Investment commentary - 31 January 2011

16/02/2011
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

Global Equity markets began the New Year in positive fashion due to improvement in the economic environment, particularly in the US. Global bond yields stabilised in January after rising sharply in late 2010. The US 10-year Treasury yield rose 8bps, and was the fourth consecutive monthly increase and the longest streak since 2006.

Significant developments over the month were:

  • Domestic economic data released during January was dominated by the floods in Queensland and parts of Victoria. The floods are expected to cost 0.5% to GDP growth in Q1 2011, mainly due to losses in agricultural production and coal exports. Infrastructure rebuilding should add to GDP growth in 2011 and into 2012. There is also an anticipated short-term impact on inflation through higher food prices. Other domestic economic data released was mixed. Consumer confidence fell 5.7% as a result of the floods. Inflation data for Q4 2010 was weaker than expected, 0.4% qoq and annual growth of 2.7%. Retail sales rose a soft 0.3%.
  • In the US, the economy expanded by 3.2% annualised in Q4 driven by private consumption. Employment growth was sluggish with 103,000 jobs added in November. Unemployment is at 9.4% down from 9.8% in October. As widely expected, the US Federal Reserve left interest rates on hold. Commentary released retained the commitment to keep the federal funds rate low for an extended period of time. Inflation data released in January was subdued, headline inflation was 1.5% yoy, whilst core inflation was 0.8% yoy.
  • In China, growth data exceeded expectations. GDP growth was 9.8% for Q4, up from 9.6% in Q3. The stronger than expected growth figure prompted speculation Chinese officials will commence further tightening measures by announcing plans to cool the property sector.
  • Strong economic conditions in Germany lead to conjecture that the European Financial Stability Facility would be expanded.
  • The oil price rose 0.9% to finish at US$92.15/bbl. Gold declined 6.0% to US$1332.16/oz.


Australian Shares

The Australian market opened 2011 strongly ahead of the February reporting season. However, investor sentiment was soon dominated by the floods in Queensland and Victoria and unrest in the Middle East. The S&P/ASX 300 index returned 0.1% over January.

Large cap stocks (+0.6%) outperformed their Mid cap (-1.7%) and Small cap (-2.2%) counterparts for the first time since June 2010. The Materials (-3.1%) sector underperformed the Australian market in January along with IT (-3.9%) and Utilities (-1.8%). Consumer Staples (+2.5%) outperformed all sectors, whilst Financials ex Property (+2.4%) also performed strongly.

Unsurprisingly given the strong sector performance, a number of financials dominated the positive contributors list, headed by Westpac (+4.0%). Similarly, given the performance of resources it was no surprise to see BHP Billiton (-2.0%) top the negative contributors list.

Overseas Shares

The MSCI World ex Aus Index returned +5.3% for an unhedged Australian investor. In local currency terms, the strong depreciation of the A$ saw returns eroded to +2.0%. The month of January saw Value stocks (+6.0%) outperform Growth stocks (+4.8%) in A$ terms, based on the S&P Developed ex-Australia Large Medium Cap Value and Growth indices.

In the US, the S&P 500 Composite Index returned +2.4%, the Dow Jones Industrial Index +2.9% and the NASDAQ Composite Index +1.8%, in local currency terms. In Europe, the FTSE 100 (UK) returned -0.6%, the DAX 30 (Germany) +2.4% and the CAC 40 (France) +5.3% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned -0.6%, Hong Kong's Hang Seng +1.8%, India's BSE 100 Index -10.4% and the TOPIX (Japan) +1.3% again in local currency terms.

Emerging markets returned a flat 0.0% over the month in A$ terms.

Property

Domestic listed property trusts (A-REITs) returned +2.4% for the month. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +1.8% over January.

Fixed Interest

The UBS Australia Composite Bond Index returned 0.9% for the month. The Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index returned -0.1% and 0.1%, over the month respectively.

Currency

The A$ depreciated over January. The local currency fell 2.7% against the US dollar, 1.7% against the Yen, 4.9% against the Pound Sterling, 4.8% against the Euro and 2.4% on a trade-weighted basis.

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