Investment commentary - 31 July 2015

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

The Australian share market rebounded over July, with the S&P/ASX 300 returning 4.3% for the month, as improving international conditions and positive momentum in domestic labour markets led to a recovery in investor confidence.

Following a relatively muted June, the Australian dollar fell against most of the major currencies including a fall of 4.5% against the US Dollar to finish the month at $0.734 USD. As a result unhedged international shares outperformed, with the MSCI World ex Australia returning 6.6% over the month, compared to a fully-hedged return of 2.8%.

Internationally, the Chinese share market correction drove much of the market news for July. The Chinese government intervened to support markets following significant share market declines between early June and early July. However despite policymaker actions, volatility remained high. The CSI 300 rallied by 16% over several weeks only to fall back again by 10% in the last week of July. Nevertheless, there have been tentative signs of stabilisation within the broader economy following an easing of monetary policy. Year-end June real GDP growth remained at 7%, above expectations for a drop to 6.8%. Europe and Japan both continued their economic recovery, and the Greek debt drama has been muted for the time being.

In the US, a rate hike in late 2015 becomes all-the-more imminent as housing figures continue to strengthen alongside an advanced estimate of Q2 GDP growth at 2.3% (annualised) and a revised Q1 from -0.2% to 0.6%. Europe and Japan both continued their economic recovery, and the Greek debt drama has been muted for the time being.


  • The RBA left interest rates on hold at 2.0% in August, as expected by financial markets and a large majority of economists polled by Bloomberg. The statement accompanying the decision was more upbeat on the level of economic activity and employment growth in Australia than in past months, though continued to note that there is spare capacity in the economy. Meanwhile, reference to the Australian dollar being overvalued was removed from the statement, pointing to a higher bar for further cuts to the cash rate.
  • Australian seasonally adjusted employment increased by 38,500 in July, ahead of estimates for a 10,000 increase. Employment gains were split between full time (12,400) and part time (26,100) roles. The participation rate rose substantially from 64.8% to 65.1%, prompting the unemployment rate to increase to 6.3% from a revised 6.1% (previously reported as 6.0%). Trend employment increased by 17,800, while trend unemployment and participation rates were unchanged at 6.1% and 64.9%, respectively. While this release continues to indicate positive momentum in the labour market, the extent of gains could be revised downwards in coming months.
  • Australian CPI rose by 0.7% in the June quarter, slightly below expectations for 0.8%. CPI for the year to 30 June 2015 was 1.5%, behind expectations for 1.7%. The trimmed mean was 0.6% over the quarter, in-line with expectations. Over the year the trimmed mean was 2.2%, higher than a year earlier, but still within the RBA’s 2 to 3% inflation target band. Annual inflation was the highest in Education (+5.4%) and Alcohol and Tobacco (+4.8%), and the lowest in Communication (-3.4%) and Transport (-2.4%).
  • Australian retail trade rose 0.7% in seasonally adjusted terms in June, ahead of expectations for a 0.4% increase, while May sales were revised up from 0.3% to 0.4%. In trend terms, retail trade rose by 0.3% in the month and 4.7% from a year earlier. Household goods was the strongest sector, with sales rising 0.8% while Department stores were the weakest, falling 0.2% in the month in trend terms.
  • US non-farm payrolls rose by 215,000 positions in July, slightly behind expectations for a 225,000 increase, while the prior two months gains were revised upwards by a collective 14,000 positions. The unemployment rate and participation rates were both unchanged and in line with expectations at 5.3% and 62.6%, respectively. Average hourly earnings increased by 0.2% in July, and were 2.1% higher than a year earlier. While monthly earnings growth was in line with expectations, the annual figure fell short of expectations for 2.3%. The survey continues to point towards ongoing strength of the US labour market.
  • The US Federal Reserve left monetary policy on hold at its July meeting, as widely expected. The Fed’s press release provided limited hints on when it intends to raise interest rates, despite many market participants expecting an increase to come in September.
  • The first estimate of Q2 2015 US GDP was released. GDP was estimated to have risen at an annualised quarterly pace of 2.3%, slightly below expectations for a 2.5% increase, though Q1 growth was revised up from -0.2% to 0.6%. Consumption contributed 2.0ppts, while investment, net exports and government were each estimated to have contributed 0.1ppts to growth.
  • The US ISM Manufacturing Index declined to 52.7 in July, from 53.5 in June and was behind expectations for no change. The decline was driven by lower employment, inventories and export orders, though partially offset by high new orders. 11 of 18 industries in the survey reported growth, unchanged from June.
  • The US CPI rose 0.3% in June, in line with expectations, though below May’s figure of 0.4%. CPI rose 0.1% over the year to June. Core CPI, which excludes volatile items such as food and energy, was also in line with estimates for a 0.2% increase in the month, and 1.8% increase from a year earlier.
  • The China Caixin (formerly HSBC) Manufacturing PMI declined substantially to 47.8 in July, a two year low, from 49.4 in June, and was well below expectations. Output, new orders, new orders and inventories all declined. The official PMI was relatively unscathed, easing to 50, from 50.2 in June, and slightly below expectations for 50.1.
  • Chinese GDP rose 7.0% over the year to June, ahead of market expectations for 6.8% and unchanged from the prior quarter. The upside surprise was driven by activity in the services sector, rising 8.4% YoY, while the manufacturing and construction sector grew 6.1% YoY. Financial market turnover is understood to be the key factor supporting stronger services activity in the quarter.
  • Euro area core CPI rose 1.0% from a year earlier in July, above expectations for no change from the 0.8% increase over the year to June.
  • The Euro area composite PMI declined slightly to 53.9 in July, from 54.2 in June and was ahead of expectations for no change from the earlier “flash” estimate of 53.7. The survey continues to point to expansion in both services and manufacturing activity in the euro area.
  • The Bank of Canada cut interest rates by 25 basis points to 0.5% in July, as expected by economists. The Bank lowered rates following revisions it made to Canada’s growth profile and as a result, a higher probability that inflation will fall below its target.


Australian Equities produced a positive absolute return in July as the S&P/ASX 300 Accumulation Index returned +4.3%. From a sector perspective; Healthcare (+9.5%), Consumer Staples (+7.5%) and Industrials (+6.3%) were the strongest performers, while Materials (-1.4%), Energy (+0.2%), and Financials ex Prop (+4.6%) were the weakest. The Australian Small Companies Index underperformed Australian large caps, with a return of +1.6% for the month.


Global Equities returned +2.8% in hedged (Australian dollar) terms, and +6.6% in unhedged (Australian dollar) terms as the Australian dollar depreciated against most major currencies over the month. Global Small Caps underperformed the broad cap index returning +4.2%, while emerging markets returned -2.6% (both in Australian dollars unhedged). In the US, the S&P500 returned +2.1%, while the NASDAQ returned +2.8%. Outside of the US, Japan (+1.8%), the UK (+2.8%), India (+3.0%) and Germany (+3.3%) all rose in local currency terms. In other regions, China (-14.3%) and Hong Kong (-6.1%) both experienced falls over the month of July (returns in local currency terms). Across the sectors, Consumer Staples (+10.1%), Utilities (+10.0%), and Healthcare (+9.1%) were the strongest performers, while Energy (-1.8%), Materials (-0.5%) and Industrials (+5.2%) were the weakest (all in A$ terms).


The Real Assets sector produced relatively strong performances in July, with Global Core Infrastructure returning +3.6% and Global Real Estate Investment Trusts (REITs) returning +4.6% (both in Australian dollar hedged terms). Domestic REITs also posted a positive return with a result of +5.7% in July while Australian Direct Property returned +1.8% on a lagged basis.


Ten-year sovereign bond yields decreased in the US (-13bps to 2.20%), Japan (-3bps to 0.41%), Germany (-15bps to 0.62%) and the UK (-6bps to 1.97%). Two-year sovereign bond yields increased in the US (+7bps to 0.66%) and were muted in the UK (0.57%), Germany (-0.24%) and Japan (0.01%). Overall, hedged Global Government Bonds returned +1.2% for the month as measured by the Citigroup World Government Bond Index. Australian bond markets saw decreases in the ten-year (-17bps to 2.84%), five-year (-16bps to 2.17%) and two-year yields (-14bps to 1.88%). The Australian Government Bond Index returned +1.3% while the Australian Composite Bond Index returned 1.3%.


Over July, the Australian dollar depreciated against most major currencies with falls of -2.9% against the Euro, -4.3% against the Pound Sterling, -3.7% against the Japanese Yen and –4.5% against the US Dollar to finish at US$0.734 on July 31. On a trade-weighted basis, the Australian dollar fell -3.8% for the month.


Commodity prices generally saw significant falls over the month of July. The broad S&P GSCI Commodity Total Return Index fell -10.1% following a muted June. The price of oil fell (-13.7% to US$52.79 per barrel), while gold also fell (-6.4%), finishing the month at US$1,094.3 per ounce. Iron ore prices resumed their decline after a steady few months, declining by -7.5%, finishing the month at US$55.5 per metric tonne.

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