Investment commentary - 31 December 2015

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
Domestic equity markets finished off the year strongly in December 2015.

The S&P/ASX 300 returned 2.7%, boosted by strong performances from the Consumer Staples (+7.1%) and Consumer Discretionary (+6.3%) sectors. The Small Ordinaries returned 3.9% for the month to return a double figure result (+10.2%) for investors and remain the pick of the market capitalisation spectrum over the 2015 calendar year. Release of the November 2015 labour force data provided positive signs domestically as employment jumped by 71,000 in November after a 56,000 rise in October 2015, with the unemployment rate falling slightly to 5.8%. As a result, investors lowered their 2016 monetary policy easing expectations as December 2015 markets priced in a 50% chance of just one rate cut over the year ahead.

In the United States (US), the Federal Reserve (Fed) raised interest rates for the first time since 2006 to a range of 0.25% to 0.50%.  However, the Fed had successfully managed investor expectations leading up to the ‘lift-off’, and the result affected markets only modestly on the day. The Fed also noted that the return to higher interest rate levels would be a gradual increase, and rates will likely remain lower than long-run levels for the foreseeable future.

Commodity prices were particularly weak in December 2015, as oil prices hit seven year lows due in part to a strong US dollar (USD) and swelling US crude inventories, finishing the year at US$35.7 a barrel. The S&P GSCI Commodity Total Return index fell by 9.0% following on from a 10.4% fall in November 2015.


  • Australian labour data significantly exceeded expectations for a 10,000 loss in November, with seasonally adjusted employment rising by 71,400. Gains were split between full and part time, while the unemployment rate declined to 5.8% from 5.9%, despite participation rising from 65.0% to 65.3%. Some potential data quality issues have been highlighted which may bias the data. Nevertheless, trend employment has remained resilient in recent quarters. In November trend employment increased by 25,300, while unemployment remained at 6.0%.
  • Australian retail sales rose 0.4% in November, in line with expectations, while October sales were revised up to 0.6% from 0.5%. The strongest gains in November were reported in cafes and restaurants (+1.0%), while department stores were the weakest (-0.8% MoM). Retail sales have increased by 4.0% from a year earlier in trend terms.
  • The Fed raised interest rates in December by 25 basis points (bps) to 0.25% to 0.5% as widely expected by economists and markets. The Fed’s assessment of economic conditions was virtually unchanged from October, and reiterated that future changes in interest rates will be “gradual”. The Fed also released its quarterly economic projections and dot plot.  The Fed member 2016 median gross domestic product (GDP) expectations were revised up by 0.1% to 2.4%; while 2016-2018 median unemployment was revised down by 0.1% to 4.7%; and 2016 median core PCE inflation was revised down by 0.1% to 1.6%.  The median interest expectation for 2016 was unchanged, while the median for 2017 was revised down by 25bps to 2.375%, and 2018 was revised down by 12.5bps to 3.25%.
  • US non-farm payrolls rose by 292,000 in December, well ahead of expectations for 200,000 while there were 50,000 of net positive revisions to the prior two months’ employment, taking three month average employment growth to 284,000. The unemployment rate remained unchanged at 5.0%, while the participation rate edged up to 62.6% from 62.5%.  Wage growth was slightly disappointing, with wage gains flat in December, below expectations for 0.2%. The annual pace of wage growth increased to 2.5% from 2.3%, due to base effects, but fell short of expectations for 2.7%.
  • The US Institute for Supply Management (ISM) Manufacturing Index declined to 48.2 in December from 48.6 in November, and was below expectations of 49.  Nevertheless, production and orders both increased, but remained below 50, while employment, prices and imports all declined. Six of 18 industries in the survey reported growth, consistent with November. Meanwhile the non-manufacturing ISM remains strong at 55.3, though was below expectations of 56 and the prior reading of 55.9.
  • US consumer price index (CPI) was flat in November, in line with expectations, and below the 0.2% increase recorded in October. Core CPI rose 0.2% in November, in line with expectations and unchanged from the prior monthly change. Over the year to November core CPI rose 2.0%, in line with expectations, though was ahead of the 1.9% over the year to October.
  • The China Caixin Manufacturing purchasing managers’ index (PMI) declined to 48.2 in December from 48.6 in November, and was below expectations for 48.9. Both new exports orders and output declined substantially. Meanwhile, the Official PMI edged up to 49.7 from 49.6 in December, though fell short of expectations for 49.8. Both output and new orders increased.
  • European core CPI rose 0.9% over the year to December, unchanged from November but was below expectations for 1.0%. Headline CPI rose 0.2%, below estimates for a 0.3% increase.
  • The Euro area composite PMI increased to 54.3 in December from 54.2 in November, primarily due to an increase in services activity. Activity rose across the four key economies of Germany, France, Spain and Italy, as well as Ireland.
  • The Bank of Japan (BoJ) announced some ‘technical adjustments’ to its Quantitative and Qualitative Easing program, increasing the average maturity of its Government Bond purchases from seven years to 10 years to seven years to 12 years as well as increasing its equity exchange traded fund purchases by an annual pace of JPY300 billion to JPY3.3 trillion. The new component will specifically target companies that “proactively invest in physical and human capital” in an attempt to boost credibility in its push for companies to raise wages and boost capex. The ‘technical adjustments’ will also allow banks to use foreign currency loans as collateral to borrow from the BoJ, while it also increased the maximum holding of a Japanese Real Estate Investment Trust (REIT) the BoJ can own from 5% to 10%.
  • The BoJ’s fourth quarter Tankan Index was mixed relative to expectations but strong. Large manufacturing conditions were unchanged +12 (greater than zero indicates optimists outnumber pessimists), relative to consensus for +11, while the outlook declined to +7 from +10, below consensus for +11. Large non-manufacturing conditions were unchanged at +25, relative to consensus for +23, however, the outlook fell to +18 from +19, and was below consensus for +22.  Meanwhile, companies indicated they intend to increase capital expenditure by 10.8% over the year to April 2016, in line with plans reported in the Q3 survey.


Australian Equities brought generally positive returns over December as the S&P/ASX 300 Accumulation Index rose 2.7%. From a sector perspective; Consumer Staples (+7.1%), Consumer Discretionary (+6.3%) and Telecom Services (+4.3%) were the strongest performers, while Energy (-7.5%), Industrials (-0.5%), and Healthcare (0.6%) were the weakest. The Australian Small Companies Index outperformed Australian large caps, with a return of 3.9% for the month.


Global Equities returned -2.1% in hedged (Australian dollar) terms, and -2.3% in unhedged (Australian dollar) terms as the Australian dollar marginally appreciated against the USD over the month. Global Small Caps underperformed the broad cap index returning -2.9%, while emerging markets retraced further, returning -2.6% (both in Australian dollars unhedged). In the US, the S&P500 returned -1.6%, while the NASDAQ returned -2.0% in USD terms. Outside of the US, Japan returned -1.9%, the UK -1.7%, India 0.5% and Germany -5.6%, all in local currency terms. In other regions, China rose 2.7% and Hong Kong fell 0.4% (returns in local currency terms). Across the sectors, Healthcare (+1.1%), Utilities (+1.1%), and Consumer Staples (+0.5%) were the strongest performers, while Energy (-10.0%), Materials (-4.5%) and Industrials (-2.9%) were the weakest (all in A$ terms).


The Real Assets sector saw mixed returns over December, with Global Core Infrastructure returning -1.1% and Global REITs returning 0.8% (both in Australian dollar hedged terms). Domestic REITs posted a return of 4.0% in December while Australian Direct Property returned 0.7% on a lagged basis.


Ten-year sovereign bond yields saw increases across most major economies with notables being the US (+6bps to 2.27%), Japan (-5bps to 0.25%), the UK (+13bps to 1.96%) and Germany (+16bps to 0.63%). Two-year sovereign bond yields increased in the US (+13bps to 1.04%) and Germany (+7bps to -0.33%) and the UK (+5bps to 0.66%) but decreased in Japan (-1bp to -0.01%).  Overall, hedged Global Government Bonds returned -0.1% for the month as measured by the Citigroup World Government Bond Index. Australian bond markets saw a relatively muted yield curve over the month, with the 10-year (+2bps to 2.88%), five-year (-6bps to 2.24%) and two-year (+2bps to 2.03%) yields all shifting slightly. The Australian Government Bond Index returned 0.4% while the Australian Composite Bond Index returned 0.3% for the month.


Over December, the Australian dollar saw mixed results, with falls of -1.6% against the Euro and -0.3% against the Japanese Yen, and rises of 3.0% against the Pound Sterling and 0.4% against the USD to finish at USD0.728 on 31 December 2015. On a trade-weighted basis, the Australian dollar rose 1.5% for the month.


Commodity prices saw further weak results over the month of December as demand generators continued to struggle. The broad S&P GSCI Commodity Total Return Index fell by 9.0%, while iron ore prices fell by 2.7% - finishing the month at US$43.8 per metric tonne. The price of oil fell (-19.1% to US$35.70 per barrel), while gold also fell (-0.1%), finishing the month at US$1,062.4 per ounce.


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