Investment commentary - 31 January 2016

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
The start of 2016 began on a treacherous note for risk asset investors as equity and commodity markets plunged over the first month.

The MSCI World ex Australia Unhedged index returned -3.2% for the month, with the MSCI Emerging Markets index lagging the developed market index to return -3.8%.

Chinese equity market volatility was reinvigorated with the release of a weak gross domestic product (GDP) data report, helping to trigger a 22.6% fall in the Shanghai Composite Index over the month despite stabilisation efforts by the People’s Bank of China (PBoC). Oil prices had sunk below $30 a barrel during the month as investors worried about oversupply with the lifting of Iran sanctions, coupled with slowing Chinese demand, and a mild winter in the United States (US). The resulting flight to safety from global equities and high-yielding credit to government bonds resulted in a broad decrease in developed government yields over the month.

The Australian economy continued to stagnate in January, although there are continued signs that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in mining investment continued. Equity markets were not as fortunate, however, as the ASX300 fell 5.4% over the month; largely affected by the aforementioned catalysts. Financials ex Property and Materials sectors were particularly hard hit, falling 8.9% and 9.1% respectively. The easing bias to Australian interest rates was maintained in the early February meeting of the Reserve Bank of Australia (RBA), as inflation continues to be quite subdued.


  • The RBA left interest rates on hold at 2.0% in February, retaining a slight easing bias. The statement released by the RBA indicated that key factors that may drive future changes in monetary policy include assessing whether recent strong labour market growth is sustainable, and if recent financial market weakness is due to real economic factors.
  • Australian labour data exceeded expectations in December, with seasonally adjusted employment declining by 1,000 positions, relative to expectations for a 10,000 fall. Full time employment increased by 17,600, while part time employment declined by 18,500. Positive revisions were made to the prior month’s already large increase to 71,400, taking December to 74,900. The seasonally adjusted unemployment rate was muted at 5.8%, largely due to a fall in the participation rate from 65.3% to 65.1%. In less volatile trend terms, the unemployment rate declined to 5.8% from 5.9%.
  • Australian consumer price index (CPI) rose 0.4% in Q4 and 1.7% from a year earlier, exceeding expectations for 0.3% and 1.6%, respectively. The year-on-year (YoY) increase in the CPI also exceeded the increase over the year to September (+1.5%). The trimmed mean rose 0.6% in the quarter and 2.1% from a year earlier, broadly in line with expectations.
  • Australian Retail Sales were flat in December in seasonally adjusted terms, falling short of expectations for a 0.4% increase. In trend terms, sales rose 0.3% in the month and 4.0% from a year earlier. On a sector basis Clothing, footwear and personal accessories, Household goods and Department store sales all increased by 0.4% in trend terms, while Cafes, restaurants and takeaway food, and Other retailers were flat.
  • US Nonfarm Payrolls rose by 151,000 in January, behind expectations for a 190,000 gain, though due to strong growth in the prior months, this took the average fourth quarter employment change to 279,000. The participation rate increased to 62.7% from 62.6%, while the unemployment rate declined to 4.9%, beating expectations for 5.0%. Wages rose 0.5% in January to be 2.5% higher than a year earlier, ahead of expectations for 0.3% and 2.2% respectively, though the annual pace of gains slowed from 2.7% due to base effects.
  • The US Institute for Supply Management (ISM) Manufacturing Index increased to 48.2 in January from a downwardly revised 48, falling short of expectations for 48.4.  Eight of the 18 industries in the survey reported growth in the month. New orders and production increased, while prices declined. The US Non-Manufacturing ISM printed 53.5 in January, well short of expectations for 55.1 and the 55.8 recorded in December. New orders, current activity and employment all declined.
  • The first estimate of Q4 US GDP indicated that the US economy grew by 0.7% (annualised), below expectations for 0.8%, and the 2.0% posted in the prior quarter. Personal consumption grew 2.2%, contributing 1.5% to growth, while fixed investment was flat, government contributed 0.1% to growth, while net exports and inventories both detracted 0.5%.
  • US CPI declined 0.1% in December and 0.7% from a year earlier, below expectations for no change, and 0.7%, respectively. Core CPI, rose 0.1% in the month falling short of expectations for 0.2%, though rose 2.1% from a year earlier, in line with expectations.
  • The Bank of Japan (BoJ) shocked markets by cutting interest rates by 20 basis points (bps) to -0.1% despite Governor Kuroda stating publicly on a number of occasions that the BoJ was not considering implementation of negative interest rates. The policy introduces a tiered structure for interest rates, with the negative component only to be applied to excess funds greater than the current amount parked by banks at the BoJ. Existing amounts in the BoJ’s current account will continue to receive 0.1% interest, while required reserves will receive no interest. The BoJ highlighted that further cuts are likely in coming months.
  • Chinese GDP reportedly grew 6.8% YoY in Q4, just below expectations for 6.9%. Industry is estimated to have contributed 2%, construction 0.6%, financial services 0.9%, real estate services 0.2% and other services 1.6%.
  • The China Caixin Manufacturing purchasing managers’ index (PMI) rose to 48.4 in January, from 48.2 in December, and was ahead of expectations for 48.1. Meanwhile, the official PMI declined to 49.4 from 49.7 and was short of expectations for 49.6, as output and new orders both fell.
  • European Core CPI rose 1.0% YoY in January, ahead of expectations for no change from 0.9%.
  • The Eurozone composite PMI declined to 53.6 in January from 54.3 in December though was in line with expectations. Activity slowed in Germany, Italy but accelerated in Spain and Ireland.


Australian Equities brought weak returns over January as the S&P/ASX 300 Accumulation Index fell 5.4%. From a sector perspective; Property Trusts (+1.0%), Utilities (+0.7%) and Telecom Services (+0.7%) were the strongest performers, while Materials (-9.1%), Financials ex Prop (-8.9%), and Energy (-6.5%) were the weakest. The Australian Small Companies Index outperformed Australian large caps, with a return of -5.1% for the month.


Global Equities returned -5.4% in hedged (Australian dollar) terms, and -3.2% in unhedged (Australian dollar) terms as the Australian dollar depreciated against the USD over the month. Global Small Caps underperformed the broad cap index returning -5.1%, while emerging markets retraced further, returning -3.8% (both in Australian dollars unhedged). In the US, the S&P500 returned -5.0%, while the NASDAQ returned -7.9% in USD terms. Outside of the US, Japan returned -7.4%, the UK -2.5%, India -5.8% and Germany -8.8%, all in local currency terms. In other regions, China fell 22.6% while Hong Kong fell 10.2% (returns in local currency terms). Across the sectors, Utilities (+4.4%), Telecommunication Services (+3.2%), and Consumer Staples (+2.8%) were the strongest performers, while Materials (-7.6%), Financials (-7.3%) and Healthcare (-5.2%) were the weakest (all in Australian dollar terms).


The Real Assets sector saw mixed returns over January, with Global Core Infrastructure returning 0.6% and Global REITs returning -3.6% (both in Australian dollar hedged terms). Domestic REITs posted a return of 0.9% in January while Australian Direct Property returned 2.4% on a lagged basis.


Ten-year sovereign bond yields saw decreases across most major economies with notables being the US (-34bps to 1.93%), Japan (-14bps to 0.11%), the United Kingdom (UK) (-39bps to 1.57%) and Germany (-7bps to 0.27%). Two-year sovereign bond yields decreased in the US (-25bps to 0.79%), Germany (-14bps to -0.48%), the UK (-31bps to 0.34%) and Japan (-5bps to -0.06%). Overall, hedged Global Government Bonds returned 2.2% for the month as measured by the Citigroup World Government Bond Index. Australian bond markets also saw a fall in the yield curve over the month, with the 10-year (-25bps to 2.64%), five-year (-16bps to 2.09%) and two-year (-12bps to 1.92%) yields all shifting downward. The Australian Government Bond Index returned 1.4% while the Australian Composite Bond Index returned 1.2% for the month.


Over January, the Australian dollar broadly depreciated with falls of -2.8% against the Euro, -3.1% against the Japanese Yen and -2.8% against the USD while appreciating marginally (+0.3%) against the Pound Sterling. The Australian dollar finished the month at USD0.707 on 31 January 2016. On a trade-weighted basis, the Australian dollar fell 1.9% for the month.


The late 2015 slide in commodities continued through the first month of 2016 as demand generators continued to struggle. The broad S&P GSCI Commodity Total Return Index fell by 2.5%, while iron ore prices fell by 2.3% – finishing the month at US$42.8 per metric tonne. The price of oil fell (-3.9% to US$34.30 per barrel), while gold rose (+5.2%), finishing the month at US$1,117.15 per ounce.


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