
  • Australian GDP was 0.2% quarter on quarter (QoQ) in Q2, below expectations for 0.4%, and slower than the 0.9% growth in recorded Q1. GDP grew 2.0% year on year (YoY), below estimates for 2.2%, while Q1 YoY growth was revised up from 2.3% to 2.5%. Q1 composition was also weak, with government consumption and investment contributing 0.6 percentage points (ppts), private consumption 0.3ppts, private investment -0.1ppts, inventories -0.2ppts and net exports -0.6ppts. Real net disposable income fell 0.3% in the quarter and 0.7% over the past year, while nominal growth rose only 1.6% YoY, the lowest financial year growth since 1961-62.
  • Australian retail trade declined 0.1% in seasonally adjusted terms in July, behind of expectations for a 0.2% increase, while June sales were revised down from 0.7% to 0.6%. In trend terms retail trade rose by 0.2% in the month and 4.4% from a year earlier. Household goods and Clothing, footwear and personal accessories were the strongest sectors, with sales rising 0.4%, while Department stores were the weakest, falling 0.1% in the month in trend terms.
  • US non-farm payrolls rose by 173,000 in August, behind expectations for a 217,000 increase, though the prior two months gains were revised upwards by a collective 44,000. This suggests that recent employment gains were broadly in line with expectations. The unemployment rate declined from 5.3% to 5.1% and the participation rate was unchanged at 62.6%. Average hourly earnings increased 0.3% in August, and were 2.2% higher than a year earlier, ahead of expectations for 0.2% and 2.1%, respectively. While earnings growth is inching upwards, it seems low in the context of low unemployment.
  • The second estimate of Q2 2015 US GDP was released. GDP was revised upwards to 3.7% QoQ annualised from the prior estimate of 2.3% and was ahead of estimates for 3.2%. Consumption was estimated to have contributed 2.1ppts to growth, private investment 0.7ppts, inventories and net exports 0.2ppts each and government 0.5ppts. Growth in all of these components was revised upwards, and suggests that soft growth in Q1 was an anomaly, rather than the commencement of a slowdown in US growth.
  • The US Institute of Supply Management (ISM) Manufacturing Index declined to 51.1 in August, from 52.7 in July and was behind estimates for 52.5. All sub-indices declined, although the decline in new orders had the biggest impact on the headline index. Ten of 18 industries in the survey reported growth, down from 11 in July. While this is a substantial decline, the survey suggests that US manufacturing activity continues to expand.
  • The US consumer price index (CPI) rose 0.1% in July, behind estimates for 0.2% and the 0.3% increase recorded in June. CPI rose 0.2% over the year to July. Core CPI, which excludes volatile items such as food and energy, also rose 0.1% in the month, below estimates for a 0.2% increase, and rose 1.8% from a year earlier.
  • The China Caixin Manufacturing purchasing managers’ index (PMI) declined to 47.3 in August, from 47.8 in July and was well below expectations. Output, new orders, new export orders and inventories all declined. The official PMI continues to paint a more upbeat picture than the Caixin PMI, easing to 47.8 in August, from 50.0 in July, in line with market expectations.
  • Euro area GDP grew 0.4% QoQ in Q2, and 1.5% over the year to June, ahead of expectations for 0.3% QoQ and 1.2% YoY. Spain continues to be one of the top performing major European economies, growing 1.0% QoQ and 3.1% YoY, while Germany grew 0.4% QoQ and 1.6% YoY, while France was flat in the quarter and grew only 1.0% YoY.
  • Euro area core CPI rose 1.0% from a year earlier in August, unchanged from the year to July and inline with expectations for 1.0%.
  • Euro area composite PMI increased slightly to 54.3 in August, from 53.9 in July, as gains in Germany, Italy and Spain were large enough to offset a fall in activity in France. The survey continues to point to expansion in both services and manufacturing activity in the Euro area.
  • Japanese GDP contracted 0.3% in the second quarter, ahead of estimates for a 0.5% contraction, though below the 1.1% pace of growth recorded in Q1. Inventories contributed 0.3ppts to growth, the government sector 0.2ppts, while net exports detracted 0.3ppts and private consumption detracted 0.4ppts.


Australian Equities produced a negative return in August as the S&P/ASX 300 Accumulation Index fell -7.7%. From a sector perspective; Utilities (-0.4%), Consumer Discretionary (-3.9%) and Property Trusts (-4.0%) were the strongest relative performers, while Energy (-13.8%), IT (-11.5%), and Financials ex Prop (-10.6%) were the weakest. The Australian Small Companies Index outperformed Australian large caps, with a return of -4.9% for the month.


Global Equities returned -6.6% in hedged (Australian dollar) terms, and -3.1% in unhedged (Australian dollar) terms as the Australian dollar depreciated against most major currencies over the month. Global Small Caps outperformed the broad cap index returning -1.9%, while emerging markets returned -5.8% (both in Australian dollars unhedged). In the US, the S&P500 returned -6.0%, while the NASDAQ returned -6.9%. Outside of the US, Japan (-7.4%), the UK (-6.0%), India (-6.2%) and Germany (-9.3%) all fell in local currency terms. In other regions, China (-12.5%) and Hong Kong (-11.8%) both continued their falls over the month of August (returns in local currency terms). Across the sectors, Telecommunication Services (-0.8%), Utilities (-1.5%), and Energy (-2.4%) were the strongest relative performers, while Financials (-4.4%), Materials (-4.2%) and Healthcare (-4.0%) were the weakest (all in A$ terms).


The Real Assets sector produced generally negative returns in August, with Global Core Infrastructure returning -4.4% and Global Real Estate Investment Trusts (REITs) returning -5.9% (both in Australian dollar hedged terms). Domestic REITs also posted a negative return with a result of -4.0% in August while Australian Direct Property returned +0.4% on a lagged basis.


Ten-year sovereign bond yields decreased in the US (-1bp to 2.20%), Japan (-3bps to 0.38%) and the United Kingdom (UK) (-7bps to 1.82%) but increased in Germany (+13bps to 0.75%). Two-year sovereign bond yields increased in the US (+5bps to 0.71%), the UK (+13bps to 0.69%) and Germany (+3bps to -0.20%) whilst staying level in Japan (0.01%). Overall, hedged Global Government Bonds returned 0.0% for the month as measured by the Citigroup World Government Bond Index. Australian bond markets saw decreases in the 10-year (-9bps to 2.66%), five-year (-12bps to 2.00%) and two-year yields (-9bps to 1.79%). The Australian Government Bond Index returned +0.7% while the Australian Composite Bond Index returned 0.6%.


Over August, the Australian dollar depreciated further against most major currencies with falls of -4.7% against the Euro, -0.9% against the Pound Sterling, -4.3% against the Japanese Yen and -3.5% against the US Dollar to finish at US$0.709 on August 31. On a trade-weighted basis, the Australian dollar fell -0.8% for the month.


Commodity prices generally saw mixed results over the month of August. The broad S&P GSCI Commodity Total Return Index rose 3.9% following a large fall in July. The price of oil fell (-5.7% to US$49.76 per barrel), while gold rose modestly (+3.3%), finishing the month at US$1,130.7 per ounce. Iron ore prices steadied somewhat, rising by 1.8%, finishing the month at US$56.5 per metric tonne.


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 2015 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.