Investment commentary - 31 March 2016

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
After a dreary start to 2016, a return of investor confidence was responsible for a March 2016 recovery.

Major fears that had driven markets down earlier in the year began to ease, the United States (US) dollar started to soften and the price of oil started to rise, suggesting that the global economy was not headed for a crash. The substantial market recovery in March was a very encouraging end to a sometimes frightening first quarter as the 5.3% return for March meant the MSCI World ex Australia finished only 1.9% below where it finished 2015 (in hedged Australian dollar terms). The rebound that began in the second half of February was helped by more stimulus from the European Central Bank (ECB) as well as the US Federal Reserve (Fed) noting in its March release that US household spending and economic activity continues to expand at a moderate pace. Nevertheless, it is important to remember that although we have largely recovered from the spike in uncertainty earlier in the year, risks remain.

Domestic financial markets also benefitted from the global recovery in investor confidence as the S&P/ASX 300 Index rose 4.8% for the month. The latest release from the Reserve Bank of Australia (RBA) maintained a relatively upbeat outlook for the domestic economy. It noted a continual rebalance of the economy following the mining investment boom, developments in the labour market, and a pick-up in the pace of business lending. However, the RBA maintained an accommodating stance as inflation remains low.

One of the biggest influences on performance for Australian investors over March was currency hedging policy, when a fully hedged MSCI World ex Australia index outperformed the unhedged index by 6.2%.


  • The RBA left interest rates on hold at 2.0% in April. While the accompanying statement struck a cautious tone on global developments, it appeared upbeat on the Australian economy, relative to recent statements.  However, the RBA continued to leave the door open to future interest rate cuts in light of low inflation, and the possibility of further Australian dollar appreciation.
  • Australian seasonally adjusted employment was broadly flat in February, below expectations for a 13,500 gain. Full time employment increased by 15,000, while part time employment declined by 15,600.  A fall in the unemployment rate from 6.0% to 5.8% can be explained by a decline in participation from 65.1% (previously reported as 65.2%) to 64.9%.  Less volatile trend employment rose by 11,400, down from the 16,400 gain in January.  Trend unemployment and participation were unchanged at 5.8% and 65.1%, respectively.
  • Australian retail sales were flat in February, behind expectations for a 0.4% gain, and the 0.3% increase recorded in January. In trend terms, sales rose 0.2% in February to have increased 3.7% from a year earlier, below the 4.0% annual gain to January.  Household goods and department stores were the strongest sectors, with sales rising by 0.7% and 0.3% respectively in February, while food retailing only gained 0.1%, and other retailing was flat.
  • US non-farm payrolls grew 215,000 in March, ahead of expectations for 205,000, while February’s gains were revised up by 3,000 to 245,000.  The unemployment rate increased to 5.0% from 4.9%, as the participation rate rose from 62.9% to 63%. Average hourly earnings rose by 0.3% in March to be 2.3% higher than a year earlier, exceeding expectations for 0.2% and 2.2% respectively. Meanwhile, average hours worked was unchanged at 34.4 hours per week.
  • The Institute for Supply Management (ISM) Manufacturing Index jumped from 49.5 to 51.8 in March, exceeding expectations for 51.  New orders increased to their highest level since November 2014 and production increased to its highest level since May 2015.  Twelve of 18 industries in the survey reported growth, up from nine in February.  The ISM Non-Manufacturing Index increased from 53.4 in February to 54.5 in March and was ahead of expectations for 53.1.
  • US Q4 gross domestic product (GDP) was revised up from 1.0% to 1.4% quarter-on-quarter annualised, ahead of expectations for no change as personal consumption growth was revised up from 2.0% to 2.4%. Personal consumption contributed 1.7 percentage points (ppts) and fixed private investment 0.1ppt to quarterly growth, while inventories detracted 0.2ppts and net exports 0.1ppt. The core PCE deflator rose 1.7% year-on-year, below expectations for 1.8%.
  • US headline consumer price index (CPI) declined 0.2% in February, in line with expectations over the month, but rose 1.0% year-on-year, slightly ahead of expectations for 0.9%. Core CPI rose 0.3% in January and 2.3% from a year earlier, ahead of consensus for no change from 2.2%.
  • The China Caixin Manufacturing purchasing managers’ index (PMI) jumped from 48 to 49.7, exceeding expectations for 48.3. Both output and new orders rose to above 50, while other indicators contracted at a lower pace. The official PMI rose from 49 to 50.2, exceeding expectations for 49.4, as both output and new orders increased substantially.
  • The Bank of Japan Tankan Index generally saw declines in business sentiment in Q1. Current conditions for large non-manufacturers eased to 22 from 25, and were below expectations for 24, while the outlook declined to 17 from 18, behind expectations for 20. Current conditions for large manufacturers declined from 12 to 6, behind expectations for 8, while the outlook declined from 7 to 3, behind expectations for no change.
  • European Core CPI rose 1.0 % over the year to March, ahead of estimates for 0.9%, and accelerating over the 0.8% pace recorded over the year to February.
  • The Eurozone composite PMI increased to 53.1 in March from 53 in February, below expectations for 54. Activity accelerated in Ireland and Spain, but slowed elsewhere.


Australian equities finished the quarter strongly in March, with the S&P/ASX 300 Accumulation Index returning 4.8% for the month. There were mixed results across the market spectrum, with the best performer being the Mid 50, returning 5.5% for the quarter. The best performing sectors were Financials ex Prop (+6.7%) and Energy (+6.2%). The weakest performing sectors were Healthcare (+0.4%) and Utilities (+1.3%). The largest positive contributors to the return of the index were CBA, NAB and Westpac, with absolute returns of 6.8%, 9.2% and 6.1% respectively. On the other hand, the most significant detractors from performance were Caltex, Ramsay Health Care and Brambles with absolute returns of -6.6%, -7.2% and -2.8% respectively.


The broad MSCI World ex Australia Index was up 5.2% in hedged terms and down 1.0% in unhedged terms over the quarter, as the Australian dollar appreciated strongly through March. The strongest performing sectors were Materials (+5.3%) and Industrials (+1.3%), while Financials (-4.4%) and IT (-2.4%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 0.7% while Emerging Markets returned 5.1%.

Over March, the NASDAQ returned 6.8%, the S&P 500 Composite Index returned 6.8% and the Dow Jones Industrial Average returned 7.2%, all in local currency terms. European markets experienced modest returns, with the FTSE 100 (UK) up 1.8%, DAX 30 (Germany) 5.0% and the CAC 40 (France) returning 0.9%. In Asia, equity markets rebounded strongly, with the Indian BSE 500 up 10.6%, the Hang Seng Index returning 9.2%, the SSE Composite (China) returning 11.8% and the Japanese TOPIX rising 4.8%.


The Real Assets sector saw positive returns over March with Global Core Infrastructure returning 5.7%, and Global REITs returning 7.7% (both in Australian dollar hedged terms).  Domestic REITs posted a return of 2.5% in March while Australian Direct Property returned 0.6% on a lagged basis.


Global sovereign bonds produced relatively modest returns over March for hedged Australian investors, with yields rising marginally over the period. Ten-year bond yields rose across most developed economies with Germany (+11 basis points (bps) to 0.16%), the US (+4bps to 1.78%), Japan (+2bps to -0.04%) and the United Kingdom (UK) (+8bps to 1.42%) all experiencing rises. Two-year bond yields saw a similar fate with the UK (+7bp to 0.45%), Japan (+3bps to -0.21%) and Germany (+8bps to -0.48%) all experiencing rises, and the US (-4bps to 0.75%) falling marginally. Global Bond indices rose for hedged investors, with the Barclays Capital Global Aggregate Bond Index returning 0.9% and the Citigroup World Government Bond (ex-Australia) Index returning 0.6% over the month, both on a fully hedged basis.

Domestically, Australian 10-year bond yields rose 9bps to 2.49% while five-year (+16bps to 2.08%) and two-year (+12bps to 1.90) bond yields also rose. As a result, Australian bond returns were relatively muted for the month. Australian Government Bond Index returned -0.3% while the Australian Composite Bond Index returned -0.2% for the month.


The Australian dollar appreciated strongly against most major currencies over March, finishing at US$0.769 with a Trade Weighted Index of 64.4. The Australian dollar appreciated 3.6% against the Euro, 3.7% against the Pound Sterling, 6.4% against the Japanese Yen and 7.7% against the US Dollar. On a trade-weighted basis, the local currency rose 4.9% over the quarter.


In commodities, the S&P GSCI Commodity Total Return Index fell 2.6% for the month. This fall wasn’t shared across the board in commodities however, as the prices of Iron Ore, Gold and Oil all rose individually.

Gold prices finished the quarter at US$1,234.34 per ounce for a 0.1% increase over the period. The oil price rose over March, by 9.7% to $39.95 per barrel – rebounding from its 10-year low in January. Iron ore prices also rose over the month, by 10.9% to US$54.8 per metric tonne. This rise meant that Iron ore prices have rose 3.4% over the past 12 months to 31 March 2016.


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