Investment commentary - 30 November 2013

15/12/2013
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

The potential tapering of asset purchases by the US Federal Reserve was once again at the forefront of investors' minds. The release of the minutes from the October Federal Open Market Committee (FOMC) meeting reignited talk of the possible wind down of stimulus, as the committee noted that if the labour market and economic conditions continue to improve then the tapering of stimulus will begin in the “coming months”. This news resulted in some market jitters, even though the statement should not have come as a big surprise - most investors have grown to expect that monetary stimulus will eventually unwind. Recent US economic data continues to point to further improvement in the world's largest economy.

In China, the Communist Party held its much anticipated Third Plenum and a 60 point plan of reforms was unveiled. The bold reforms were applauded by the market, although economists acknowledge that implementing the changes will be a long and complex process. The recovery in Europe remains fragile, in particular recent data points to softness in France. Locally, the RBA continued to 'jawbone' the Australian dollar, with Glenn Stevens stating that the board has an “open-mind” to currency market intervention. At the December meeting the RBA left the official cash rate unchanged at the record low of 2.50%.

Significant developments over the month were:

  • The RBA left the cash rate unchanged at 2.50% at their December meeting. The Board expects that earlier rate cuts will continue to support the domestic economy. The accompanying statement reiterated the RBA's discomfort with the stubbornly high level of the Australian dollar.
  • Australian Q3 2013 GDP data fell short of economists' expectations, growing by 0.6% for the quarter and 2.3% for the year. The main contributors to growth were net exports and final consumption expenditure, while changes in inventories detracted from growth. Terms of trade fell by 3.3% over the quarter.
  • The US economy expanded faster than initially reported, with GDP growth for the September quarter revised up to an annual rate of 3.6% from the initial estimate of 2.8%. The revision was driven by higher inventories, as businesses built up merchandise at a faster pace.
  • US manufacturing activity continued to accelerate over November with the ISM Manufacturing PMI rising to 57.3, the highest level since April 2011 and marking the sixth straight month of growth in the sector. US employment data once again surprised on the upside, with 203,000 jobs created in November. The unemployment rate fell to a five year low of 7.0%
  • Chinese manufacturing continued to expand with the HSBC China Manufacturing PMI index sitting at 50.8 in November, the second highest reading in eight months. Inflation slowed in November to an annual rate of 3.0%, down from 3.2% in October. Chinese trade data exceeded expectations in November with exports rising 12.7% from a year earlier.
  • The European recovery is at risk of running out of steam, with Euro Area GDP growing by just 0.1% over Q3 2013 representing a slowdown from the 0.3% growth seen in the second quarter. France posted negative growth over the September quarter and as such is at risk of drifting back into recession in the coming months. The recession in Italy has entered its third year, although the pace of contraction has slowed to 0.1% in the third quarter.
  • The Euro Area unemployment rate dropped 0.1% to 12.1% in October. The highest unemployment rates continue to be recorded in Greece and Spain. Youth unemployment in the region is considerably high at 24.4%.
  • In Japan, the seasonally adjusted unemployment rate remained steady in October at 4.0% and the annual inflation rate stayed unchanged at 1.1% in October. Third quarter GDP growth disappointed - revised down to an annual rate of 1.1% from an initial estimate of 1.9%, which significantly lags the 3.8% annual growth rate posted in the second quarter.
  • Commodity prices were mixed in November. Gold prices fell 5.3% in November finishing the month at US$1,253.35/oz. Iron ore prices rose by 3.0%, ending the month at US$137.0/MT. The oil price strengthened by 3.3% to $111.24/bbl

 

Australian Shares

The Australian sharemarket fell by 1.4% in November, in contrast to Overseas Sharemarkets which generally rose over the month. Small Caps (returned -5.2%), Large Caps (-1.0%) and Mid Caps (-1.3%) all posted negative returns in November. All sectors finished in the red with the exception of Financials (excluding property trusts). The best performing sectors were Financials (excluding property trusts) (+0.2%), Healthcare (-0.3%) and Materials (-0.8%). The weakest performing sectors included Energy (-6.4%), Industrials (-3.7%) and Utilities (-2.8%). On a stock level, the Commonwealth Bank (+2.3%), Macquarie (+6.7%) and QBE (+5.9%) made the largest contribution to the return of the index. On the other hand, ANZ (-5.4%), Westpac (-3.7%) and Newcrest Mining (-25.3%) were the most significant detractors from the performance of the index. Other interesting developments on the local exchange included the price of GrainCorp which plummeted following the news that the Treasurer rejected the foreign acquisition of the company by ADM.

 

Overseas Shares

Global sharemarkets were generally stronger in November. The broad MSCI World ex Australia Index rose 2.5% in hedged terms and 5.7% in unhedged terms, as the Australian dollar depreciated against most of the major currencies. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (+5.8%) marginally outperformed their Value (+5.7%) counterparts in A$ terms. The strongest performing sectors were Healthcare (+7.6%) and Information Technology (+7.3%), while Materials (+3.2%) and Utilities (+2.0%) were the worst performers. In A$ terms, the Global Small Cap sector rose 5.5%, while Emerging Markets returned 2.1%.

In the US, the S&P 500 Composite Index rose 3.0% during November, the NASDAQ returned 3.6% and the Dow Jones Industrial Average gained 3.8%, all in local currency terms. In Europe the DAX 30 (Germany) rallied by 4.1%, while the other major markets posted modest returns with the CAC 40 (France) rising by 0.1% and the FTSE 100 (UK) losing 0.7%. Asian markets were generally stronger over the month, with the Japanese TOPIX rallying 5.4%, the Chinese Shanghai Composite Index gaining 3.7% and the Hang Seng finishing the month 3.0% higher, while the Indian BSE 500 lost 0.8%.

 

Property

Real Estate Investment Trusts (REITs) posted disappointing performance over the month; domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) returned -2.7%, while Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) lost 2.5% on a fully hedged basis. The unlisted property sector (as measured by the Mercer/IPD Index) returned 0.5% in October on the back of solid returns from Industrial funds (+0.7%).

 

Fixed Interest

Global Sovereign Bond yields generally rose across the major markets over the month. Ten-year bond yields rose: in the US (+21bps to 2.76%), the UK (+15bps to 2.77%), Germany (+1bps to 1.69%) and Japan (+1bps to 0.61%). Two-year bond yields were lower in the US (-2bps to 0.27%) and Germany (-2bps to 0.11%). Global Bond indices saw modest returns over the month, with both the Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index returning 0.1%, both on a fully hedged basis.

Australian ten-year Bond yields increased by 19bps to 4.13% and five-year bond yields rose 12bps to 3.44%. Australian bonds produced weak returns in November. The UBS Credit Index returned 0.2%, UBS Semi-Government Index finished the month flat and the UBS Treasury Bond Index fell by 0.3%.

 

Currencies

The Australian Dollar reversed the recent rise and depreciated against most major currencies in November. The Australian Dollar fell 3.5% relative to the US Dollar, finishing the month at US$0.914. Against other currencies, the A$ depreciated 5.3% relative to the Pound Sterling, 3.6% against the Euro, and gained 0.7% relative to the Yen. On a trade weighted basis, the local currency lost 3.2% over the month.

 

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