Investment commentary - 31 December 2012



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

Share markets finished the 2012 calendar year on a positive note as investors downplayed the US 'fiscal cliff' concerns, which were ultimately resolved in 11th-hour negotiations on the final day of the year.

Positive economic data from the US and China supported market sentiment over December, with investor confidence further enhanced by the Fed's decision to explicitly link future funds rate increases to sustained declines in the US unemployment rate. In the eurozone, the recession deepened despite the receding threat of a single currency break up. Locally, the share market was up on the back of renewed confidence in stronger growth in China in 2013 under its new leadership, and continued offshore demand for high-yielding Australian shares.

Significant developments over the month were:

  • The Reserve Bank of Australia delivered a much-anticipated rate cut at its final meeting for 2012 in December, reducing the cash rate by 25 bps to 3.0%.
  • US GDP growth was revised upwards to 3.1% in Q3 2012 from the previous estimate 2.7%, and more than doubling growth of 1.3% in Q2 2012. The increase was largely attributable to revised increases in exports (1.9% from 1.1%) and government spending (3.9% from 3.5%).
  • The US housing market continued to improve reflected in in a 5.9% increase in existing home sales and a 0.5% rise in US house prices (as measured by FHFA House Price Index) over December.
  • The Fed announced a moderate extension to its quantitative easing program, deciding from January 2013 to rollover maturing Treasury securities at auction.
  • After a period of intensive negotiations, America's congress finally passed a deal that averted much of the uncertainty around the 'fiscal cliff', a severe fiscal tightening that threatened to push the US economy back into a recession. Markets were relieved despite the expected re-emergence of another political fight over the US debt ceiling and further negotiations in the next two months.
  • According to a survey, China's manufacturing sector expanded for the second consecutive month in December, following thirteen months in contractionary territory dating back to October 2011, adding to recent signs of a rebound in China. The HSBC PMI Index posted 51.5 in December, up from 50.5 in November and expanding at its fastest pace in nineteen months.
  • Eurozone finance ministers and the IMF formally approved a further tranche of financial assistance to Greece of 49.1 billion euros ($65 billion) by the end of March 2013, after Greece brought back its own debt at a fraction of face value.
  • S&P, the ratings agency, raised Greece's credit rating 6 notches higher from selective default to B- as Greece's bond buyback and the international bailout program removed the imminent threat of a Greek bankruptcy and euro zone exit.
  • Despite the receding threat of a currency breakup, EU policy makers still face an ailing economy. The Eurozone unemployment rate hit a record 11.8% in November, up from 11.7% in October. The manufacturing sector signaled a seventeenth consecutive month contraction, the Eurozone PMI falling to 46.1 in December from 46.2 in November.
  • While most commodity prices softened over the month, oil prices rose 3.7% to US$91.8/bbl and iron ore prices continued to rise from recent lows, hitting US$141.0/MT. Gold prices dropped 3.2% finishing the month at US$1,662.4/oz.

Australian Shares

Australian shares ended the month of December 2012 higher, benefitting from positive economic news out of China and strong foreign demand for local high-yielding stocks. The S&P/ASX 300 Accumulation Index finished the month up 3.3%, driven by the outperforming Industrials (+5.8%), Materials (+4.8%), Utilities (+4.1%) and Financials ex Prop (+3.4%) sectors. Underlying the market's performance were strong returns from Fortescue Metals Group (+19.1%), Rio Tinto (+12.6%), BHP (+8.1%), CSL (+4.4%) and Commonwealth Bank (+4.2%). Small company stocks also fared well, with the S&P/ASX Small Ordinaries Index posting 3.2%.

Overseas Shares

Overseas share market gains were positive in December 2012. Performance of Emerging Market shares (+5.4% in A$ unhedged terms) was particularly strong, led by China (+17.9%) and Brazil (+6.1%). Global shares returned 1.8% in US$ terms, which translated to 2.3% in unhedged A$ terms in line with a 0.5% depreciation in the A$. Growth stocks (+1.4%) underperformed Value stocks (+3.7%) in A$ terms based on the S&P Developed ex-Australia Large Medium Cap Growth and Value indices over the month. Global small caps also fared well (+3.7% in A$ unhedged terms). Cyclical sectors outperformed over December, driven by Financials (+4.9%), Materials (+4.9%), Industrials (+3.8%) and Consumer Discretionary (+3.0%).

US stocks posted positive returns yet lagged most other regions, with the S&P500 Composite Index up 0.9% over the month in local currency terms. The more concentrated Dow Jones Industrial Average lagged the broader index, returning 0.8% for the month, while the NASDAQ rose 0.3%. In Europe, returns were positive as European policy makers continue to aid the euro region back to economic health with the FTSE 100 (UK) 0.6% higher, the DAX 30 (Germany) up 2.8% and the CAC 40 (France) increased 2.6% all in local currency terms. Asian markets outperformed other markets over the month supported by the Chinese Shanghai Composite Index and the Japanese TOPIX that rallied 14.6% and 10.1% respectively in local currency terms. The Hong Kong Hang Seng Index and Indian BSE 500 increased 1.5% and 2.9% respectively, all in local currency terms.


Real Estate Investment Trusts (REITs) had a positive month, with domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) increasing 2.9% and Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) gaining 4.4% on a fully hedged basis.

Fixed Interest

Sovereign bond yields rose as investors continued to seek higher-yielding opportunities elsewhere. Ten-year yields rose in the US (+13bps to 1.75%), UK (+5bps to 1.82%), Japan (+8bps to 0.79%) and in Australia (+18bps to 3.27%), though fell in Germany (-7bps to 1.18%). Interestingly, German two-year yields once again slipped into negative territory, falling 2bps to -0.01%. Movements, however, were minimal elsewhere: US (-1bps to 0.24%), UK (+1bps to 0.32%) and unchanged in Japan (0.10%). Australian sovereign bonds were relatively flat over December as investor appetite for defensive assets continues to wane.

The UBS Treasury Bond Index dropped 0.2% while the UBS Semi-Government Index and the UBS Credit Index climbed 0.2% and 0.6% respectively over the month. Global bond returns posted positive movements over the month. The Barclays Capital Global Aggregate Bond Index and the Citigroup World Government Bond (ex-Australia) Index rose 0.3% and 0.2% respectively during the month, both on a fully hedged basis.


The Australian dollar fell against all major currencies over the month with the exception of the Japanese Yen. The A$ fell 0.5% against the US$, finishing the month at US$1.04. Against other currencies, the A$ depreciated 1.9% relative to the Pound Sterling, 1.8%% against the Euro while appreciating 4.3% against the Japanese Yen over December. On a trade weighted basis, the local currency fell marginally by 0.1% over December.


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