Investment commentary - 31 October 2015

 Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
October 2015 was a strong month for world markets as equities recovered following several volatile months.

Most major equity markets returned strong positive absolute returns. Economic data continues to strengthen in the United States (US) and Europe, and concerns about global growth were reduced on the back of possible further easing in monetary policy by major central banks around the world. The European Central Bank (ECB) indicated in mid-October that there is room for further monetary policy easing this year. In the US, the economy picked up to an above-average pace in mid-2015.

It is possible that declining unemployment and a strong economy are finally pressuring wages higher as labour market conditions improved over the month alongside further consumption strength. Current conditions are adding to expectations of an impending US Federal Reserve (Fed) rate hike in late-2015 or early-2016.


  • The Reserve Bank of Australia (RBA) left interest rates on hold at 2.0% in November as expected by approximately two thirds of economists sampled by Bloomberg, while interest rate markets were pricing in an even chance of a cut. The statement accompanying the decision was mixed, indicating that while the economic outlook had improved in recent months, low inflation may provide further scope for the RBA to cut interest rates. Three days later, the RBA released its quarterly statement of monetary policy, where the 2015-16 consumer price index (CPI) forecast was revised down by 50 basis points (bps) to 1.5% to 2.5%, and the 2015 gross domestic product (GDP) growth forecast was revised down by 25bps to 2.25%. Neither of these were a surprise in light of recent data releases.
  • Australian CPI rose by 0.5% in the September quarter, slightly below expectations for 0.7%. The CPI was 1.5% higher than a year earlier, behind expectations for 1.7%. The trimmed mean rose 0.3% in the quarter, behind expectations for 0.5%. The trimmed mean was 2.1% higher than a year earlier, from 2.2% in the June quarter, only just within RBA’s 2% to 3% inflation target band. Annual inflation was the highest in Education (+5.5%) and Alcohol and Tobacco (+5.0%), and the lowest in Communication (-4.1%) and Transport (-2.2%).
  • Australian seasonally adjusted employment declined by 5,100 in September, behind estimates for a 9,600 increase. Full time employment declined by 13,900, while part time employment increased by 8,900. The participation rate declined substantially from 65.1% to 64.9%, while the unemployment rate was steady at 6.2%. Trend employment increased by 12,400, while the participation rate ticked up to 65.0% from 64.9%, and the unemployment rate was unchanged at 6.2%. While this release was slightly underwhelming, the labour market remains relatively resilient in an otherwise less than impressive domestic economy.
  • Australian retail trade rose 0.4% in seasonally adjusted terms in September, in-line with expectations. In trend terms retail trade rose by 0.3% in the month and 3.7% from a year earlier. Other retailing was the strongest sector, with sales rising 0.6%, while Food retailing and Clothing, footwear and personal accessories were the weakest, declining 0.1% in the month in trend terms.
  • The Fed left interest rates unchanged at 0% to 0.25% at its October meeting, in line with expectations. The statement accompanying the decision dropped references included in September to slow growth in China and emerging markets. The statement also made strong suggestions that interest rates will be increased in December, particularly if economic data releases leading in to the December meeting do not significantly underwhelm.
  • US non-farm payrolls rose by 271,000 in October, ahead expectations for a 185,000 increase, while the prior two months gains were revised upwards by a collective 5,000.  The unemployment rate declined to 5.0% from 5.1%, while the participation rate was unchanged at 62.4%. Average hourly earnings increased by 0.4% in the month 2.5% over the year to September, the fastest pace since 2009. While it may be too early to call a new trend, it is possible that low unemployment and a strong economy are finally pressuring wages higher.
  • The first estimate of Q3 2015 US GDP was released. GDP was estimated to have grown 1.5% quarter on quarter (QoQ) annualised, slightly behind estimates for 1.6%, and the prior quarter’s 3.9% growth. Consumption is estimated to have contributed 2.2 percentage points (ppts) to growth; private investment, 0.5ppts; government, 0.3ppts; while net exports were neutral; and inventories detracted 1.4ppts.  While the pace of growth was not rapid, the composition was strong, indicating that the US economy remains in good health.
  • The US Institute for Supply Management (ISM) Manufacturing Index declined to 50.1 in October, from 50.2 in September, slightly ahead of estimates for 50. New orders, new export orders and production increased indicating that activity is likely to have bottomed for the time being. Seven of 18 industries in the survey reported growth, unchanged from September.
  • The US CPI declined 0.2% in September, in line with estimates and below the 0.1% decrease recorded in August. CPI rose 0.2% over the year to September. Core CPI, which excludes volatile items such as food and energy, rose 0.2% in the month, ahead of estimates for 0.1%, to be 1.9% higher than a year earlier.
  • Chinese GDP rose 6.9% over the year to September, ahead of market expectations for 6.8% and though below the 7.0% growth recorded in the prior quarter. The upside surprise was driven by activity in the services sector, which rose 8.6% YoY, while the manufacturing and construction sectors grew a combined 5.8% YoY.  While Chinese GDP data is treated with some scepticism, the figures do point to both stabilisation of growth, as well as progress towards objectives to transition China from a manufacturing to a consumption driven economy.
  • The China Caixin Manufacturing PMI increased to 48.3 in October, from 47.2 in September, ahead of expectations for 47.6. Output, new orders, new export orders and all improved from the prior month. The official PMI was unchanged at 49.8, slightly behind market expectations for 50, as higher new orders offset lower output.
  • The ECB left interest rates and its asset purchase plan unchanged at its October meeting, but raised expectations that monetary policy will be eased in the coming months. In particular, inflation continues to remain sluggish, providing scope for the ECB to scale up its easing efforts.
  • Euro area core CPI rose 1.0% from a year earlier in October, up from 0.9% over the year to September.
  • The Euro area composite PMI increased to 53.9 in October from 53.6 in September. Output and new orders increased in both manufacturing and services. Activity also strengthened in each of the four key European economies: Germany, France, Spain and Italy.
  • The Bank of Japan (BoJ) also left its monetary easing program on hold at its 30 October 2015 meeting, despite expectations from approximately one third of economists sampled by Bloomberg that the BoJ would increase the size of its program. Despite the BoJ lowering its growth and inflation forecasts, following the meeting Governor Kuroda expressed an upbeat view on developments in the Japanese economy.


Australian Equities recovered in October as the S&P/ASX 300 Accumulation Index rose 4.4%. From a sector perspective; Energy (+8.0%), Utilities (+6.9%) and Healthcare (+6.2%) were the strongest performers, while Telecom Services (-2.8%), Consumer Staples (+0.5%), and IT (+0.6%) were the weakest. The Australian Small Companies Index outperformed Australian large caps, with a return of 7.1% for the month.


Global Equities returned 8.0% in hedged (Australian dollar) terms, and 6.3% in unhedged (Australian dollar) terms as the Australian dollar appreciated marginally against most major currencies over the month. Global Small Caps underperformed the broad cap index returning 4.1%, while emerging markets returned 5.5% (both in Australian dollars unhedged). In the US, the S&P500 returned 8.4%, while the NASDAQ returned 9.4% in USD terms. Outside of the US, Japan (10.4%); the United Kingdom (UK) (5.2%); India (1.7%); and Germany (12.3%) all rose in local currency terms. In other regions, China (10.8%); and Hong Kong (8.7%) both bounced back following four consecutive negative months over the June to September period (returns in local currency terms). Across the sectors, Energy (9.4%); Materials (9.2%); and IT (8.6%) were the strongest performers; while Utilities (2.0%); Healthcare (4.4%); and Financials (4.6%) were the weakest (all in A$ terms).


The Real Assets sector generally performed well over October, with Global Core Infrastructure returning 4.4% and Global Real Estate Investment Trusts (REITs) returning 5.7% (both in Australian dollar hedged terms). Domestic REITs posted a positive return with a result of 4.9% in October while Australian Direct Property returned 2.6% on a lagged basis.


Ten-year sovereign bond yields saw mixed results across most major economies with notables being the US (+9bps to 2.15%), Japan (-4bps to 0.31%), the UK (+29bps to 1.92%) and Germany (-6bps to 0.52%). Two-year sovereign bond yields increased in the US (+15bps to 0.75%) and the UK (+6bps to 0.63%) but decreased in Germany (-7bps to -0.31%) and Japan (-1bps to 0.01%). Overall, hedged Global Government Bonds returned 0.4% for the month as measured by the Citigroup World Government Bond Index. Australian bond markets were relatively muted over the month, with the ten-year yield unchanged (2.61%) and marginal decreases in five-year (-3bps to 2.03%) and two-year yields (-5bps to 1.78%). The Australian Government Bond Index returned 0.3% while the Australian Composite Bond Index also returned 0.3% for the month.


Over October, the Australian dollar appreciated against most major currencies with rises of 3.7% against the Euro, 2.5% against the Japanese Yen, 1.6% against the US Dollar and 0.3% against the Pound Sterling to finish at US$0.713 on 31 October 2015. On a trade-weighted basis, the Australian dollar rose 0.7% for the month.


Commodity prices saw mixed results over the month of October as demand generators continued to struggle. The broad S&P GSCI Commodity Total Return Index fell by 1.3%, while iron ore prices fell by 10.8%, finishing the month at US$49.5 per metric tonne. The price of oil rose (2.0% to US$48.45 per barrel), while gold also rose (2.4%), finishing the month at US$1,141.1 per ounce. Iron ore prices fell by 10.8%, finishing the month at US$49.5 per metric tonne.


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