Investment commentary - 30 September 2016

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
Despite many markets finishing relatively flat for September 2016, there was still plenty for investors to contend with during the month.

The Bank of Japan unveiled possibly the biggest news to the market in September, releasing its plan to target 0% for the 10-year JGB yield and an intention to overshoot its 2% inflation target. The aim is to minimise flattening of the JGB yield curve. The United States (US) Federal Reserve (Fed) was less active in September, keeping interest rates at 0.25% to 0.50%; however Yellen didn’t rule out the case for a further 2016 rate hike. Many eyes were poised on the first of the presidential debates with neither competitor giving much ground away. Most polls still reveal Clinton holding an edge however markets will continue to watch closely leading up to November.

Elsewhere, Eurozone inflation rose to 0.4% in September, ahead of expectations for 0.2%. The European Central Bank (ECB) would be pleased with this result following a period of heavily-criticised expansionary monetary policy accompanied by nominal signs of impact.

A major development for growth markets during the month was the unexpected deal reached at the Organization of the Petroleum Exporting Countries (OPEC) meeting in Algeria. Major oil producers reached a provisional deal to reduce output to a target of 32.5-33.0 million barrels per day. While the deal itself isn’t final, September saw a modest 4.5% rise in the price of oil to finish the month at $48.97 per barrel.

Global growth according to the International Monetary Fund (IMF) is projected to slow to 3.1% for 2016 before recovering to 3.4% for 2017, revised down 0.1% from the April forecasts. The revision reflects a more subdued outlook for advanced economies.

Australian shares felt the flow-on from global developments before finishing the month marginally ahead. The S&P/ASX 300 rose 0.5% for the month. Philip Lowe didn’t surprise markets in his first meeting as Reserve Bank of Australia (RBA) Governor, the board decided to leave the cash rate unchanged at 1.50%. Despite historically low levels of cash rates, Australia’s terms of trade inflated 1.1% over the month to finish 6.7% higher than its September 2015 low, supported in particular by increases in commodity prices.

  • The RBA decided to leave the cash rate unchanged in its October meeting, at 1.50%. New RBA Governor, Philip Lowe, maintained that the global economic is continuing to grow, albeit at a lower than average page. Recent growth trends have been supported by Chinese policymakers despite the underlying pace of growth in China moderating. Domestically, recent trends continue as the economy continues to shift away from mining investment with residential construction, public demand and exports picking up some of the slack. Measures of household and business sentiment remain above average. Holding the stance of policy unchanged at this meeting was judged to be consistent with sustainable growth in the economy and achieving the inflation target over time.
  • Australian seasonally adjusted employment dropped 3,900 in August, well below expectations for a 15,000 rise while July employment remained unchanged. The unemployment rate dropped to 5.6%, below market expectations. However, the participation rate decreased to 64.70%, below expectations for 64.90%. Part time jobs decreased by 15,400 while full time jobs increased by 11,500. In trend terms employment increased by 9,900 while the unemployment rate was flat at 5.7% and the participation rate remained steady at 64.8%.
  • Australian Retail Sales increased 0.40% month on month (MoM) in seasonally adjusted terms over August, above expectations for 0.2%, following a steady July. The strongest gains were in Cafes, restaurants and takeaway food services (+0.7%) and the weakest was Department stores (-0.7%). In trend terms, retail sales rose 2.6% year on year (YoY), down from 2.7% over the year to July.
  • Australian house prices rose by 2.0% in the second quarter, and 4.1%% from a year earlier, below expectations for 2.8% and 5.1%, respectively. Gains continue to be concentrated in Sydney and Melbourne. Meanwhile building approvals fell 1.8% in August to be 10.1% higher than a year earlier in seasonally adjusted terms, well above expectations for a monthly 6.0% fall and above an annual 5.1% gain. In trend terms building approvals were 0.6% higher in the month, and 4.4% higher than a year earlier.
  • US Non-Farm Payrolls increased by 156,000 in September, below expectations for 175,000 while there was an upwards revision to 167,000 of the prior month. The unemployment rate rose slightly to 5.0%, above for 4.9%, while the participation rate increased marginally to 62.9%.
  • The Institute for Supply Management (ISM) Manufacturing Index increased to 51.5 in September, above consensus for 50.4, and 49.4 in August. Non-metallic Mineral Products, Furniture & Related Products and Textile Mills reported the largest growth while Printing & Related Support Activities, Petroleum & Coal Products and Wood Products were the most significant declines. The ISM Non-Manufacturing Index increased to 57.1 in September from 51.4 in August. Agriculture, Forestry and Fishing & Hunting were the most significant contributors while Mining, Real Estate and Rental & Leasing were the largest detractors.
  • The estimate of Q2 2016 US gross domestic product (GDP) was projected to have grown 1.4% quarter on quarter (QoQ) annualised, above expectations of 1.3%, and below 1.6% growth recorded in Q1 2016.
  • US Headline consumer price index (CPI) increased to 0.2% MoM and 1.1% YoY to August, above expectations for 0.1% MoM and 1.0% YoY, and above the stagnant 0.0% movement in July. Core CPI increased to 0.3% MoM above expectations and 2.3% YoY above expectations of 2.2% for the month.
  • The China Caixin Manufacturing purchasing managers’ index (PMI) printed 50.1 in September, in line with expectations for 50.1 and slightly above 50.0 reading in August. Output and total new orders continued its expansion and firms raised purchasing activity for the third month, however, cost-cutting initiatives led to further reduction in employment. Meanwhile, the official PMI remained steady at 50.4 in September, slightly below expectations for 50.5.
  • Chinese GDP remained at 6.7% YoY to Q2, above expectations for 6.6% and holding at 6.7% recorded over the year to Q1. However, QoQ seasonally adjusted grew 1.8% QoQ, above expectations for 1.6% and the prior 1.2%.
  • European Core CPI estimates held steady at 0.8% over the year to September, from 0.9% in August, in line with estimates for 0.8%. The unemployment rate remained at 10.1% in September, above expectations.
  • The Eurozone composite PMI decreased further to 52.6 in September, down from 52.9 in August. Reaching a 20-month low, decreased growth in Germany, Italy, Spain and Ireland has offset the brief acceleration in France.


The Australian equity market strengthened over September, with the S&P/ASX 300 Accumulation Index returning 0.5% for the month. There were positive returns across the majority of the market spectrum, the exception being the S&P/ASX Mid 50 Accum, returning -1.0% for the month. The best performing sectors were Materials (+5.7%) and Consumer Staples (+1.6%). The weakest performing sectors were Telecom Services (-4.0%) and Real Estate (-4.0%). The largest positive contributors to the return of the index were BHP, South32 and ANZ, with absolute returns of 9.7%, 26.3% and 3.3% respectively. In contrast, the most significant detractors from performance were Scentre Group, Santos and TPG Telecom with absolute returns of -5.1%, -18.7% and -29.3% respectively.


The broad MSCI World ex Australia Index was up 0.3% in hedged terms and -1.3% in unhedged terms over the month, as the Australian dollar appreciated against most major currencies over September. The strongest performing sectors were Energy (+1.0%) and Information Technology (+0.7%), while Telecommunication Services (-2.2%) and Healthcare (-1.9%) were the worst performers. In Australian dollar terms, the Global Small Cap sector decreased -0.3% while Emerging Markets dropped -0.5% in unhedged Australian dollar terms.

Over August, the NASDAQ returned 1.9%, the S&P 500 Composite Index was flat and the Dow Jones Industrial Average returned -0.4%, all in US dollar terms. European markets experienced mixed returns, with the FTSE 100 (UK) up 1.8%, DAX 30 (Germany) down -0.8% and the CAC 40 (France) receiving 0.4%. In Asia, the Indian BSE 500 was down -1.1%, the Hang Seng Index up 1.8%, the SSE Composite (China) down -2.6% and the Japanese TOPIX up 0.3%.


The Real Assets sector saw mixed returns over the month. The FTSE Global Core Infrastructure index returned 1.4 %, and Global REITs returned -1.2% (both in Australian dollar hedged terms). Domestic REITs posted a return of -4.3% in September, while Australian Direct Property (NAV) returned 0.4% on a lagged basis.


Global sovereign bonds were mixed over September for hedged Australian investors. Ten-year bond yields rose for the US (+4 basis points (bps) to 1.61%) and the UK (+12bps to 0.76%) while Germany (-7bps to -0.19%) and Japan (-1bp to -0.08%) experienced falls. Two-year international bond yields saw falls across the market with the UK (-4bps to 0.11%), the US (-3bps to 0.76%), Japan (-8bps to -0.28%) and Germany (-7bps to -0.69%) all decreasing yields. Global Bond indices were subdued for hedged investors, with the Barclays Capital Global Aggregate Bond Index returning 0.1% and the Citigroup World Government Bond (ex-Australia) Index returning 0.0% over the month, both on a fully hedged basis.

Domestically, Australian 10-year bond yields rose 8bps to 1.91% while five-year (+9bps to 1.62%) and two-year (+10bps to 1.55%) bond yields also rose. As a result, Australian bond returns were relatively weak for the month. Australia Treasury Bond Index returned -0.4% while the Australian Composite Bond Index returned -0.2% for the month.


The Australian dollar rose against most currencies over September, finishing at US$0.765 with a Trade Weighted Index of 63.9 on 30 September 2016. The Australian dollar appreciated against the US dollar (1.8%), the Euro (0.9%) and the Pound Sterling (+2.5%) but continued its depreciation against the Yen (-0.5%). On a trade-weighted basis, the local currency increased 1.1% over the month.


In commodities, the S&P GSCI Commodity Total Return Index rose 2.3% for the month. Gold prices finished the month at US$1,321.51 per ounce for a 1.0% increase over the period. The oil price rose over September, by 4.5% to $48.97 per barrel. Iron ore prices also dropped over the month, by 4.2% to US$57.0 per metric tonne.
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