Investment commentary - 31 January 2015



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

Easing monetary policy across the world has been the key theme this month. In the past weeks there have been monetary policy easing moves from central banks in the euro area, Swiss, Canada, Denmark, Norway, Republic of Turkey, Peru, India, and Egypt, among others, to combat increased deflation risks and prove additional support to growth.

US equities underperformed over the month, with the S&P500 dropping 3.0% .Other major equities markets fared better over the month, with modest rallies in Japanese, European and Australian equities. The fall in Yen, Euro and the Australian dollar over recent months continues to support these markets.

Greek markets have become increasingly volatile since the Syriza party came to power in mid-January, as investors have become increasingly uncertain whether the country can reach a compromise with lenders. Furthermore, a surprise decision by the European Central Bank (ECB) to no longer accept Greek bonds as collateral, weighed on Greek assets, particularly the banking sector.

Russia's sovereign credit rating was downgraded to junk status (rating of BB+ from BBB-) by Standard and Poor's, its worst rating thus far, reflecting the view that Russia's economic growth prospects, hit by low oil prices and Western sanctions over the Ukraine crisis, had worsened.

Major government bond yields continued to fall, reflecting rising fears of deflation following the recent drop in oil prices and expectations of ongoing quantitative easing from major central banks. United States (US) yields are now trading at their lowest levels since May 2013 and have dropped almost 100 basis points over the past year. Yields in other major bond markets also fell reaching record lows in some countries.
Commodity prices continued to weaken in January with the price of oil dropping by a further 14.0% to US$48.04 per barrel.

In Australia, the Reserve Bank of Australia (RBA) cut the official cash rate by 25 basis points to a new low of 2.25% as falling commodity prices and weak confidence weighed on the outlook on growth despite support from falling petrol prices and the
Australian dollar.

Significant developments

  • The RBA cut interest rates by 25 basis points to 2.25% at its first meeting for the year. In the statement accompanying the decision, the RBA Governor indicated that domestic growth remains below trend, inflation is likely to remain within its target band, and that the Australian dollar remains above fair value, particularly against currencies other than the US dollar. Nevertheless, the statement dropped forward guidance which typically signals the RBA's monetary policy bias.
  • Australian seasonally adjusted employment increased by 37,200 in December ahead of expectations, while November's gains were revised down slightly from 42,700 to 45,000. Full-time employment increased by 41,700, while part-time employment declined by 4,100. The participation rate increased from 64.7% to 64.8%, though employment gains were large enough to lower unemployment from 6.3% to 6.1%. In trend terms, employment increased by 14,400, while the participation rate and unemployment rate were unchanged at 64.7% and 6.2% respectively.
  • The Australian consumer price index (CPI) rose by 0.2% in the December quarter, behind expectations for 0.3%, and was 1.7% higher than a year earlier. The trimmed mean rose 0.7% in the quarter, ahead of expectations for a 0.5% increase, though this was partially offset by the downward revision of the September quarter CPI from 0.5% to 0.3%. The trimmed mean was 2.2% higher than a year earlier, down from a revised 2.4% in the September quarter, though still within the RBA's 2% to 3% inflation target. Annual inflation was the highest in Alcohol and Tobacco (+7.4%) and Education (+5.2%), and the lowest in Communication (-3.0%) and Transport (-1.9%).
  • Australian retail trade rose 0.2% in December in both trend and seasonally adjusted terms, with seasonally adjusted sales below expectations for a 0.3% gain. Retail sales rose 4.1% from a year earlier in seasonally adjusted terms. The highest trend sales growth were in Footwear and Personal Accessories (+0.6%) and Department Stores (+0.4%), while Other Retailing (-0.1%) and Restaurants and Takeaway Food Services (+0.1%) were the weakest.
  • US Non-Farm Payrolls rose by 257,000 in January, exceeding expectations for a 228,000 gain, while November payrolls were revised up to 329,000 from 252,000, and December revised up to 423,000 from 353,000, all indicating significant strength in US hiring. Average hourly earnings increased 0.5% in January, to be 2.2% higher than a year earlier. Positive employment trends over recent quarters presumably led to discouraged workers re-entering
    the workforce, with the participation rate rising to 62.9% from 62.7%, prompting the unemployment rate to increase slightly to 5.7% from 5.6%.
  • The first estimate of Q4 US GDP was released in January. GDP rose 2.6% on a quarterly annualised basis, below expectations for 3.0%, and below the 5.0% gain in Q3. However, personal consumption rose 4.3%, its fastest pace in a decade, to contribute 2.9ppts to growth. Meanwhile, private investment contributed 1.2ppts, inventories 0.8ppts, while net exports detracted 1.0ppts and government spending (mainly defence) detracted 0.4ppts.
  • The US Institute for Supply Management (ISM) Manufacturing Index eased to 53.5 in January from a revised 55.1 in December, and was below expectations for 54.5. Most sub-indices including new orders, new export orders and backlogs declined, while inventories increased. The number of industries reporting expansion, however, increased from 11 to 14 (of 18 industries in the survey).
  • US Retail Sales declined 0.9% month-on-month in December, falling short of expectations for a 0.1% decline. Core retail sales, which exclude expenditure on automobiles and gasoline, declined 0.3%, well behind expectations for a 0.5% gain.
  • The US CPI declined 0.4% month-on-month in December, in line with expectations, while core CPI, which excludes volatile items was flat. The CPI increased 0.8% from a year earlier. While this was higher than expectations for 0.7%, it has decelerated dramatically from 1.3%, due to declines in energy prices and the appreciation of the US dollar. Year-on-year core CPI fell short of expectations for 1.7%, easing to 1.6%.
  • Chinese GDP rose 7.3% over the calendar year, unchanged from the prior quarter and slightly ahead of expectations for 7.2%. While the pace of growth is slow relative to recent history, the underlying details are positive, with consumption contributing 51.2% to GDP in the year, up from 48.2% in 2013, indicating efforts to rebalance the Chinese economy from investment to consumption driven growth are starting to bear fruit, albeit gradually.
  • The HSBC China Manufacturing purchasing managers' index (PMI) declined to 49.7 in January from 49.8 in December, below expectations for no change. The official PMI declined to 49.8 from 50.1, and below expectations for 50.2. New orders, new export orders, inventory and output all declined, signalling slowing momentum in Chinese manufacturing.
  • The Euro area CPI eased further in January to -0.6% year-on-year from -0.2% in December, and was below expectations for -0.5%, as falls in energy prices further weighed on inflation. Core inflation also eased from 0.7% to 0.6%.
  • The ECB expanded its asset purchase program in January to include sovereign bond purchases in efforts to raise inflation towards its 2% target. Up to €60 billion of sovereign bonds will be purchased each month until September 2016. The decision to purchase sovereign bonds follows on from the ECB's announcement last September that it would launch purchases of corporate bonds and asset backed securities.
  • The Swiss National Bank shocked markets by abandoning its exchange rate floor of 1.20 Swiss Francs to the Euro, while also cutting interest rates by 50bps to -0.75%. The floor had been in place since 2011, and right up to the decision, officials had provided strong indications they would maintain the floor. In the minutes following the decision, the Franc appreciated as much as 29%, before easing to end the month 13.6% higher against the US dollar and 7.5% higher against the Euro.
  • The Danish Central Bank cut interest rates in three tranches by a cumulative 45bps to -0.50% in order to maintain the Danish Krone peg with the Euro, with the latter depreciating substantially following the ECB's expansion of its asset purchase program.
  • The Bank of Canada cut interest rates by 25bps to 0.75% in January in response to falling oil prices which will both lower inflation as well as growth, given Canada is a significant energy producer.
  • The Russian Central Bank cut interest rates by 2.0% to 15.0%, which surprised markets as only days before the decision, the Central Bank governor had indicated that interest rates were likely to remain on hold. The cut partially reversed the 6.5% increase in rates which took place in December to halt a slide in the Ruble and capital outflows.


Australian equities

Australian equities rose in January with the S&P/ASX 300 Accumulation Index returning 3.2%. Across the market cap spectrum, large cap returned 3.4% meanwhile small caps lagged returning 0.9%. Telecom Services (+8.2%) and Property Trusts (+7.4%) were the strongest performing sectors, while Energy (-6.6%) and IT (-1.7%) were the weakest sectors.

Global equities

Global equities returned -0.5% in hedged (Australian dollar) terms and 3.2% in unhedged (Australian dollar) terms, as the Australian dollar continued to depreciate during the month. Global small caps returned 3.2%, while emerging markets returned 5.7% (both in unhedged terms). In the US, the S&P500 returned -3.0%, while the NASDAQ returned -2.1%. Outside of the US, Germany (+9.1%), France (+7.8%) and India (+5.8%) were strong performers, while China delivered weak returns (-0.8%). Healthcare (+7.5%) and Consumer Staples (+6.5%) were the strongest performing global sectors, while Energy (-0.6%) and Financials (-0.2%) were the weakest performing sectors.

Property and infrastructure

The performance of the real assets sector was strong in January, with global listed infrastructure returning 5.8% in unhedged terms and global listed property returning 6.6% (on a fully hedged basis). Domestic Real Estate Investment Trusts (REITs) posted solid returns of 7.4% in January while Australian direct property returned 1.5% in December 2014.

Fixed interest

Ten-year sovereign bond yields declined in the US (-49bps to 1.68%), UK (-39bps to 1.36%), Germany (-27bps to 0.27%) and Japan (-5bps to 0.28%). Twoyear bond yields decreased in the US (-18bps to 0.45%) UK (-9bps to 0.36%), and Germany (-10bps to -0.17%) but increased in Japan (3bps to 0.02%). Australian yields declined across the curve, with the two-year (-19bps to 2.00%) five-year (-23bps to 2.04%) and 10-year (-37bps to 2.44%) all decreasing. As a result, Australian sovereign bonds returned 1.9%.


The Australian dollar fell against most major currencies in January including 4.8% against the US dollar, 6.3% against the Yen, and 2.1% against the Pound Sterling. It appreciated by 1.8% against the Euro. On a traded weighted basis, the local currency lost 3.9% over the month.


Commodity prices continued to weaken in January. The broader S&P GSCI Commodity Total Return Index fell by 2.8%. The price of oil dropped by a further 14.0% to US$48.04 per barrel, while gold prices rose by 7.3% finishing the month at US$1,273.24 per ounce. Iron ore prices fell by 9.7% to US$65 per metric tonne.

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