Investment commentary - 30 April 2014

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

The month of April was broadly positive for financial markets with most asset classes delivering healthy returns. Global shares were supported by slightly better than expected United States (US) earnings and continued sustained positive economic developments.

The Federal Reserve (Fed) continued its course of tapering by reducing its bond buying program by another $US10 billion to $US45 billion a month. This is likely to express confidence that growth is picking up in line with expectations after a soft patch through winter.

Locally, the public release of the Commission of Audit (CoA) report to the Federal Government was the key domestic event this month.

The CoA paints a bleak picture of the nation's finances as policies such as the National Disability Insurance Scheme (NDIS), school reforms and population ageing cause an escalation in health, pension and education costs which are forecast to result in budget deficits averaging more than 1% of gross domestic product (GDP) from 2018 onwards. As such, the CoA makes 86 recommendations aimed at bringing the budget back under control and to a surplus by improving public sector utility. Whether or not these would and could easily be adopted is yet to be seen.

At its latest meeting, the Reserve Bank of Australia (RBA) decided to keep the official cash rate on hold at 2.50% and the board reaffirmed its intention to keep rates stable for some time. The Australian dollar inched higher this month.


Significant developments

  • The RBA board kept the cash rate unchanged at 2.50% at its May meeting, stating that “continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time”. It also expects inflation to be consistent with the 2-3 per cent target over the next two years.
  • According to the Australian Bureau of Statistics (ABS), Australian retail sales grew by 0.1% (seasonally adjusted) in March 2014, much weaker than the strong gains of late last year that.
  • US real GDP growth for the March quarter increased at an annual rate of 0.1% in the first quarter, subject to further revision. The increase in real GDP in the first quarter primarily reflected a positive contribution from personal consumption expenditures.
  • US manufacturing edged up with the Institute for Supply Management™ (ISM) Purchasing Manufacturers' Index (PMI) rising to 54.9 in April from 53.7 the previous month, indicating expansion in the manufacturing sector for the eleventh consecutive month.
  • US job growth rose by 288,000 in April. The unemployment rate fell by 0.4% to 6.3% in April – a measure that had shown little movement in the prior four months. Employment gains were seen across the spectrum, led by job growth in professional and business services, retail trade, food services and drinking places, and construction. Revisions to the February and March figures were also released taking employment gains in both these months 36,000 higher than previously reported.
  • The HSBC China Manufacturing PMI posted at 48.1 in April, up fractionally from 48.0 in March. This signalled the fourth successive monthly deterioration in the health of the sector (a reading below 50 indicates that the manufacturing economy is generally contracting). Both output and total new work declined over the month, albeit at weaker rates than those recorded in March.
  • Euro area unemployment remained steady in March at 11.8%, unchanged since October 2013.
  • The Eurozone manufacturing sector rose to 53.4 in April, up slightly from 53.0 in March. The PMI has signalled expansion for 10 successive months. Output and new order growth were recorded in all the Eurozone nations and PMI readings were above the 50 mark for all nations for the first time since November 2007.
  • In Japan, output and new orders fell for the first time in 14 months following a rise in sales tax. The headline PMI posted at 49.4 in April, down from 53.9 in March. In contrast, April saw the highest rate of growth in payroll numbers since February 2007.

Australian equities

Australian Equities rose by 1.7% in April. Positive returns were recorded across most of the market capitalisation spectrum – with Large Caps returning 2.0%, Mid Caps rising 1.8% while Small Caps underperformed dropping -1.2%. The best performing sectors were Property Trusts (+5.6%), Utilities (+3.4%) and energy (+3.4%). The weakest performing sectors were Healthcare (-1.4%) and IT (-0.2%). The largest contributors to the return of the index were BHP Billiton (+3.8%), ANZ (+4.7%) and CBA (+1.9%). On the other hand, the most significant detractors from the performance of the index were QBE Insurance Group (-9.5%), Coca-Cola Amatil (-15.7%) and Rio Tinto (-2.6%).

Global equities

Global sharemarkets were also positive in April, supported by slightly better than expected US earnings and sustained positive economic developments. The broad MSCI World ex Australia Index returned 0.9% in hedged terms and 1.0% in unhedged terms. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (0.9%) underperformed its Value (1.3%) counterparts in Australian dollar terms. The strongest performing sectors were Energy (+5.8%) and Consumer Staples (+3.1%), while Consumer Discretionary (-1.0%) and IT (-0.6%) were the worst performers. In Australian dollar terms, the Global Small Cap sector fell 1.6%, while Emerging Markets rose by 0.4%.

In April, the NASDAQ lost 2.0%, the S&P 500 Composite Index returned a modest 0.7% and the Dow Jones Industrial Average returned 0.9%, all in local currency terms. European markets showed positive returns, with the FTSE 100 (UK) up 3.1%, DAX 30 (Germany) 0.5% higher, and the CAC 40 (France) returning 2.6%. In Asia, the Indian BSE 500 (+0.6%) led the region higher while the Chinese Shanghai Composite Index (-0.3%) and the Japanese Topix (-3.4%) fell.

Property and infrastructure

Domestic Real Estate Investment Trusts (REITs) has a positive month in April, returning 5.6% and Global REITs returned 3.0% on a fully hedged basis. The unlisted property sector rose 1.1% in March, with Industrial (+1.9%) and Office (+1.1%) funds posting strong returns. Meanwhile, Global listed infrastructure returned 2.0% for the month.

Fixed interest

Global sovereign bond yields generally decreased over the month. Ten-year bond yields fell: in Germany (-10 bps to 1.47%), Japan (-1bp to 0.62%), US (-8bps to 2.65%) and in the UK (-7bps to 2.67%). Two-year bond yields were lower in the US (-1bp to 0.38%) and only marginally lower in Germany (0.15%). Global Bond indices rose higher, with the Barclays Capital Global Aggregate Bond Index gaining 0.9% and the Citigroup World Government Bond (ex-Australia) Index returning 0.8%, both on a fully hedged basis.

Australian bond yields also declined, led by the 10-year bond yields which lost 14 bps to 3.95% followed by the five-year bond yields(-11 bps to 3.33%). Australian bonds posted flat returns in March. The UBS Credit Index returned 0.8%, the UBS Semi-Government Index gained 1.0% while the UBS Treasury Bond Index finished the month 0.9% higher.


The Australian dollar appreciated against the major currencies in April, finishing the month at US$0.927. Against other currencies, the Australian dollar appreciated 0.3% relative to the Japanese Yen, 0.3% against the Euro and fell 0.3% relative to the Pound Sterling. On a trade weighted basis, the local currency gained 0.6% over the month.


Commodity prices were generally weaker in April. The S&P GSCI Commodity Total Return Index rose 0.8% for the month. Gold prices fell 0.3%, finishing the month at US$1,293.70 per ounce. The oil price rose modestly by 0.4% to $107.78 per barrel and Iron ore prices dropped by 6.1% to US$107.0 per million tonnes.


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