Investment commentary - 31 March 2014

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

The tension between Russia and Ukraine over the Crimean Peninsula and the outcome of the United States (US) Federal Open Market Committee (FOMC) meeting dominated the markets in March.

The Crimean Peninsula until February 2014 was administered by Ukraine as the autonomous republic of Crimea. Less than three weeks after Russian soldiers took over the Crimean parliament, Russian President, Vladimir Putin, completed the first annexation of another European country's territory since World War II by absorbing the peninsula into the Russian Federation. In response to these developments, the West has imposed trade sanctions and ratings agency Standard & Poor's has downgraded its outlook on Russia to negative.

In a press conference following the FOMC meeting on monetary policy, Dr Janet Yellen, Chair of the US Federal Reserve (Fed), stated that the first increase in the Fed fund's rate would most likely occur six months following the end of the current asset-purchase program. This points to a first rate rise in April 2015 assuming tapering continues at the current rate – earlier than market expectations.

Locally, the Australian dollar rose to its highest level since mid-November 2013, breaking through US$0.92. At its latest meeting, the Reserve Bank of Australia(RBA) decided to keep the official cash rate on hold at 2.50% and the board reaffirmed its intention to keep rates stable for some time.



Significant developments

  • The RBA board kept the cash rate unchanged at 2.50% at its April meeting, stating that the monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target.
  • According to the Australian Bureau of Statistics (ABS), the Australian retail sales grew by 0.2% (seasonally adjusted) in February 2014, holding onto the strong gains registered in January 2014, underpinned by improving consumer sentiment.
  • US real gross domestic product (GDP) growth for the December quarter was revised up to an annual rate of 2.6% in the final release, from the previous estimate of 2.4%. The upward revision was primarily the result of stronger private consumption growth than previously reported.
  • US manufacturing edged up with the Institute for Supply Management™ (ISM) purchasing manufacturers' index (PMI) rising to 53.7 in March from 53.2 the previous month. This marks the tenth month of consecutive growth in the sector.
  • US ISM production index bounced back from its multi-year low of a contractionary 48.2 in February to 55.9 in March. The gain has been the largest month-over-month increase in production since June 2009.
  • US job growth rose by 192,000 in March. Employment grew in professional and business services, in health care and in mining and logging. The unemployment rate was unchanged at 6.7% and the participation rate increased marginally to 63.2%.
  • The Chinese manufacturing sector continued to deteriorate for the third consecutive month in March, with the HSBC China Manufacturing PMI index falling to 48.0 from 48.5 in February. Both output and new orders contracted at faster rates while new export orders returned to growth.
  • Euro area unemployment remained steady in February at 11.9%, unchanged since October 2013. Inflation declined to 0.5% in March 2014 down from 0.7% in February. The Eurozone manufacturing sector cooled slightly in March with the PMI at 53.0, down slightly from 53.2 in February. However it continues to enjoy growth since early 2011. Eurozone manufacturing output, new orders and new export business all expanded for the ninth successive month in March. France's PMI returned to expansion territory recording a significant pick up in business sentiment in March.
  • In Japan, sales expectations for small business remain upbeat but consumer confidence has been declining since September and fell sharply in March.



Australian equities

Australian Equities managed to rise modestly by 0.2% in March. Week returns were recorded across the market capitalisation spectrum – with Large Caps returning 0.3%, Mid Caps rising 0.3% and Small Caps dropping 1.2%. The best performing sectors were Financials ex Prop (+3.1%) and Telecom (+0.8%) and Information Technology (+0.5%). The weakest performing sectors were Materials (-3.2%) and Consumer Staples (-2.1%). The largest contributors to the return of the index were CBA (+3.7%), Westpac (+3.7%) and ANZ (+3.3%).

On the other hand, the most significant detractors from the performance of the index were BHP (-4.7%), Wesfarmers (-3.8%) and Rio Tinto (-4.7%). Rising house prices and an improvement in leading indicators in the domestic labour market suggest that the economy should continue to improve over the coming months, however, the significant slowing in China and the tight federal budget would undermine growth.

Global equities

Global sharemarkets had a weak month, undermined by a range of issues particularly the excessive valuations in the US. The broad MSCI World ex Australia Index returned 0.2% in hedged terms and -3.4% in unhedged terms, as the Australian dollar gained against the major currencies. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (-4.1%) underperformed its Value (-2.5%) counterparts in Australian dollar terms.

The strongest performing sectors were Utilities (-1.0%) and Energy (-1.4%), while Consumer Discretionary (-5.6%) and Healthcare(-5.2%) were the worst performers. In Australian dollar terms, the Global Small Cap sector fell 3.9%, while Emerging Markets fell 0.5%. In the US, the NASDAQ lost 2.5%, the S&P 500 Composite Index returned a modest 0.8% and the Dow Jones Industrial Average inched 0.93% higher, all in local currency terms. European markets showed poor returns, with the FTSE 100 (UK) down 2.6%, DAX 30 (Germany) losing 1.4%, and the CAC 40 (France) dropping 0.2%.

Returns in Asia were mixed: the Hang Seng lost 2.7%, the Indian BSE 500 rose 7.6% and the Chinese Shanghai Composite Index dropped 1.1% while the Japanese TOPIX gained over the month returning 0.2%.

Property and infrastructure

After strong gains in February, domestic real estate investment trusts (REITs) dropped 1.6% and Global REITs returned a modest 0.2% on a fully hedged basis. The unlisted property sector rose 0.5% in February, with Industrial (+0.6%) and Office (+0.6%) funds posting strong returns. Global listed infrastructure (as measured by the UBS Global Infrastructure and Utilities Hedged Index) returned 2.4% for the month.

Fixed interest

Global sovereign bond yields remained quiet over the month. Ten-year bond yields rose: in Germany (4bps to 1.57%), Japan (4bps to 0.63%), US (6bps to 2.73%) and in the UK (+2bps to 2.74%). Two-year bond yields were higher in the US (9bps to 0.39%) and in Germany (+4bps to 0.15%). Global Bond indices rose higher, with the Barclays Capital Global Aggregate Bond Index gaining 0.3% and the Citigroup World Government Bond (ex-Australia) Index returning 0.4%, both on a fully hedged basis.

Australian 10-year bond yields rose by 7bps to 4.08% and five-year bond yields rose by 15bps to 3.44%. Australian bonds posted flat returns in March. The UBS Credit Index returned 0.1%, the UBS Semi-Government Index gained 0.1% while the UBS Treasury Bond Index finished the month 0.1% lower.


The Australian dollar appreciated against the major currencies in March. The Australian dollar rose 3.1% relative to the US dollar, finishing the month at US$0.922. Against other currencies, the Australian dollar appreciated 4.3% relative to the Japanese Yen, 2.7% against the Euro and 3.4% relative to the Pound Sterling. On a trade weighted basis, the local currency gained 3.0% over the month.


Commodity prices were generally weaker in March. The S&P GSCI Commodity Total Return Index fell 3.3% for the month. Gold prices fell 2.8%, finishing the month at US$1,289.28.70 per ounce. The oil price fell 1.8% to $107.31 per barrel. Iron ore prices dropped by 4.2% to US$115.0 per million tonnes.


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