Investment commentary - 31 August 2010

21/09/2010
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

 


Equity markets were sold off in August as uncertainty over US economic growth and continued bad news out of Europe dominated investor sentiment. In contrast to equities, fixed interest markets posted positive returns after yields fell both domestically and in the US. Australian Listed Property Trusts (A-REITs) also produced strong returns.


Significant developments over the month were:

  • The RBA kept its cash rate target unchanged at 4.50% for the third month in a row. The RBA’s quarterly Statement of Monetary Policy forecast GDP growth of 3.75% - 4.00% in 2011 and 2012 and said that the economy “is likely to be pushing up against supply-side constraints over time.”
  • The Federal election left Australia with its first hung parliament for 60 years with neither the Labor government nor the Coalition able to win an outright majority of seats in the House of Representatives.
  • Other domestic economic developments were mixed. Employment increased by 23.5k in July (exp. 20k); the rise for the year to date is 180k or 1.6%. Higher participation pushed the unemployment rate up to 5.3% (from 5.1%). Consumer confidence (Westpac-Melbourne Institute index) built on July’s jump with a rise of 5.4% (exp 3.5%) in August, reaching its highest level since January. The NAB Business confidence fell in July to a new 14-month low of 2 points due to weakness in the manufacturing, retail and construction sectors.
  • The Federal Open Market Committee left the target range for the US cash rate unchanged at 0-0.25%. The ISM manufacturing index for July fell to its lowest level this year but was slightly stronger than expected at 55.5 (exp. 54.5) from 56.2 in June. The nonmanufacturing index rose to 54.3 (exp. 53.0) from 53.8.
  • China’s economic output was $1,337bn in Q2, keeping it on track to overtake Japan as the world’s second largest economy in 2010.
  • Growth was also strong in India; Q2 growth was 8.8%. The expectation is for the country to grow at 8.5% in 2010, after growing at 7.4% in 2009.
  • In Europe, Greece fell deeper into recession after GDP shrank by 1.5% in Q2, more than the -1.1% forecast.
  • The oil price fell 9.3% to finish at US$71.63/bbl. Weak global sentiment and high US inventories contributed to the fall.


Australian Shares

After July saw Australian equity markets post a positive start to the new financial year, markets retreated in August.  The S&P/ASX300 lost 1.1%, but was one of the better performed markets globally.

There was quite a divergence in returns with Small cap stocks (+1.8%) outperforming their Mid cap (0.0%) and Large cap (-1.5%) counterparts for the second successive month. In aggregate, defensive sectors outperformed with Consumer Staples (+6.3%), Property Trusts (+3.5%) and Industrials  (+2.3%) posting strong returns. However, a disappointing earnings outlook from Telstra (-13.9%) saw Telecom Services (-9.0%) lose significant ground.

BHP Billiton (-7.5%) in direct contrast to last month, topped the negative contributors list.


Overseas Shares

In aggregate, overseas shares returned -2.1% for the month for an unhedged Australian investor as measured by the MSCI World ex Aus Index. The depreciation of the AUD (on a trade weighted basis) saw the return in local currency terms slightly eroded to -3.4%. Growth stocks (-2.0%) outperformed Value stocks (-2.1%) in AUD terms over the month, based on the S&P Developed ex-Australia Large Medium Cap Value and Growth indices.

In the US, the S&P 500 Composite Index returned -4.5%, the Dow Jones Industrial Index -3.9% and the NASDAQ Composite Index -6.1%, all in local currency terms. In Europe, the FTSE 100 (UK) returned -0.1%, the DAX 30 (Germany) -3.6% and the CAC 40 (France) -4.0% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned +0.1%, Hong Kong’s Hang Seng -2.1%, India’s BSE 100 Index +0.7% and the TOPIX (Japan) -5.3% all in local currency terms.

Emerging markets lost 0.3% over the month in AUD terms.


Property

Domestic listed property trusts (A-REITs) returned +3.5% for the month. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +0.1%. Australian Direct Property (Mercer/IPD Australian Pooled Property) returned +0.4%.


Fixed Interest

The UBS Australia Composite Bond Index gained 1.9% for the month. The Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index rose 2.4% and 2.1%, both on a fully hedged basis.


Currency

The A$ was mixed during August. The local currency depreciated 1.7% against the US Dollar and 4.7% against the Yen. Conversely, the Australian dollar appreciated 0.2% against the Pound Sterling and 0.8% against the Euro. On a trade weighted basis the dollar lost 0.6%.


 

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