Investment commentary - 28 February 2010


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

The global share market posted a steady increase in February, but performance differed across different countries and regions, with US and UK markets delivering positive returns while the European and Japanese markets lost ground. Concerns over some European nations' fiscal strength continued to dominate market sentiment and monetary policy tightening in China and the discount rate hike in US all worked to increase market volatility.

The Australian equity market also ended the month higher with the local reporting season delivering results largely in line with expectations. Both global and domestic bond yields edged higher with significant amounts of issuance in both US and local bond markets. However safe haven flows to lower risk assets driven by sovereign risk concerns placed some downward pressure on bond yields. The Australian dollar reversed the downward trend witnessed in January and appreciated against most major currencies but lost ground against the Yen. Domestic listed property trusts received support from company earning reports and rose in line with their global peers.

Significant developments over the month were:

  • The Reserve Bank of Australia surprised the market by leaving the official interest rate unchanged at 3.75% at the board meeting held on February 2nd. The RBA remained positive on the economic outlook and indicated "Inflation is expected to be consistent with the target in 2010", and more information and time were needed to assess the impact of three consecutive rate hikes during the December quarter.
  • Domestic economic data released over the month was mixed. The employment figures maintained strong momentum, jumping up 52.7k in January, (but the majority of the increase still comprised of part-time employment.) The unemployment rate fell to 5.3% compared to the market forecast of 5.6%. Another positive reading was Q4 private capital expenditure spending, which posted a better than expected rise of 5.5%. Private sector credit also gained 0.4% in January. However housing finance commitments fell 5.5% in December despite the house price index delivering a better than expected 5.2% in Q4. The Westpac-Melbourne Institute consumer confidence index also dropped 2.6% m/m in February and retail sales surprised on the downside falling 0.7% in December.
  • US economic data released over the period was broadly positive. The FOMC maintained the Federal Funds rate (interest rate banks charge each other for loans) at 0-0.25% but raised the discount rate (the interest rate the Fed charges banks for direct loans) from 0.50% to 0.75%. The unemployment rate fell to 9.7% in January, beating the market forecast of 10.0%. The ISM manufacturing index (58.4), retail sales (+0.5% m/m), industrial production (+0.9%) and housing starts (+2.8% m/m) all rose more than expected in January. In contrast, January non-farm payrolls fell unexpectedly, and consumer confidence as measured by the Conference Board consumer confidence index also unexpectedly fell in February to 46.0. The December trade deficit widened to $40.2bn USD. January headline CPI rose 0.2% m/m and 2.6% y/y.
  • The US Federal Reserve announcement to raise the discount rate from 0.50% to 0.75% surprised the market. However the announcement was soon followed by Federal Reserve Chairman Ben Bernanke's reassurance of the Federal Reserves commitment to effectively maintain interest rates at low levels for an extended period.
  • Crude oil (WTI) regained ground from last months sharp fall, moving up 8.7% for the month to finish at US$79.69 per barrel.
  • Gold gained 3.3% to finish at US$1117/oz. Despite the decision by the US Fed Reserve to lift the discount rate and the IMF announcement to sell 191 tonnes of gold on the market, the gold price gained support from international interest rates being maintained at low levels and “safe haven” demand driven by European fiscal difficulties.

Australian shares

February saw the Australian share market recover from the sharp decline in January. Concerns over the potential tightening of economic policy in China together with European sovereign risk issues drove the market down in the early part of the month. However with international turmoil calming down, investors switched their focus to domestic developments, including the largely positive economic readings and the interim profit reporting season which delivered results in line and in some cases slightly above expectations. The S&P/ASX 300 index advanced 2.1% for the month, with most of the gains coming from Large Cap (+2.5%) stocks, while Mid Cap (+0.2%) and Small Cap (-0.5%) continued to underperform.

This profit reporting season saw defensive market sectors in favour. Consumer Staples (+7.3%) posted the strongest returns, buoyed by upbeat results from Wesfarmers and Woolworths. Healthcare (+3.9%) was also positively affected by strong results from CSL. In contrast, Telecom Services (-6.3%) was the worst performer, dragged down by a profit downgrade from Telstra. Industrials (-0.2%) was still under pressure from a challenging environment and the appreciating Australian Dollar. Over the month, Telstra (-10.5%) was the biggest drag to the index, followed by NAB (-3.1%), whose earnings results failed to impress the market. Conversely, the other three of the four major banks, top miners and retailers together provided solid support to the market.

Overseas shares

The MSCI World ex Australia index gained 1.9% in local currency terms. Value stocks (+0.5%) lagged behind their Growth (+0.7%) counterparts as well as the broader market in AUD terms. In the US, the S&P 500 index returned +3.1%, the Dow Jones +2.6% and the NASDAQ +4.2%, all in local currency terms. In Europe, the FTSE 100 (UK) returned +3.2%, the DAX (Germany) -0.2% and the CAC (France) -0.8% in local currency terms. Results from the Asian markets were broadly positive. The Chinese Shanghai Composite returned +2.1%, Hong Kong's Hang Seng +2.4%, the India BSE 200 Index +0.3% but the Nikkei (Japan) lost 0.7%, again all in local currency terms.


Domestic listed property trusts (A-REITs) rose 1.4% for the month on the back of companies earnings upgrades, bringing the 12 month return to 42.6%. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) was up by 3.4% for the month and has now posted a gain of +73.6% over 12 months.

Fixed interest

The UBS Australia Composite Bond index gained 0.5% for the month and is up 3.4% over the year. The Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index both returned +0.8% on a fully hedged basis over the month.


The Australian Dollar appreciated against most major trading partner currencies over the month. The local currency appreciated 0.7% against the US Dollar, 2.6% against the Euro, 6.0% against the Pound Sterling and 0.4% on a trade weighted basis, but depreciated 1.2% against the Yen.

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