Investment commentary - 31 October 2013

18/11/2013
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

The US fiscal situation attracted significant attention over the month of October, with the US Government being forced into a partial shutdown as the Republicans and Democrats failed to reach agreement over the federal budget.

Markets placed little weight on the shutdown, believing it would be short term and would not have a significant impact on the US economy, and instead focused on the ongoing negotiations surrounding the lifting of the US debt ceiling. It was estimated that under the existing debt limit the US Treasury Department would exhaust its ability to borrow between October 22 and the end of the month, after which the US Government would not be able to meet its obligations, including interest and principal payments on its debt.

Ultimately US politicians were able to reach agreement on both the budget and debt ceiling, although the government shutdown lasted a longer than expected 16 days. Financial markets lifted as the threat of a US default came to an end. In China, recent data has been generally positive, suggesting that that the economy is stabilising following the softness in the first half of the year.

News out of Europe continues to point to a gradual recovery in the region, with Spain emerging from a two year recession. A further fall in the Euro area inflation rate paved the way for the ECB to once again loosen monetary policy.

Locally, at the November meeting the RBA left the official cash rate unchanged at the record low of 2.50%. With a spike in the September inflation number and growing talk that the housing market may be overheating, many investors expect that the current easing cycle has come to an end. Nevertheless, it appears that the stubbornly high Australian dollar is causing the RBA a growing level of discomfort.

Significant developments over the month were:

  • The RBA left the cash rate unchanged at 2.50% at their November meeting. The accompanying statement and a speech by Reserve Bank Governor Glenn Stevens in late October suggest that the RBA is not comfortable with the current high level of the Australian Dollar.
  • The Australian economy added a disappointing 1,100 new jobs over October, falling short of market expectations. The seasonally adjusted unemployment rate remained steady at 5.7%. Australian inflation spiked in Q3 2013, with CPI rising 1.2% over the quarter and so increasing 2.2% over the year.
  • The US economy surged over the September quarter with GDP growing at a higher than expected annual rate of 2.8%. US manufacturing activity continued to accelerate over October with the ISM Manufacturing PMI rising to 56.4, the highest level since April 2011.
  • At the October Federal Open Market Committee (FOMC) meeting, the US Federal Reserve decided not to 'taper' asset purchases, maintain the pace at $85 billion per month. The Fed did not provide guidance on the tapering of the stimulus and some investors saw this as a signal that tapering in December is not off the table.
  • October US employment data surprised on the upside, with 204,000 jobs being created over the month. The unemployment rate ticked up to 7.3%, although this number included temporary furloughed federal employees.
  • China's GDP growth accelerated over Q3 2013 to 7.8% pa, the result was in line with market expectations and was the fastest pace of growth this year. Chinese manufacturing continued to grow over October with the HSBC China Manufacturing PMI rising to 50.9 up from 50.2 in September, representing expansion in the sector for the third consecutive month and the strongest rate of improvement in seven months.
  • Euro area inflation fell to an annual rate of 0.7% in October, significantly lower than the ECB's inflation target of “below, but close to, 2%”. The ECB was quick to react to the drop in inflation, cutting the main refinancing rate to 0.25%.
  • Spain posted positive growth in GDP of 0.1% over the September 2013 quarter. This marks the end of a two year long recession, with the economy expanding for the first time since Q1 2011. Nevertheless, the country faces one of the largest rates of unemployment in the Euro area at 26%.
  • Eurozone manufacturing expanded for the fourth straight month, with the Manufacturing PMI index rising to 51.3 in October, up from 51.1 in September. The recovery in the sector continues to be far-reaching with all nations experiencing growth, except France and Greece.
  • Positive news continues to emerge from Japan following the recent policy stimulus. The seasonally adjusted unemployment rate fell in September to 4.0%, from 4.1% in August. Inflation accelerated over September to an annual rate of 1.1%, a sign that the economy is on the right track to overcome deflation.
  • Commodity prices generally weakened over the month. Gold prices fell 0.5% in October finishing the month at US$1,323.61/oz. Iron ore prices nudged down by 0.7%, ending the month at US$133.0/MT. The oil price weakened by 0.3% to $107.68/bbl.

 

Australian Shares

The Australian equity market experienced another strong month, finish 3.9% higher. Small Caps (+2.7%) underperformed their LargeCap (+4.2%) counterparts but outperformed Mid Cap (+2.2%) stocks. The defensive sectors had mixed performance over the month with Property Trusts, Consumer Staples and Utilities underperforming the broader market, while Healthcare and Telecom Services performed particularly strongly. The best performing sectors were Financials (excluding property trusts) (+5.9%), Healthcare (+4.5%) and Telecom Services (+4.2%). The weakest performing sectors included Energy (+0.2%), Utilities, (+1.1%) and Industrials (+1.9%). On a stock level, ANZ (+10.4%), CBA (+6.8%) and BHP (+5.7%) made the largest contribution to the return of the index. On the other hand, Newcrest Mining (-11.9%), Qantas (-15.6%) and WorleyParsons (-9.0%) were the most significant detractors from the performance of the index.

Overseas Shares

Global equity markets were generally stronger over October. The broad MSCI World ex Australia Index rose 4.1% in hedged terms and 2.6% in unhedged terms, as the Australian dollar gained against all of the major currencies. Based on the relative performance of the S&P Developed ex-Australia Large & Mid cap indices, Global Growth (+2.3%) underperformed their Value (+2.8%) counterparts in A$ terms. The strongest performing sectors were Telecommunication Services (+5.4%) and Consumer Staples (+3.3%), while Materials (+1.1%) and Utilities (+1.9%) were the worst performers. In A$ terms, the Global Small Cap sector rose 1.8%, while Emerging Markets returned 3.5% in October.

In the US, the S&P 500 Composite Index rose 4.6% during October, the NASDAQ returned 3.9% and the Dow Jones Industrial Average gained 2.9%, all in local currency terms. European markets were stronger, with the DAX 30 (Germany) jumping 5.1%, the FTSE 100 (UK) returning 4.3% and the CAC 40 (France) gaining 3.8%. Asian markets were mixed over the month, with the Indian BSE 500 soaring 9.1%, and the Hang Seng rising 1.7%, while the Japanese TOPIX finished the month flat and the Chinese Shanghai Composite Index lost 1.5%.

Property

Real Estate Investment Trusts (REITs) performed well over the month; domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) advanced 2.6%, while Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) gained 3.0% on a fully hedged basis. The unlisted property sector (as measured by the Mercer/IPD Australia Monthly Property Fund Index) returned 1.0% over September on the back of solid returns from Retail funds (+1.4%).

Fixed Interest

Global sovereign bond yields generally fell across the major markets over the month. Ten-year bond yields fell: in Japan (-9bps to 0.60%), the US (-7bps to 2.54%) and Germany (-5bps to 1.68%); however rose in the UK (+9bps to 2.62%). Two-year bond yields were lower in Germany (-2bps to 0.13%) and the US (-2bps to 0.30%). Global bond indices saw positive returns over the month, with both the Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index returning 1.1%, both on a fully hedged basis.

The Australian ten-year bond yield increased by 13bps to 3.94% and the five-year bond yield rose 16bps to 3.33%. Australian bonds produced generally weak returns over October, with the UBS Credit Index returning 0.2%, UBS Semi-Government Index rising 0.1% and the UBS Treasury Bond Index finishing flat for the month.

Currencies

The Australian Dollar continued to climb against all of the major currencies in October. The Australian Dollar rose 1.3% relative to the US Dollar, finishing the month at US$0.947. Against other currencies, the A$ appreciated 2.1% against the Pound Sterling, 1.3% relative to the Yen and 0.8% versus the Euro. On a trade weighted basis, the local currency gained 1.3% over the month.

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