Investment commentary - 30 September 2014



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

Most local asset classes ended the month lower with Australian shares suffering the most in September 2014.

While international shares declined in local currency terms, it rose in unhedged Australian dollar terms, due to the substantial depreciation of the Australian dollar.

In the United States (US), the Federal Reserve (Fed) reinforced expectations around the pace of asset purchase tapering and the timing of the first Fed funds hike. The Fed, however, surprised markets by raising its Fed funds rate forecasts, with the median projection raised from 1.125% to 1.375% for the end of 2015. As a result, bond yields experienced a sharp reversal in direction in September.

The European Central Bank (ECB) also eased monetary policy, surprising markets by announcing a 10 basis point cut to interest rates and a programme of asset purchases expected to commence in October. The rationale for the additional stimulus is falling inflationary expectations and concerns about slower growth momentum in the region over the last two quarters.

In Scotland, the no-vote prevailed which was good news for United Kingdom (UK) and Scottish assets and saw the Pound Sterling appreciate against all major currencies, reaching a two-year high against the Euro. Ongoing geopolitical concerns continued to impact markets in the latter half of September - clashes in the Ukraine, ongoing air strikes in the Middle East, and protests in Hong Kong - causing markets to retreat and give back some of the earlier gains of the month.

Locally, the Financial Stability Review of the Reserve Bank of Australia (RBA) expressed concern that the housing market is becoming too speculative and poses a risk to the broader economy. This has, as a result, prompted the Australian Prudential Regulation Authority (APRA) to step up its surveillance of the banking sector. The Australian dollar, now at its lowest level since January, continued to slide on the back of a higher US dollar as well as the continuing fall in the iron ore price.

Significant developments

  • The RBA board left the cash rate on hold at 2.50% at its September meeting, re-iterating that it expects the cash rate to remain unchanged for some time, and for inflation to be consistent with the 2% to 3% target over the next two years. The RBA also released its quarterly Financial Stability Review. The review suggests that the Australian banking and financial systems are strong, though some concern was raised that "...the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing's share of the housing stock". Nevertheless, the RBA considers this to pose more risks to the economy than to financial systems.
  • Australian August labour force data was released. The Australian Bureau of Statistics (ABS) estimates that employment increased by an all-time high of 121,000 in the month in seasonally adjusted terms, eclipsing consensus estimates for 15,000. The participation rate rose from 64.9% to 65.2%, and the unemployment rate declined from 6.4% to 6.1%. These figures should be treated with some scepticism, particularly following the prior month, when the ABS estimated that the unemployment rate jumped from 6.0% to 6.4%, despite flat employment growth and a small change in participation. Less volatile trend estimates suggest that employment increased by 18,700, and the participation rate increased from 64.9% to 65.0%, and the unemployment rate increased from 6.1% to 6.2%.
  • Australian July retail trade data was released, indicating that sales rose 0.4% month-on-month in seasonally adjusted terms, in line with consensus estimates. Retail sales rose 5.9% over the year to August. Food retailing, household goods retailing and cafes, restaurants and takeaway food services were the strongest performing sectors, while clothing, footwear and personal accessories and department stores were the weakest.
  • The Fed's Federal Open Market Committee (FOMC) met in September and lowered the pace of its monthly asset purchases by $10 billion per month from $25 billion to $15 billion per month. Despite expectations that the Fed will cease its asset purchase program in October, and start increasing interest rates in mid-2015, the accompanying statement retained a commitment to leave interest rates on hold "...for a considerable time after the asset purchase programme ends". The quarterly economic projections of Fed members was also released, indicating that gross domestic product (GDP) growth and unemployment expectations have been revised downward slightly, but interest rate expectations have been revised upwards.
  • The third and final estimate of US second quarter GDP growth was released. GDP growth was revised up from 4.2% to 4.6% (annualised quarter-onquarter). Upward revisions were made to residential and non-residential investment, net-exports and government expenditure.
  • US non-farm payrolls rose 142,000 in August, falling well short of expectations for a 230,000 rise, though it is worth noting that on average non-farm payrolls have grown by more than 200,000 per month over the last six months, a pace considered associated with above trend growth in the US.
  • The ISM Manufacturing Index rose to a fresh post-2011 high in August, rising to 59.0, ahead of expectations for 56.9. Consistent with the past two months, 17 of 18 industries in the sample reported growth.
  • The HSBC China Manufacturing Purchasing Managers' Index (PMI) was unchanged from the prior month in September, coming in at 50.2. The survey suggests that export related activity is strong relative to domestic focused activity. Meanwhile the official August PMI printed 51.1, decelerating from the prior month's 51.7 print. Both surveys point to a loss of momentum in the Chinese economy.
  • The ECB further eased monetary policy in September, cutting interest rates by 10 basis points, lowering the benchmark main refinancing rate to 0.05%. A programme to purchase covered bonds and asset backed securities was also announced, with further details to be released when the program is launched in October.
  • Second quarter GDP growth in the Euro-zone was estimated to be flat on a quarter-on-quarter basis, and to have increased by 0.7% year-on-year, while consumer price index (CPI) rose only 0.4% in the year to August, demonstrating the challenges that the ECB has to stimulate growth in the Euro-zone.


Australian equities

Australian Equities declined in September with the S&P/ASX 300 Accumulation Index returning -5.4%. Both Australian Mid Cap (-5.8%) and Australian Small Companies (-5.5%) underperformed the Large Caps Index (-5.3%). Healthcare (-0.1%) and Utilities (-2.5%) were the strongest performing sectors, while Materials (-6.4%) and Financials ex-Property (-6.5%) were the weakest sectors. The largest contributors to the return of the index were Alumina (+9.4%), Recall Holdings (+19.3%) and TPG Telecom (+13.4%). Conversely, the most significant detractors from the performance of the index were CBA (-7.4%), BHP Billiton (-7.4%) and Westpac (-7.9%).

Global equities

Global equities (the broad MSCI World ex Australia Index) returned -0.7% in hedged ($A) terms, but returned +4.3% in unhedged terms, due to the significant depreciation of the Australian dollar. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices,Global Growth (+4.4%) outperformed its Value (+4.2%) counterparts in Australian dollar terms. The strongest performing sectors were Healthcare (+7.3%) and Information Technology (+5.9%), while Energy (-1.1%) and Materials (0.4%) were the worst performers. In Australian dollar terms, Global Small Caps and Emerging Markets lagged in September returning 0.9% and -1.0% respectively.

Across the major regions, in the US the NASDAQ fell -1.9, the S&P 500 Composite Index returned -1.4% and the Dow Jones Industrial Average returned -0.2%, all in local currency terms. European markets saw mixed performance, with the FTSE 100 (UK) down 2.8%, the DAX 30 (Germany) flat, and the CAC 40 (France) returning 1.0%. In Asia, the Chinese Shanghai Composite Index rallied 6.6%, the Hang Seng fell 6.9%, and the Indian BSE 500 returned 0.8% while the Japanese TOPIX posted 4.5% in September.

Property and infrastructure

Domestic Real Estate Investment Trusts (REITs) returned -5.1% in September, while Global REITs returned -4.5% on a fully hedged basis. The unlisted property sector rose 0.6% in August, with the Industrial (+0.6%) and Retail (+0.6%) sector funds posting the strongest returns. Global listed infrastructure returned 3.5% in unhedged terms and -1.0% in hedged terms in September.

Fixed interest

Ten-year bond yields rose in the US (+16bps to 2.51%), Germany (+1bp to 0.90%), Japan (+3bps to 0.53%) and the UK (+6bps to 2.31%). Two-year bond yields rose in the US (+9bps to 0.56%) and decreased in Germany (-3bps to -0.06%) during September. As a result, Global Bond indices fell during the month, with the Barclays Capital Global Aggregate Bond Index losing 0.1% on a fully hedged basis.

Australian 10-year bond yields rose 19bps ending September at 3.48%, while five-year bond yields rose 9bps to 2.97%. As expected, Australian bond indices also posted negative returns in September. The UBS Credit Index returned -0.1%, the UBS Semi-Government Index returned -0.5% while the UBS Treasury Bond Index was also lower (-0.5%).


The Australian dollar depreciated against the US dollar finishing September at US$0.875 driven by improving economic fundamentals of the US relative to Australia and declining commodity prices. The Australian dollar fell against most major currencies including -4.5% against the Pound Sterling, -2.8% against the Euro and -1.4% against the Japanese Yen. On a trade weighted basis, the local currency lost 4.2% over the month.


Commodity prices were generally weaker in September. The broader S&P GSCI Commodity Total Return Index rose marginally by 0.44% for the month of September. Gold prices fell 5.83%, finishing the month at US$1,212.83 per ounce and the oil price fell by a further 6.72% to $94.72.54 per barrel. Iron ore prices fell dramatically by 11.5% to US$78.5 per metric tonne.

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