Investment commentary - 30 June 2011

14/07/2011
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

The 2010/11 financial year ended on a muted note, with equity markets following the May downward trend, driven by continued uncertainty surrounding Greek sovereign debt issues and signs of a slowing Chinese economy. Australian equities finished the month down 2.0%, however, despite the negative finish for the year, the benchmark index finished up 11.9% for the 12 month period.

Significant developments over the month were:

  • Ambiguous domestic economic data, with reduced confidence levels amongst consumers and businesses along with mixed labour market data, where 8,000 jobs were added, but 22,000 full-time jobs lost.
  • The Reserve Bank of Australia left rates on hold at 4.75%, given their view that “global financial conditions remain accommodative”. Their attention now looks to the June CPI figure due to be published late July.
  • New austerity measures were approved by Greece's Parliament late in the month, securing the next €12bn tranche of bailout funding from the European Union and the International Monetary Fund.
  • Fears of contagion influenced credit rating agencies' decision to place a number of countries on watch due to them holding large levels of Greek debt.
  • The US Federal Reserve (The Fed) provided a bearish outlook on the current economy, downgrading its economic growth forecasts to 2.7% - 2.9%. The Fed also ended the second round of quantitative easing on 30 June 2011, with Chairman, Ben Bernanke unsure “why slower growth is persisting”.
  • In China, inflation rose to 5.5% (from 5.3% in April) over the 12 months to May 2011, which prompted the Chinese government to increase the reserve requirement ratio for the sixth time this year, effectively constricting liquidity. These tightening actions appear to be having the desired effect, as China's PMI Manufacturing figure was at its lowest level since February 2009 (down to 50.1 from 52 in May).
  • Japanese equity markets rebounded strongly (+1.4%), with signs that manufacturing levels (particularly auto production) are returning to normal levels posttsunami.
  • The announced release of Strategic Petroleum Reserves pushed the oil price down, falling 7.3% to US$95.1/bbl.


Australian Shares

The local market fell for the third consecutive month, with the S&P/ASX 300 index down 2.0% for the month, influenced by domestic and international macroeconomic headwinds weighing on investor sentiment. The benchmark index finished the quarter -4.3%, but +11.9% overall for the 2010/11 financial year, on the back of strong performance in the latter months of 2010, and early 2011.

Investors appeared to favour large stocks, where Large cap (-1.5%) outperformed its Mid cap (- 2.8%) and Small cap (-5.1%) counterparts.

The majority of sectors posted negative returns, with Energy (-8.7%), IT (-5.6%) and Telecom Services (-4.1%) the worst performing. Consumer Staples (+0.6%) and Utilities (+2.0%) were the only sectors with positive gains for June.

Overseas Shares

In unhedged terms, the MSCI World ex Aus index returned -1.6%. A slight appreciation of the AUD relative to major currencies saw the hedged return (-2.1%) slightly lower. For the third month running, Growth stocks (-1.9%) outperformed Value stocks (-2.2%) 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 was down 1.7%, the Dow Jones Industrials Index returned -1.1% and the NASDAQ Composite Index -2.1%, in local currency terms. In Europe, the FTSE 100 (UK) returned -0.4%, the DAX 30 (Germany) +1.1% and the CAC 40 (France) -0.1% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned +0.7%, Hong Kong's Hang Seng -4.8%, India's BSE 100 Index (+0.9%) and the TOPIX (Japan) returned +1.4% in local currency terms respectively for June.

The MSCI Emerging Markets Index was down -2.0% in A$ terms.

Property

Domestic listed property trusts (A-REITs) were down for the month, with the S&P/ASX 300 Property Index returning -0.8% for the month, outperforming the bourse by 1.2%.

Fixed Interest

The UBS Australia Composite Bond Index returned +0.6% during June. On a hedged basis, the Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index both returned +0.2% respectively.

Currency

The A$ appreciated (+0.5%) against the US Dollar and the Pound Sterling (+3.0%), whilst depreciating against the Euro (-0.4%) and Yen (-0.1%). The Australian Dollar had a flat month on a trade weighted basis.

 

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