Investment commentary - 31 August 2012



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

Markets in August were buoyed by comments from the European Central Bank President foreshadowing new measures to support European sovereign bond markets, and from the Chairman of the US Federal Reserve alluding to the possibility additional monetary stimulus in the US (QE3).

However, towards the end of the month markets lost some ground as renewed uncertainty emerged over whether the promise of the additional measures would be sufficient to prompt a recovery in global growth.

ECB President Mario Draghi had previously indicated a firm commitment to preserve the euro, and markets were eagerly awaiting positive news in the lead up to the ECB’s governing council meeting on 6 September.

The weakening in sentiment late in the month also followed renewed fears over the depth of the slowdown in China, whilst modest growth from the US and poor economic data in other regions also disappointed expectations. Locally, the RBA kept interest rates on hold despite weaker domestic conditions and downward pressures on commodity prices from a sluggish Chinese economy.

Significant developments over the month were:

  • The Board of the Reserve Bank of Australia left the official cash rate unchanged at 3.50% for the second consecutive month. Despite a more subdued international outlook, the RBA expects inflation to track within target bands.
  • Data released in early September showed the seasonally adjusted unemployment rate edged down by 0.1% to 5.1% in August, the lowest level since May. However, total employment fell by 8,800 in the month, slightly lower than forecast.
  • The Chinese manufacturing output signalled a renewed decline during August where the HSBC PMI Index slumped to a three year low finishing at 47.6 from 49.3 in the previous month. The continued deterioration in manufacturing activity in China has increased speculation the authorities may respond with a further round of stimulus measures.
  • US GDP in the second quarter was upwardly revised by 0.2% to an annualised rate of 1.7%, although still below the 2.0% in the previous quarter and 4.1% in late 2011. The unemployment rate edged down from 8.3% in July to 8.1% in August which was unexpectedly driven down by Americans leaving the labour force.
  • US housing prices rose by 1.2% over the year to June signalling a gradual recovery in the housing market. However, consumer confidence fell sharply in August as the approaching fiscal cliff and the situation in Europe continue to undermine confidence in the US.
  • As investors awaited the ECB’s governing council meeting in early September, Spain plunged into a double-dip recession as its interrelated problems with the banking sector and regional governments continue. Figures released this month saw the flight of funds from Spanish banks continue in July with bank deposits down by 4.7%.
  • Australian commodity prices plunged during the month led by falls from iron ore plummeting 22.0% over the month to US$96.0/MT. Oil prices rose to US$96.5/bbl in August, surging 9.5% for the month and gold increased 3.3%, settling at US$1,674.40/oz.

Australian Shares

The local market finished the month higher with the reporting season focusing investor attention back on company fundamentals.

The S&P/ASX 300 finished the month up 2.1%. The sectors of Information Technology (+10.5%), Healthcare (+6.1%) and Consumer Staples (+5.9%) were the strongest performers over the month. Underlying the performance of these sectors were strong returns from IAG (+13.3%), Suncorp Group (+12.6%), AMP (+11.9%), Brambles (+9.7%) and Wesfarmers (+6.4%). It was also a solid month for domestic small companies stocks (+2.9%) as investors began to search the market for “cheap cyclicals”.

Overseas Shares

Global share markets trended higher in anticipation of US and European central bank action. Global shares returned 2.6% in US$ terms, which translated to 4.5% in unhedged A$ terms in line with a 1.8% depreciation in the local dollar (A$). It was also a strong month for global small companies (+5.2% in A$ unhedged terms) and emerging market shares (+1.5% in A$ unhedged terms). All global sectors finished the month higher with Information Technology (+6.3%), Consumer Discretionary (+5.7%) and Financials (+5.6%) providing the most robust returns over the period. US stocks posted positive returns as the market anticipated another round of easing policies. The S&P500 Composite Index returned 2.3% over the month in local currency terms. The more concentrated Dow Jones Industrial Average and NASDAQ also rallied by 1.0% and 4.3% respectively. Familiar headwinds from the euro zone’s debt crisis were relatively muted over the month as investors awaited an ECB announcement on new measures to support European sovereign debt markets. In Europe, the FTSE 100 (UK) returned +2.1%, the CAC 40 (France) increased 3.7% and the DAX 30 (Germany) rose 2.9% all in local currency terms. Weaknesses in the Chinese economy dragged the performance of Asian markets down over the month with Hong Kong’s Hang Seng Index down 1.3% and the Japanese TOPIX fell 0.6%. The Chinese markets (Shanghai Composite Index) reflected signs of faltering growth, declining 2.7% for the month.


Real Estate Investment Trusts (REITs) fell slightly over the month. Domestic REITs as measured by the S&P/ASX 300 A-REIT Index dropped marginally by 0.1% while the FTSE EPRA/NAREIT Global Developed Index (G-REITs) returned 0.3% on a fully hedged basis. The unlisted property sector (as measured by the Mercer/IPD Australian Pooled Property Fund Index) rose 0.6% driven by relatively strong returns from Industrial property funds.

Fixed Interest

Sovereign bond yields rose modestly as investors moved out of bonds and into share markets as they looked to central banks to stimulate an economic recovery. Ten-year bond yields rose in the US (+13bps to 1.62%), in Germany (+2bps to 1.25%), the UK (+6bps to 1.46%) and in Australia (+3bps to 3.04%). German 2-year yields remained in negative territory, albeit rising modestly over the month (+6bps to -0.04%), as did 2-year yields in the US (+3bps to 0.26%) and in the UK (+3bps to 0.13%).

Despite the modest rises in yields, returns were positive in both the Australian and global sovereign bond markets in the month (+0.4% and +0.4% in $A hedged respectively).

August was a solid month for global credit (+0.8% in A$ hedged) as well as for both Australian and global inflation linked bonds (+0.2% and +0.3% respectively), and Australian credit (the UBS Credit Index rising 0.9%).


The Australian weakened broadly as mounting concern about China’s slowing economy weighed on the future outlook of Australia’s mining boom. The Australian dollar decreased against all major currencies over the month. The A$ depreciated by 1.8% against the US$, finishing the month at US$1.03. Against other currencies, the A$ dropped relative to the Euro by 4.1%, by 3.1% against Pound Sterling and by 1.5% relative to the Yen. On a trade weighted basis, the local currency depreciated by 2.4% over August.


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