Investment commentary - 31 January 2014

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

The year kicked off with a bang with a flurry of data and developments driving global markets.

All eyes were on the turmoil in emerging markets (EM), many of which experienced large currency devaluations and falling stock markets. Many EM countries run current account deficits, thereby, relying on external capital for funding. As tapering began in the United States (US), the attractiveness of returns on EM investments declined and many investors began to withdraw capital from these regions. The impact was not just limited to the "fragile five" (a term coined to describe the most susceptible nations: Brazil, Turkey, South Africa, Indonesia and India), but affected other countries including Russia and Turkey. Many EM central banks responded by hiking interest rates in part to protect their currencies - including Turkey, South Africa, Brazil and India.

In the US, recent data continued to point to an ongoing economic recovery with strong gross domestic product (GDP) growth recorded in the December 2013 quarter. The US Federal Reserve (Fed) announced a further reduction in its bond buying program, bringing total monthly purchases to $65 billion. There was no mention of the volatility experienced by emerging markets in the press release following the Fed's January 2014 meeting. Concerns over softness in China re-emerged following the release of a manufacturing survey which suggested the sector contracted in January.

Locally, the Reserve Bank of Australia (RBA) decided to keep the official cash rate on hold at 2.50%. The post meeting statement suggests that the current easing cycle has come to an end, with the board declaring that there is "likely to be a period of stability in interest rates" going forward.


Significant developments

  • The RBA left the cash rate unchanged at 2.50% at its February meeting. The tone of the accompanying statement changed from previous meetings, with the RBA moving away from the previous dovish stance to a neutral position on interest rates. There was no mention of an "uncomfortably high" Australian dollar.
  • The Australian economy shed 22,600 jobs in December, which disappointed the market. The unemployment rate remained steady at 5.8% while the participation rate fell 0.2% to 64.6%. On a more upbeat note, data released by National Australia Bank showed that business conditions hit a two-and-a-half-year high while business confidence remained elevated.
  • US GDP growth was solid in the December quarter, expanding by an annual rate of 3.2%. Although this marked a slowdown in growth from the previous quarter, it was nevertheless a strong result given the fiscal headwinds faced over the quarter including the government shutdown.
  • US manufacturing activity continued to grow in January, albeit at a slower pace than in previous months, with the ISM Manufacturing purchasing manufacturers' index (PMI) falling to 51.3 from 56.5 in December. The sector has grown for eight consecutive months.
  • US employment data once again surprised on the downside with 113,000 jobs created in January, only a slight improvement on the 75,000 jobs created in December. Despite the disappointing jobs data, the unemployment rate fell to 6.6% and the participation rate rose to 63.0%.
  • The Chinese manufacturing sector contracted in January, with the HSBC China Manufacturing PMI index falling to 49.5 from 50.5 in December.
  • The Euro area unemployment rate remained steady at 12.0% in December. Inflation in the region fell to an annual rate of 0.7% in January drifting further away from the ECB's inflation target of just below 2.0% per annum.
  • In response to growing currency volatility, a number of emerging market central banks hiked interest rates over the month. The Turkish central bank increased all of its main interest rates during an emergency meeting - the one week re-purchase rate increased to 10% from 4.5%. South Africa raised rates by 0.5% to 5.5%, Brazil hiked rates by 0.5% to 10.5% and India increased rates by 0.25% to 8%.
  • The recovery in the Eurozone manufacturing sector continued in January with the Manufacturing PMI index rising to 54.0 - a 32 month high. The PMI was driven higher by Germany while the Greek manufacturing sector moved back into expansionary territory for the first time since August 2009. The contraction in the French manufacturing sector slowed over the month.
  • In Japan the annual inflation rate increased from 1.5% to 1.6% in December, the highest rate since 2008.

Australian equities

Australian equities followed global markets lower, with the broad index falling 3.0%. Poor returns were recorded across the market capitalisation spectrum - Mid Caps and Large Caps both dropped 3.0% and Small Caps faired a little better returning -2.8%. The best performing sectors were more defensive in nature, being Utilities (+0.8%), Property Trusts (+0.4%) and Healthcare (+0.3%). The weakest performing sectors were Financials (excluding property trusts) (-4.6%), Consumer Discretionary (-4.5%) and Energy (-3.8%). The largest contributors to the return of the index were Newcrest Mining (+23.9%), CSL (+2.0%) and Alumina (+14.4%). On the other hand, the most significant detractors from the performance of the index were CBA (-4.6%), ANZ (-6.1%) and Westpac (-4.2%). Notable developments on the local bourse included the news that Myer approached David Jones about a possible merger late last year.

Global equities

Global sharemarkets were weaker in January with concerns that the turmoil in EM may spread to developed countries. The broad MSCI World ex Australia Index fell 3.1% in hedged terms and 1.2% in unhedged terms, as the Australian dollar continued to depreciate against the major currencies. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (-1.3%) underperformed their Value (-1.1%) counterparts in Australian dollar terms. The strongest performing sectors were Healthcare (+3.2%) and Utilities (+2.8%), while Energy (-3.7%) and Consumer Staples (-3.0%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 0.7%, while Emerging Markets plummeted 4.1%.

In the US, the Dow Jones Industrial Average dropped 5.2% in January, the S&P 500 Composite Index returned -3.5% and the NASDAQ lost 1.7%, all in local currency terms. European markets also finished in the red, as the FTSE 100 (UK) fell 3.5%, the CAC 40 (France) dropped 3.0% and the DAX 30 (Germany) returned -2.6%. In Asia, the Japanese TOPIX returned -6.3%, the Hang Seng dropped 5.5%, the Indian BSE 500 fell 4.2% and the Chinese Shanghai Composite Index finished 3.9% lower.


Real estate investment trusts (REITs) posted positive performance over the month; domestic REITs rose 0.4% and Global REITs returned 0.1% on a fully hedged basis. The unlisted property sector (as measured by the Mercer/IPD Index) returned 1.1% in December, with Industrial (+2.9%) funds posting strong returns. Global listed infrastructure (as measured by the UBS Global Infrastructure and Utilities Hedged Index) returned 0.6% for the month.

Fixed interest

Global sovereign bond yields generally fell across the major markets over the month driven by the "risk off" environment. Ten-year bond yields fell: in Germany (-38bps to 1.57%), the US (-34bps to 2.67%), the United Kingdom (-32 bps to 2.71%) and Japan (-11bps to 0.63%). Two-year bond yields were lower in Germany (-13bps to 0.07%) and the US (-5bps to 0.31%). A fall in yields and a return to risk aversion meant Global Bond indices saw strong returns over the month, with both the Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index gaining 1.7%, both on a fully hedged basis.

Australian 10-year bond yields decreased by 24bps to 4.00% and five-year bond yields fell 14bps to 3.29%. Australian bonds produced positive returns in January. The UBS Treasury Bond Index finished the month 1.2% higher, the UBS Semi-Government Index gained 1.1% and the UBS Credit Index returned 0.9%.


The Australian dollar continued to depreciate against the major currencies in January. The Australian dollar fell 2.1% relative to the US dollar, finishing the month at US$0.876. Against other currencies, the Australian dollar depreciated 4.5% relative to the Japanese Yen, 2.0% against the Pound Sterling and 0.3% relative to the Euro. On a trade weighted basis, the local currency lost 1.7% over the month.


Commodity prices were mixed in December. The S&P GSCI Commodity Total Return Index returned 0.9% for the month. Gold prices rose 2.9% as risk aversion returned to the market, finishing the month at US$1,242.68/oz. Iron ore prices dropped by 7.3% to US$127.0/MT. The oil price fell by 3.1% to $107.97/bbl.


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