Investment commentary - 31 January 2013

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

Equity markets kicked 2013 off to a positive start following the successful last minute action by the US Government to avert the 'fiscal cliff' at the end of 2012.

The postponement of the US debt ceiling provided a temporal relief to the market despite concerns over the automatic spending cuts associated with sequestration. Central banks reaffirmed their commitment to easy monetary policy into 2013 and the new government in Japan is taking decisive action to stimulate the Japanese economy via a range of fiscal and monetary measures.

Favourable Chinese economic data drove market optimism higher along with the ECB's announcement that the European banks intend to make early LTRO loan repayments worth €137bn ($183bn). Locally, the RBA kept interest rates on hold in their first meeting of 2013 despite holding an easing bias.

Significant developments over the month were:

  • The Reserve Bank of Australia held the official cash rate steady at 3.0% at their first meeting of the year in February despite the recent run of subdued domestic data.
  • Domestic inflation rose 0.2% over Q4 2012 falling short of market expectations taking the annualised CPI to 2.2%.
  • The Australian unemployment rate remained at 5.4% over January despite the slight downward movement of the participation rate. The number of full-time jobs dropped 1.2% while part-time jobs increased 4.3% over the month.
  • The initial US Q4 2012 GDP estimate disappointed markets as it shrunk at an annualised rate of 0.1%. This is largely attributable to reduced defence spending and sluggish growth in corporate inventory as the disruptions from Hurricane Sandy took effect.
  • US jobless rate edged up slightly to 7.9% in January while non-farm payroll employment increased by 157,000. In addition, US house prices (measured by FHFA House Price Index) continued its upward trend returning 0.6% during November 2012.
  • The US Senate approved the bill to temporarily suspend the federal borrowing limit until May 2013. However, uncertainty lingers over the automatic spending cuts associated with sequestration due to take effect in March 2013.
  • The recovery in China continued to gain traction. Chinese inflation rate hit a seven month high at 2.5% as Q4 2012 GDP grew at a better-than-expected 2.0% bringing annual growth to 7.9%.
  • The HSBC Chinese Manufacturing PMI Index for January rose for the third consecutive month to 51.9 from 51.5 in December signalling modest improvement in Chinese operating conditions.
  • Eurozone unemployment remained stubbornly high at 11.7% over December. Manufacturing activity improved to an 11-month high in January to 47.9 from 46.1 despite remaining in contractionary territory.
  • Early repayment by European banks on the three-year LTRO funding of €137bn was widely viewed as an indication of improving fundamentals across Europe. However, political uncertainty threatens the recovery of the eurozone where Spanish (30 bps to 4.6%) and Italian (35bps to 5.45%) bond yields spiked over the month.
  • The Bank of Japan (BoJ) confirmed a new inflation target of 2% following pressures from the new Japanese government. The Japanese asset purchasing program was increased by ¥10 trillion to ¥111 trillion ($1.31 trillion) over the month. In addition, BoJ committed to an open-ended asset purchase program starting in 2014.
  • Most commodity prices soared over the month. Oil prices rose 6.3% to US$97.7/bbl while gold price was flat finishing the month at US$1,663.9/oz. Iron ore prices rose 8.5% over the month to US$153.0/MT, hitting levels not seen since November 2011.

Australian Shares

Australian Shares ended January on a positive note as the S&P/ASX 300 Accumulation Index returned 5.0%. All sectors finished higher with IT (+14.7%), Consumer Discretionary (+8.6%), Financials ex Prop (+7.0%), Energy (+6.0%) and Industrials (+5.7%) being the stronger outperformers. Underlying the market's performance were strong returns from AMP (+11.1%), NAB (+10.1%), QBE Insurance Group (+9.9%), Westpac Banking (+6.6%) and Westfield Group (+6.3%). The S&P/ASX Small Ordinaries Index also fared well returning 4.2% over January.

Overseas Shares

International Share markets moved higher in January as positive news on the world economy continued to drive investor optimism. The broad MSCI World ex Australia Index rose 4.6% in unhedged terms and 5.6% in fully hedged terms. More specifically, based on the relative performance of the S&P Developed ex-Australia Large mid cap indices, global Growth (+3.5%) continued to lag their Value (+5.2%) counterparts in A$ terms. All global sectors finished the month higher with Healthcare (+6.7%), Financials (+5.8%), Energy (+5.7%) and Consumer Discretionary (+5.2%) being the largest outperformers.

US stocks posted positive returns as favourable corporate earnings and encouraging economic data boosted confidence. The S&P 500 opened 2013 with its best monthly gain since October 2011 at 5.2%. The more concentrated Dow Jones Industrial Average and NASDAQ also rose 5.9% and 4.1% respectively, all in local currency terms. European markets gained steadily over January with the FTSE 100 (UK) 6.5% higher, the CAC 40 (France) up 2.5% and the DAX 30 (Germany) increased 2.1% all in local currency terms.

In Asian markets, the Chinese Shanghai Composite Index (+5.1%) and the Japanese TOPIX (+9.4%) outperformed the Indian BSE 500 (+2.9%) and Hong Kong Hang Seng Index (+1.5%), all in local currency terms as the Chinese recovery continued to gain traction along with favourable central bank action in Japan.

In A$ terms, Emerging markets (+0.9%) posted decent gains but significantly underperformed developed markets, as measured by the MSCI EM (Net) Index.


Real Estate Investment Trusts (REITs) had a positive month; Domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) rose 4.4% and Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) gained 3.9% on a fully hedged basis.

Fixed Interest

Bond markets fell over the month as upbeat global sentiment lessened the appeal of safe-haven assets. Ten-year yields rose across the globe: in the US (+24 bps to 1.99%), UK (+28 bps to 2.10%), Germany (+44 bps to 1.62%) and Australia (+18 bps to 3.45%). Japanese ten-year yields (-4 bps to 0.75%) did however fall slightly as investors expect BOJ to take bolder action to ease monetary policy. Interestingly, German two-year yields spiked 26 bps to 0.25% in the month after falling into negative territory in December.

Australian Sovereign bonds fell over the month as markets expected further monetary easing by the RBA. The UBS Treasury Bond Index and UBS Semi-Government Index dropped 0.5% and 0.2% respectively while the UBS Credit Index rose 0.2% over the month.

Global Bond returns posted negative movements over the month. The Barclays Capital Global Aggregate Bond Index and the Citigroup World Government Bond (ex-Australia) Index fell 0.3% and 0.2% respectively, both on a fully hedged basis.


The Australian dollar rose against all major currencies over the month with the exception of the Euro as markets anticipate the ECB to leave interest rates on hold. The A$ offset the December falls over January increasing 0.5% against the US$, finishing at US$1.04.

The A$ appreciated 3.0% relative to the Pound Sterling, soared 6.0% against the Japanese Yen while shrinking 2.4% against the Euro. On a trade weighted basis, the local currency appreciated 0.8% over December.



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