Investment commentary - 28 February 2015


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

Following on from January's actions, central banks were a key driver for another positive month for risk assets. The Reserve Bank of Australia (RBA) cut official rates by 25 basis points (bps) to 2.25% in early February, providing a boost to Australian shares, while the easing program of the European Central Bank (ECB) also led to strong gains for European shares.

Meanwhile a bounce in oil and commodity prices helped materials and energy stocks outperform other sectors, while positive risk sentiment pushed longer term bond yields higher, more than offsetting the impact of generally disappointing data releases from the United States (US). The Australian dollar (AUD) rose slightly, despite the RBA's decision to cut interest rates, taking a breather from its substantial depreciation over the preceding five months.

Significant developments

  • The RBA left interest rates on hold at 2.25% in March, despite interest rate markets and a majority of economists sampled by Bloomberg expecting a cut of 25bps. The statement indicated a preference to see how February's cut would work through the economy, while retaining an easing bias.
  • Australian gross domestic product (GDP) grew 0.5% in Q4 and 2.5% over the 2014 calendar year on a seasonally adjusted basis. Quarterly growth was slightly below expectations for 0.6%, though Q3 growth was revised up to 0.4% from 0.3%. Net exports and consumption contributed 0.7 percentage points (ppts) and 0.6ppts respectively to Q4 growth, while inventories detracted 0.6ppts. The Australian economy continues to grow below trend due to drag from the conclusion of the mining investment boom.
  • Australian seasonally adjusted employment declined by 12,200 in January, behind expectations for a 5,000 fall, while December employment was revised up from a gain of 37,400 to 42,300. Full-time employment declined by 27,100 in January, while part-time employment increased by 15,900. The unemployment rate increased to 6.4% from 6.1% while participation was unchanged. In trend terms, employment increased by 6,000, while the unemployment rate increased by 0.1% to 6.3%, while the participation rate was unchanged at 71.0%.
  • Australian retail trade rose by 0.4% in seasonally adjusted terms in January, in line with expectations. In trend terms retail trade rose by 0.2% in the month, and 3.1% from a year earlier. In January clothing, footwear and personal accessories and department stores were the strongest sectors, rising 0.7% and 0.5% respectively, while other retailing and food retailing were the weakest declining 0.2% and rising 0.1% respectively in trend terms.
  • Australian private capital expenditure contracted 2.2% in Q4 and 3.6% in the calendar year. Increased investment in buildings and structures for non-mining industries was insufficient to offset declines from the mining sector. Capex intentions for 2014-15 were revised up slightly by 0.4% to $152.7bn, but are 8.6% lower than the relevant estimate for 2013-14. The first estimate of capex for 2015-16 was also provided in the survey, but at $109.8 billion is 12.4% lower than the first estimate for 2014-15.
  • US Non-Farm Payrolls increased by 295,000 in February, above expectations for a 235,000 gain, while payrolls for the prior two months were revised down by 18,000. The participation rate declined to 62.8% from 62.9%, while unemployment declined to 5.5% from 5.7%. Average hourly earnings were less impressive, rising 0.1% in February and 2.0% from a year earlier, falling short of expectations for gains of 0.2% and 2.2% respectively.
  • The second estimate of Q4 US GDP was released. GDP was estimated to have risen at an annualised quarterly pace of 2.2%, ahead of expectations for 2.0%, though was revised down from the initial 2.6% estimate. Consumption contributed 2.8ppts to growth, investment 0.8ppts and inventories 0.1ppts, while net exports detracted 1.2ppts and the government sector 0.3ppts.
  • The US Institute for Supply Management (ISM) Manufacturing Index eased to 52.9 in February from 53.5 in March, and was slightly below expectations for 53.0. The new orders, output and employment subcomponents of the index all declined in the month. Twelve of 18 industries in the survey reported growth.
  • US Retail Sales declined 0.8% in January behind expectations for a 0.4% decline, and accelerating from the 0.9% decline in December. Core retail sales rose 0.2%, also short of expectations for a 0.4% gain, though December sales were revised up from -0.3% to 0.0%.
  • The US consumer price index (CPI) declined 0.7% in January and 0.1% from a year earlier. January's CPI was lower than expectations for a 0.6% decline, though December's 0.4% decline was revised up to a 0.3% decline. Core CPI, which excludes volatile items such as food and gasoline rose by 0.2% in January to be 1.6% higher than a year earlier, which was in line with estimates.
  • The HSBC China Manufacturing purchasing managers' index (PMI) rose to 50.7 in February from 50.1 in January, ahead of estimates for no change. The gains were led by an increase in new orders, new export orders and output. The official PMI rose to 49.9 from 49.8, ahead of expectations for 49.7.
  • Euro area GDP rose 0.3% in Q4, ahead of estimates for a 0.2% increase. The euro area grew 0.9% from a year earlier, led by Spain and Germany which grew 2.0% and 1.5% respectively, but weighed on by France which grew only 0.2%, while Italy contracted 0.5%.
  • Euro area CPI declined 0.3% from a year earlier in February, slightly above expectations for a 0.4% decline. Core CPI rose 0.6% from a year earlier, in line with expectations.
  • Japanese GDP grew 0.4% in Q4, falling short of expectations for a 0.5% gain. Net exports contributed 0.2ppts to growth, while consumption and the government sector each contributed 0.1ppt. GDP growth was flat over the calendar year, due to the negative impact of an increase in the consumption tax in April 2014.


Australian equities

Australian equities rose in February with the S&P/ASX 300 Accumulation Index returning 6.9%. Materials (+11.8%), Energy (+9.2%) and Consumer Discretionary (+7.9%) were the strongest performing sectors, while Telecommunications (0.6%), Consumer Staples (1.1%) and Property Trusts (+3.7%) were the weakest sectors. Australian Small Companies (small caps) outperformed Australian large companies (large caps), with the Small Ordinaries Accumulation Index returning 8.4%..

Global equities

Global equities returned 5.3% in unhedged (AUD) terms and 6.0% in hedged (AUD) terms, as the Australian dollar rose during the month. Global small caps returned 5.6%, while emerging markets returned 2.6% (both in AUD unhedged). In the US, the S&P500 returned 5.5%, while the NASDAQ returned 7.1%. Outside of the US, Italy (+8.9%), France (+7.5%) and Germany (+6.6%) were strong performers, while Hong Kong (+1.3%) and the UK (+2.9%) lagged (returns in local currency terms).

Property and infrastructure

Real asset sector performance was mixed in February, with Global Listed Infrastructure returning +0.8% and Global Listed Property returning -0.4% (in AUD hedged terms). Agricultural Commodities returned 2.2% while Broad Commodities returned 2.8% (both in AUD hedged terms).

Fixed interest

Ten-year bond yields increased in the US (+33bps to 2.01%), United Kingdom (+42bps to 1.78%), Germany (+1bp to 0.28%) and Japan (+6bps to 0.34%). Two-year sovereign bond yields increased in the US (+13bps to 0.58%) and the UK (+10bps to 0.46%), were flat in Japan (0.02%) but declined in Germany (-4bps to -0.21%).

Australian yields were mixed, with the two-year (-19bps to 1.81%) and five-year (-11bps to 1.93%) declining, while the ten-year rose (+2bps to 2.46%). As a result, Global sovereign bonds returned -0.9% (AUD hedged) and Australian sovereign bonds returned 0.3%, Global credit returned -0.3% (AUD hedged) and emerging markets debt returned -1.8% (AUD unhedged).


The AUD rose 0.6% against the USD in February, stabilising following substantial falls over the last five months. The USD appreciated 1.8% against the Japanese Yen (JPY) and 0.8% against the Euro. The AUD appreciated 2.4% against the JPY and 1.3% against the Euro, to end the month 0.3% higher on a trade-weighted basis.


Commodity prices generally rose in February. The broader S&P GSCI Commodity Total Return Index rose by 5.9%, the first gain in eight months, mainly the result of a sharp rebound in oil prices. The price of oil rose for the first time since June 2014, by 27% to USD61.06 per barrel, while gold prices fell by 4.5% finishing the month at USD1,216.57 per ounce. Iron ore prices remained flat at USD64.5 per metric tonne.

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