Investment commentary - 31 May 2013

17/06/2013
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

Global equity markets had a volatile May, with a strong start that was ultimately undermined by poor returns in the second half of May following concerns that the US Fed may wind down its quantitative easing program.

A set of positive economic data fuelled optimism in the US economy, however equity markets were impacted by Bernanke's testimonial that the Fed may reduce the pace of bond repurchases over the next few meetings. China continued to show symptoms of slowing growth with weaker manufacturing activity which led to a decline in commodity prices. Europe continues to remain in recession, with the slow down spreading to the core nations.

Following the Bank of Japan's unprecedented monetary stimulus, there are signs that the Japanese economy is improving with a rise in industrial output and a pick up in inflation. Locally, the RBA resolved to leave the cash rate at the record low of 2.75% following the recent depreciation of the Australian dollar and a mild rebound in the housing market.

Significant developments over the month were:

  • The RBA maintained the official cash rate at 2.75% at their June meeting with signs that previous interest rate cuts are beginning to boost household borrowing and are enticing investors to shift into risk assets.
  • The release of the Australian Federal budget for the coming financial year revealed that the Government will not be pursuing aggressive cuts in order to bring the budget back to surplus, instead forecasting a deficit of $18bn in 2013/14 and focusing on sustainable savings that aim to bring the budget to balance in 2015/16.
  • Australian GDP grew 0.6% over the March quarter on a seasonally adjusted basis bringing the annualised figure to 2.5%, falling short of market expectations.
  • US GDP over Q1 2013 was revised lower to 2.5% from 2.6% as the fall in government spending dragged more on the US economy than initially estimated. US manufacturing activity fell into contractionary territory in May, down to 49.0 from 50.7 as measured by the ISM business survey. US CPI decreased 0.4% in April after falling 0.2% in March and was largely driven by aggressive decreases in gasoline prices.
  • US unemployment edged higher in May to 7.6% from 7.5% in April mainly due to an increase in the number of people entering the labour force. The US housing market continued its recovery with the S&P/Case-Shiller House Price index climbing 1.1% in March and bringing the annualised growth rate to 10.9%.
  • The Chinese manufacturing sector, as measured by the HSBC Flash Chinese Manufacturing PMI Index, fell slightly to 51.0 in May from 51.1 in April and growing 2.1% over the year to May compared to 2.4% in April.
  • Eurozone unemployment reached another record high of 12.2% in April, up from 12.1% in March. The manufacturing sector continued to deteriorate albeit at a slower pace, with the Manufacturing PMI index at 48.3 in May up from 46.7 in April.
  • Evidence of a recovery in Japan with inflation rising by 0.3% over April and industrial production increasing by 1.7% over the month. Japanese unemployment remained at a multi year low of 4.1% in April.
  • Commodity prices generally declined over the month as concerns over the Chinese slowdown continued to linger. Gold prices dropped 5.1% finishing the month at US$1,392.74/oz while oil prices fell 1.4% to $91.9/bbl. Iron ore prices also plunged over May by 16.8% ending the month at US$114.0/MT.

 

 

Australian Shares

The Australian equity market suffered its worst monthly performance since May last year with the S&P/ASX 300 Accumulation Index falling by 4.5%. By sector, Information Technology (+4.6%), Materials (+2.2%) and Energy (+2.1%) were the best performers over the month, while Consumer Staples (-9.0%) and Financials (excluding property) (-8.4%) were the largest detractors from performance.

The market was driven lower by the big four banks, with Westpac (-15.5%), NAB (-14.3%) and ANZ (-13.1%) experiencing the largest losses, while Iluka (+26.0%) and QBE (+20.1%) were among the winners. The S&P/ASX Small Ordinaries Index fell 3.8% over the month, relatively outperforming the large cap index.

 

Overseas Shares

Global equity markets were predominately stronger in May. The broad MSCI World ex Australia Index rose 8.8% in unhedged terms and 2.1% in hedged terms as the A$ fell sharply against all major currencies. More specifically, based on the relative performance of the S&P Developed ex-Australia Large & Mid cap indices, global Growth (+8.5%) underperformed their Value (+9.3%) counterparts in A$ terms. The best performing sectors over May were Information Technology (+11.6%), Consumer Discretionary (+11.1%) and Industrials (+10.5%), while Utilities (+1.7%) and Telecommunication Services (+2.5%) were the worst performers.

US stocks reached another record high in mid May and the S&P 500 posted a 2.3% return for the month. The more concentrated Dow Jones Industrial Average and NASDAQ also rose 2.2% and 3.8% respectively, all in local currency terms. European markets performed well with the CAC 40 (France) advancing 4.3%, the FTSE 100 (UK) 2.8% higher and DAX 30 (Germany) rose 5.5%, all in local currency terms. Asian markets lagged their European and US counterparts, with the Japanese TOPIX posting a loss of 2.5% due to concerns over the effects of Bank of Japan's aggressive monetary easing and rising bond yields. The Chinese Shanghai Composite Index gained 5.6% in May and the Indian BSE 500 returned 0.8%, while the Hang Seng Index lost 0.9%.

In A$ terms, the global small cap sector jumped 9.4%, while emerging markets had a strong month returning 5.5%.

 

Property

Real Estate Investment Trusts (REITs) had a weak May; domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) fell 3.7% and Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) lost 6.4% on a fully hedged basis.

 

Fixed Interest

In May sovereign bond yields rose across the major markets. Ten-year bond yields rose: in Australia (+27 bps to 3.36%), US (+49 bps to 2.16%), UK (+33 bps to 2.01%), Germany (+26 bps to 1.46%) and Japan (+25bps to 0.85%). Two-year bond yields were higher in Europe (+10 bps to 0.14%), Germany (+6 bps to 0.07%), the US (+9 bps to 0.30%), and Japan (+1 bps to 0.14%). Australian bonds were softer over the month, with the UBS Credit Index rising 0.3% and UBS Semi-Government Index returning 0.1%, while the UBS Treasury Bond Index fell 0.5%. Global Bond returns saw negative movements over the month. The Citigroup World Government Bond (ex-Australia) Index fell 1.4% and the Barclays Capital Global Aggregate Bond Index dropped 1.3%, both on a fully hedged basis.

 

Currencies

Following the RBA's official cash rate cut and concerns over Chinese growth, the Australian dollar depreciated significantly against all the major currencies over the month. The Australian dollar fell 7.6% relative to the US dollar finishing May at US$0.959. Against other currencies, the A$ depreciated 6.0% against the Euro, 5.2% relative to the Pound Sterling and 4.3% against the Yen. On a trade weighted basis, the local currency depreciated 5.6% over the month.

 

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