Investment commentary - 30 November 2015

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
November 2015 was a relatively muted month for developed equity markets despite the heightened geopolitical risk with the terrorist attacks in Paris, the lockdown in Brussels and the downing of the Russian jet fighter by Turkey.  

This can be partially attributed to the continuation of central bank policies to align and manage investor sentiment in major economies, resulting in shock events having less of a market impact. Over the month, the MSCI World Index returned 0.8% in local currency terms.

In Japan, Q3 gross domestic product (GDP) was revised to +0.3% from its preliminary figure of -0.2%, on the back of a sharp upward revision to inventories and business investment, avoiding a technical recession as a result. Elsewhere, the European Central Bank (ECB) released relatively soft monetary stimulus late in the month, marginally decreasing its deposit facility rate from -0.2% to -0.3% and extending the time horizon for asset purchasing to March 2017.

Domestically, currency movement was a major story over the month of November, with the Australian dollar appreciating against most major currencies. However this shift is not a beneficial one for domestic export-orientated and import-competing industries amid Australia’s transition to stronger non-mining capex activity. In fixed income markets, Australian bonds were sold off over the month on the back of strong employment numbers and increased conviction in a December rate hike by the United States (US) Federal Reserve (Fed).


  • The Reserve Bank of Australia (RBA) left interest rates on hold at 2.0% in December as widely expected. The RBA retained a neutral monetary policy bias, noting that economic conditions have improved in recent months, though also acknowledging that low inflation may lead to further cuts in interest rates.
  • Australian GDP grew 0.9% quarter on quarter (QoQ) and 2.5% year on year (YoY) in Q3, ahead of estimates for 0.8% and 2.4%, respectively. Quarterly growth was solely driven by net exports, which contributed 1.5ppts to growth. While household consumption contributed 0.5ppts and grew 2.7% YoY, domestic demand contracted, primarily driven by falls in private and public investment.
  • Australian seasonally adjusted employment increased by 58,600 positions in October, ahead of expectations for 15,000, while September’s job losses were revised up from -5,100 to -800. Forty-thousand full time and 18,600 part time jobs were created in October. The participation rate increased from 64.9% to 65%, while the unemployment rate fell to 5.9% from 6.2%, both beating expectations for no change. Hours worked also increased 1.2% in the month and 3.8% from a year earlier, the fastest pace since the global financial crisis.  In trend terms, employment increased 18,800, while the participation and unemployment rates were unchanged at 65% and 6.1%, respectively.
  • Australian retail trade rose 0.5% in seasonally adjusted terms in October, ahead of expectations for 0.4%. In trend terms retail trade rose by 0.3% in the month and 3.9% from a year earlier. Department stores were the strongest sector, with sales rising 0.7%, while Clothing, footwear and personal accessories were the weakest, declining 0.1% in the month in trend terms.
  • US non-farm payrolls rose 211,000 in November, ahead of estimates for 200,000 while there were 35,000 net positive revisions to the past two months payrolls. The unemployment rate was unchanged at 5.0%, though the participation rate edged up to 62.5% from 62.4%. Average hourly earnings rose 0.2% in the month and 2.3% from a year earlier. While wage growth was in line with expectations, the annual growth decelerated from October’s 2.5% due to base effects.
  • The second estimate of Q3 2015 US GDP was released. GDP was revised up to 2.1% QoQ annualised from the prior reading of 1.5%. Consumption is estimated to have contributed 2.1 percentage points (ppts) to growth, private investment 0.5ppts, government 0.3ppts, while net exports detracted and inventories detracted 0.2ppts and 0.6ppts, respectively.
  • The US Institute for Supply Management (ISM) Manufacturing Index declined to 48.6 in November, from 50.1 in October, well-below estimates for 50.5. New orders and production both declined, while survey participants pointed to slowing activity in Europe and China, and the higher US dollar as factors weighing on activity. Five of 18 industries in the survey reported growth, down from seven in October.
  • The US consumer price index (CPI) increased 0.2% in October, in line with estimates and above the 0.2% decrease recorded in September. CPI rose 0.2% over the year to September. Core CPI, which excludes volatile items such as food and energy, also rose 0.2% in the month, in line with estimates and was 1.9% higher than a year earlier.
  • The China Caixin Manufacturing purchasing managers’ index (PMI) increased to 48.6 in November, from 48.3 in October, ahead of expectations for no change. Output and new export orders increased and while new orders contracted at a faster pace, pointing to stronger external than domestic growth. The official PMI fell to 49.6, slightly behind market expectations for 49.8, as output and new orders both fell.
  • The ECB lowered its deposit rate by 0.1% to -0.3%, but left its refinancing rate unchanged at 0.05%. Despite widespread expectations and clear signalling at prior monetary policy meetings, the ECB left the size of its Quantitative Easing programme unchanged, at €60 billion per month, though extended the programme’s maturity date from September 2016 to March 2017. Due to the easing falling well short of expectations, the Euro gained significantly, while equities were sold off following the announcement.
  • Euro area GDP expanded 0.3% in Q3 and 1.6% from a year earlier, in line with expectations. Growth in Spain remained solid rising 0.8% QoQ and 3.4% YoY, while France grew 0.3% QoQ and 1.2% YoY, Germany 0.3% QoQ and 1.7% YoY and Italy 0.2% QoQ and 0.8% YoY.
  • Euro area CPI rose 0.9% over the year to October, behind estimates for a 0.9% increase and the 1.0% increase over the year to September. Headline CPI rose 0.1%, behind estimates for a 0.2% increase.
  • The Euro area composite PMI increased to 54.2 in November from 53.9 in October, as both output and new orders increased. Activity also strengthened in Germany, Spain and Italy, but remained unchanged in France.
  • The second estimate of Japanese Q3 GDP growth was released. Growth was revised up to 0.3% QoQ from -0.2% QoQ in the preliminary estimates, due to upward revisions to business investment and inventories. Consumption contributed 0.2ppts to growth, net exports, business investment and government 0.1ppt each, while inventories detracted 0.2ppts from growth. Over the year to September, Japanese GDP grew by 1.7%.


Australian Equities were relatively flat over November as the S&P/ASX 300 Accumulation Index fell 0.7%. From a sector perspective; Healthcare (+5.2%), IT (+4.5%) and Financials ex Property (+2.5%) were the strongest performers, while Materials (-12.2%), Property Trusts (-2.8%), and Utilities (-1.4%) were the weakest. The Australian Small Companies Index outperformed Australian large caps, with a return of 0% for the month.


Global Equities returned 0.8% in hedged (Australian dollar) terms, and -2.1% in unhedged (Australian dollar) terms as the Australian dollar appreciated against most major currencies over the month. Global Small Caps outperformed the broad cap index returning -0.4%, while emerging markets retraced, returning -5.4% (both in Australian dollars unhedged). In the US, the S&P500 returned 0.3%, while the NASDAQ returned 1.1% in USD terms. Outside of the US, Japan returned 1.4%, the United Kingdom (UK) 0.3%, India -0.8% and Germany 4.9%, all in local currency terms. In other regions, China rose 1.9% and Hong Kong fell 2.7% (returns in local currency terms). Across the sectors, IT (-0.6%), Industrials (-1.0%), and Financials (-1.7%) were the strongest performers, while Utilities (-5.1%), Materials (-3.6%) and Telecommunication Services (-2.9%) were the weakest (all in A$ terms).


The Real Assets sector saw generally negative returns over November, with Global Core Infrastructure returning -2.2% and Global Real Estate Investment Trusts (REITs) returning -1.2% (both in Australian dollar hedged terms). Domestic REITs posted a return of -2.8% in November while Australian Direct Property returned 0.5% on a lagged basis.


Ten-year sovereign bond yields saw mixed results across most major economies with notables being the US (+7 basis points (bps) to 2.22%), Japan (muted at 0.31%), the UK (-10bps to 1.83%) and Germany (-5bps to 0.47%). Two-year sovereign bond yields increased in the US (+15bps to 0.91%) but decreased in Germany (-9bps to -0.40%) and Japan (-1bps to 0.00%). Overall, hedged Global Government Bonds returned 0.2% for the month as measured by the Citigroup World Government Bond Index. Australian bond markets saw a vertical shift in the yield curve over the month, with the 10-year (+25bps to 2.86%), five-year (+28bps to 2.30%) and two-year (+23bps to 2.01%) yields all increasing. The Australian Government Bond Index returned -1.1% while the Australian Composite Bond Index also returned -0.9% for the month.


Over October, the Australian dollar appreciated against most major currencies with rises of 5.0% against the Euro, 3.2% against the Pound Sterling, 2.4% against the Japanese Yen and 1.6% against the US dollar to finish at US$0.725 on 30 November 2015. On a trade-weighted basis, the Australian dollar rose 2.5% for the month.


Commodity prices saw generally weak results over the month of November as demand generators continued to struggle. The broad S&P GSCI Commodity Total Return Index fell by 10.4%, while iron ore prices fell by 9.1% – finishing the month at US$45.0 per metric tonne. The price of oil fell (-9.0% to US$44.11 per barrel), while gold also fell (-6.8%), finishing the month at US$1,063.7 per ounce.

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