Investment commentary - 31 May 2012



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

The inconclusive result of the Greek elections in mid May sent global markets into a spin, renewing concerns that Greece will leave the Euro and be unable to meet its debt commitments.

Signs of slowing economic growth in China and stubborn US unemployment figures added to concerns, resulting in investors continuing to exit growth investments in favour of safe-haven assets. Locally, the Board of the Reserve Bank of Australia surprised early in the month with an aggressive 50 bps rate cut, as central banks overseas kept cash rates steady.

Significant developments over the month were:

  • The Board of the Reserve Bank of Australia reduced the official cash rate by 50 bps to 3.75%, the Board noting that economic conditions have been somewhat weaker than expected, while inflation has moderated.
  • The Australian Bureau of Statistics released domestic unemployment figures during May, indicating that Australia's seasonally adjusted unemployment rate dropped to 5.0% in April.
  • The US market displayed weakness but fared better than Europe, with the May releases indicating slow growth. Non-farm payroll growth came in at a 12 month low but housing starts and automobile sales both surprised to the upside, a basis for muted optimism. The Fed maintains that risks remain to the downside with continuing fears around the European crisis and the effect it may have on US exports and confidence in both consumer and business.
  • Greece sank further into a political and financial morass, dragging the rest of Europe along with it, as efforts to form a new coalition government failed. The political impasse means Greece will face another round of elections next month, extending uncertainty and exacerbating volatility in financial markets across Europe and the globe.
  • The Chinese economy showed further signs of slowing, with the HSBC PMI Index at 49.3 for April, signalling a sixth consecutive month of contraction in the manufacturing sector. Q2 GDP is now expected to come in at below 8% after China revised its GDP growth to 7.5% in March.
  • The price of crude oil dropped dramatically during the month, with the cost per barrel finishing the month of May at US$86.5/bbl, down 17.5% for the month. Likewise there was downward pressure on precious metals, as the spot price of gold fell toUS$1,566.1/oz and silver tumbled to US$28.1/oz, returning -5.7% and -9.9% respectively. On a trade weighted basis, the Australian dollar depreciated 4.4%.

Australian Shares

The local market felt the impact of Euro zone uncertainty as well as concerns over slowing Chinese economic growth, with the benchmark S&P/ASX 300 Index ending the month down 6.7%. Domestic small company stocks were hit hardest as the “risk-off” sentiment dominated the local market, with Small Cap (-10.2%) underperforming both Large Cap (-6.3%) and Mid Cap (-6.8%). In a month that saw a broad sell off across most risky assets, Utilities (+2.0%) and Telecommunications (+0.2%) were the only sectors to finish the month higher. The Resources (-11.5%), Material (-10.9%) and Energy (-10.2%) sectors felt the brunt of the sell off, with Consumer Discretionary stocks (-4.2%) also hit hard.

Overseas Shares

Global share markets were impacted the most by the increase in investors' risk aversion. In local currency terms, the MSCI World ex Australia Index returned -6.8%, while significant depreciation in the A$ resulted in the unhedged index returning -1.8% for the month. In A$ terms and based on the S&P Developed ex-Australia Large Medium Cap Value and Growth indices, Growth (-1.7%) marginally outperformed Value (-1.8%) stocks on a relative basis. Emerging markets returned -4.7% in A$ terms over the month (as measured by the MSCI Emerging Markets Index). In the US, the S&P500 Composite Index fell for the second consecutive month, returning -6.0%. The more concentrated Dow Jones Industrial Average fared slightly better, posting a loss of 5.8%, whereas the NASDAQ fell 7.2% on the back of falling technology stocks.

Elsewhere, in Europe, the Greek elections were at the forefront of investor's minds during May, as the FTSE 100 (UK) returned -6.8%, the DAX 30 (Germany) tumbled 7.3% and the CAC 40 (France) fell 4.1%, all in local currency terms. Continuing signs of deteriorating growth in Asia saw the Chinese market (Shanghai Composite Index) decline 1.0%, while Hong Kong's Hang Seng Index plummeted 10.7%. Likewise Japan was hard hit, with the TOPIX experiencing a fall of 10.5%.


Real Estate Investment Trusts (REITs) were not immune to investors' concerns over the month. Domestic REITs as measured by the S&P/ASX 300 A-REIT Index finished the month down 1.2%, while the FTSE EPRA/NAREIT Global Developed Index (G-REITs) returned -4.7% on a fully hedged basis.

Fixed Interest

The RBA surprised early in the month with an aggressive half point (0.5%) rate cut, as central banks overseas kept cash rates steady. Australia's cash rate was reduced by 50 basis points to 3.75%. Sovereign bond yields touched record lows over the month as investors sought the security of government debt. Subsequently, the domestic bond market posted strong positive returns, with the UBS Treasury Bond Index returning +3.7%, outperforming the UBS Composite Bond Index (+3.1%) and UBS Credit Index (+2.2%). Global bond returns were also positive, although not to the same extent. The Citigroup World Government Bond (ex-Australia) Index gained 1.7% during the month and similarly, the Barclays Capital Global Aggregate Bond Index appreciated 1.5%, both on a fully hedged basis.


The Australian dollar hit a six month low in May, depreciating 6.8% against the US$ to end the month at US$0.97. The A$ depreciated against all other major currencies, returning -8.5% relative to the Yen, -1.7% versus the Pound Sterling, and -0.3% versus the Euro. On a trade weighted basis, the local currency depreciated 4.4%.


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 2012 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.