Investment commentary - 31 July 2013

27/08/2013
Provided by Mercer.

Global macroeconomic themes surrounding 'tapering' of Quantitative Easing in the US, a slowing China and continuing weakness in the domestic economy continued to dominate markets over July.

However, equity markets advanced on the back of US Fed chairman Ben Bernanke's assurance that the withdrawal of stimulus is not on a predetermined course but rather will be linked to an improvement in the economy and employment. US economic data continued to show positive signs, led by stronger GDP growth, an improving labour market and further evidence of a housing recovery. In Europe, signs are emerging that the economy may be on the road to recovery with a pick up in the manufacturing sector and stabilisation in the unemployment rate.

Both the European Central Bank and the Bank of England reassured markets that they will continue with their highly accommodative stances, pending evidence of a recovery.

Locally, the RBA cut the cash rate to a record low 2.50%, taking into account subdued inflation, slower growth as a result of lower levels of mining investment and a rising unemployment rate.

 

Significant developments over the month were:

  • The RBA cut the cash rate to a record low of 2.50% at their August meeting, citing subdued inflation and below trend growth over the past year as motives for the cut.
  • The Australian economy shed 10,200 jobs in July. Despite this the unemployment rate remained steady at 5.7%, as the participation rate fell 0.2% to 65.1%. Inflation in Australia remains benign, with CPI rising 0.4% over Q2 2013 and 2.4% for the year to June.
  • US manufacturing activity accelerated over July, with the ISM Manufacturing PMI jumping to 55.4 from 50.9 in June, the highest level since June 2011.
  • The US economy added 162,000 new jobs in July, which was weaker than expected and significantly lower than the 195,000 new jobs in June. Nevertheless, the unemployment rate nudged to 7.4%, the lowest level since December 2008.
  • US economic growth accelerated over the second quarter of 2013, with GDP growing at an annual rate of 1.7% compared with 1.1% in the first quarter.
  • The US housing market continued its recovery with the S&P/Case-Shiller House Price Index rising 12.2% for the year to May, posting the highest annual growth rate since 2006. New home sales jumped by 8.3% in June to a seasonally adjusted annual rate of 497,000.
  • China's GDP growth slowed to 7.5% pa over Q2 2013, down from 7.7% pa growth in the previous quarter. This result was in line with market expectations and helped to quell some of the fears surrounding a Chinese hard landing.
  • Conditions in the Chinese manufacturing sector deteriorated further with The HSBC Chinese Manufacturing PMI dropping to 47.7 in July, down from 48.2 in June. This signifies a contraction for the third straight month.
  • China's trade data surprised the market by posting a strong rebound in July, as exports rose 5.1% from a year earlier and imports leaped 10.9%. This follows an unexpected fall in June and suggests that the world's second largest economy may be stabilising.
  • Eurozone manufacturing returned to growth in July for the first time since 2011, with the Manufacturing PMI rising to 50.3, up from 48.8 in June. Euro Area unemployment remained steady at 12.1% in June
  • Signs that the Japanese economy is beginning to emerge from a long period of deflation as CPI rose by 0.2% over the year to June.
  • Commodity prices were generally stronger over the month. Gold prices rose 7.8% in July finishing the month at US$1,309.66/oz. Iron ore prices rallied 10.9% defying the pessimism surrounding China and ended the month at US$132.0/MT. Oil price rose 5.2% to $107.9/bbl.
 

Australian Shares

The Australian Equity market experienced the strongest month since October 2011, returning 5.3% during July. The best performing sectors were Materials (+9.5%) followed by Energy (+6.4%) and Financials (excluding property) (+6.3%). The weaker performing sectors were more defensive in nature and included Property Trusts (-0.7%), Consumer Staples (+1.1%) and Information Technology (+1.4%). The large miners were among some of the strongest performers, in particular Newcrest Mining (+24.3%), BHP (+10.8%) and Rio Tinto (+10.1%). On the other hand, McMillan Shakespeare (-49.8%), Treasury Wine Estates (-17.9%) and Echo Entertainment (-14.4%) were some of the weakest performers. The S&P/ASX Small Ordinaries Index jumped 9.8% over the month outperforming the broader index.

 

Overseas Shares

Global Equity markets advanced over July. The broad MSCI World ex Australia Index rose 7.4% in unhedged terms and 5.0% in hedged terms as the A$ continued to fall against all of the major currencies. More specifically, based on the relative performance of the S&P Developed ex-Australia Large & Mid cap indices, global Growth (+6.9%) underperformed their Value (+7.7%) counterparts in A$ terms. The strongest performing sectors were Financials (+8.2%), Consumer Discretionary (+7.9%) and Industrials (+7.9%), while Telecommunication Services (+5.6%) and Consumer Staples (+6.1%) were the worst performers.

In the US, the S&P 500 Composite Index jumped 5.1% in July while the more concentrated Dow Jones Industrial Average returned 4.1% and the NASDAQ gained 6.6%, all in local currency terms. European markets finished the month higher with the CAC 40 (France) rising 6.9%, the FTSE 100 (UK) up 6.6% and the DAX 30 (Germany) returning 4.0%. Asian markets lagged their European and US counterparts, with the Chinese Shanghai Composite Index rising a modest 0.7%, the Japanese TOPIX losing 0.2% and Indian BSE 500 dropping 2.5%. The Hang Seng was the exception returning 5.2% for the month.

In A$ terms, the Global Small Cap sector jumped 8.6%, while Emerging Markets returned 3.1% in July.

 

Property

Real Estate Investment Trusts (REITs) had a mixed month; domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) experienced further weakness and fell 0.7%, while Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) returned 1.2% on a fully hedged basis.

 

Fixed Interest

In July Global Sovereign Bond yields generally fell across the major markets. Ten-year bond yields fell: in the UK (-9 bps to 2.35%), Japan (-5bps to 0.79%) and Germany (-2bps to 1.67%); however rose in the US (+11bps to 2.59%). Two-year bond yields were lower in the US (-5bps to 0.29%) and Germany (-3bps to 0.13%). Global Bonds saw positive movements over the month. The Citigroup World Government Bond (ex-Australia) Index returned 0.5% and the Barclays Capital Global Aggregate Bond Index rose 0.6%, both on a fully hedged basis.

The Australian ten-year bond yield fell by 3bps to 3.72% and the two-year bond yield dropped 11bps to 3.00%. Australian Bonds produced positive returns over the month, with the UBS Treasury Bond Index and UBS Semi-Government Index returning 0.7% and 0.9% respectively, while the UBS Credit Index rose 1.1%.

 

Currencies

The Australian Dollar continued to depreciate against all of the major currencies over the month as markets anticipated an August rate cut. The Australian dollar declined 2.0% relative to the US dollar, finishing July at US$0.897. Against other currencies, the Australian dollar depreciated 4.0% relative to the Euro, 2.9% against the Yen and 1.9% relative to the Pound Sterling. On a trade weighted basis, the local currency fell 2.8% over the month.

 

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