Investment commentary - 29 February 2016

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
Global markets were relatively flat over the month of February 2016, despite a push in the last two weeks for several major equity markets.

Bond markets continued to provide a modest safe haven for investors with the Citibank World Government Bond Index returning 1.4% over the month.  United States (US) equities recorded a small negative return and Federal Reserve (Fed) Chair, Janet Yellen, warned that global financial market turbulence could set back US growth. The stance of US monetary policy remains quite accommodative in order to support further improvements in labour market conditions and a return to 2% inflation.

Elsewhere, the Japanese equity market declined sharply in the initial weeks of February following the Bank of Japan’s move to a negative rate policy in late January, broader doubts over the success of "Abenomics" in the current economy, and a rise in the yen.

Domestically, economic growth figures were encouraging; the Australian economy grew 3% through 2015 as non-mining activity and export volumes helped offset the decline in mining investment. Despite this information, growth asset markets felt the effects of global sentiment as the ASX/S&P 300 declined 1.7% for the month. Materials was the strongest performing sector while Financials ex Prop, Telecommunication Services and IT struggled.


  • The Reserve Bank of Australia (RBA) left interest rates on hold at 2.0% in March, retaining a slight easing bias. Similar to last month, the statement released by the RBA indicated that key factors that may drive future changes in monetary policy include assessing whether recent strong labour market growth is sustainable, and if recent financial market weakness is due to real economic factors.
  • Australian gross domestic product (GDP) grew 0.6% quarter-on-quarter (QoQ) in Q4 and 3.0% year-on-year (YoY), ahead of expectations for 0.4% and 2.5%, respectively, as Q3 GDP was also revised upwards. Consumption contributed 0.4 percentage points (ppts) to quarterly growth, while government contributed 0.3ppts and inventories 0.2ppts, capex detracted 0.4ppts and net exports were flat. Although GDP was better than expected, Net National Disposable Income, which adjusts GDP for population growth and changes in the terms of trade, contracted 0.4% in Q4 and 2.4% in 2015.
  • Australian employment declined by 7,900 in seasonally adjusted terms in January, below consensus for a 13,000 gain. Full-time employment declined by 40,600, while part-time employment increased by 32,700, partially reversing strong full-time employment growth in recent months. The participation rate increased from 65.1% to 65.2%, leading to the unemployment rate increasing from 5.8% to 6.0%. In less volatile trend terms employment declined by 4,400 while the participation rate was unchanged at 65.2% and the unemployment rate declined from 5.9% to 5.8% in rounded terms.
  • Australian Retail Sales rose 0.3% in seasonally adjusted terms in January, falling short of expectations for a 0.4% increase. In trend terms, sales also rose 0.3% in the month and 4.0% from a year earlier.  On a sectoral basis, Household goods was the strongest sector, rising 0.5%, while Department store sales were weak, unchanged from a month earlier.
  • US Non-Farm Payrolls rose by 242,000 in February, well ahead of estimates for 195,000 while there were positive upward revisions to the prior two months gains of 30,000. The unemployment rate was unchanged at 4.9% while the participation rate increased to 62.9% from 62.8%. Wages underwhelmed, falling 0.1% in the month, behind expectations for a 0.2% gain, taking the annual pace of wage growth to 2.2%, below expectations for 2.5%.
  • The US Institute for Supply Management (ISM) Manufacturing Index rose from 48.2 in January to 49.5 in February and was ahead of expectations for 48.5, signalling that fears on the health of the US manufacturing sector are potentially over exaggerated. Production increased 2.6ppts to 52.8, while new orders were unchanged at 51.5.  Nine of 18 industries in the survey reported growth. The ISM Non-Manufacturing Index eased from 53.5 in January to 53.4 in February, though was ahead of expectations for 53.1.
  • The second estimate of US Q4 GDP was released, resulting in GDP being revised up from 0.4% to 1.0% QoQ annualised, ahead of expectations for 0.7%. Personal consumption was revised down from 2.2% to 2.0%. In contribution terms, personal consumption contributed 1.4ppts to GDP, while fixed investment was flat, inventories detracted 0.1ppts and net exports detracted 0.3pts. The PCE Deflator rose from 1.1% to 1.3% from a year earlier.
  • US headline consumer price index (CPI) was flat in January, ahead of expectations for no change, leading the CPI to rise to 1.4% YoY from 0.7% in December, exceeding consensus for 1.3%.  Core CPI rose 0.3% in January and 2.2% from a year earlier, ahead of consensus for no change from 2.1%.
  • Japanese Q4 GDP contracted 0.3% QoQ, revised up slightly from the initial estimate of a 0.4% contraction.  GDP grew 0.8% YoY.  In terms of contributions to growth, private investment contributed 0.2ppts to quarterly growth and net exports 0.1ppt, while the government sector detracted 0.1ppt, and consumption 0.5ppts
  • The China Caixin Manufacturing purchasing managers’ index (PMI) declined to 48 in February, from 48.4 in January, behind expectations for no change as both production and new orders fell. Meanwhile, the official PMI declined from 49.4 to 49 and was also behind expectations for no change, as output and new orders both fell.
  • The European Central Bank (ECB) announced further monetary easing. The deposit rate was cut by 10 basis points (bps) to -0.4% and the refi rate was cut by 5bps to 0.00%, while the quantitative easing (QE) programme was increased by EUR20 billion to EUR80 billion per month and expanded to include non-financial investment grade credit. Finally, a four year targeted longer-term refinancing operations (TLTRO) facility will be launched in June allowing eligible banks to borrow from the ECB for up to four years at the deposit rate.
  • Euro area GDP grew 0.3% in Q4 and 1.6% YoY, with the annual growth beating expectations for 1.5%. Spain led growth, expanding 0.8% in the quarter and 3.5% over the year, while Germany and France both grew 0.3% in the quarter, while France grew 1.4% YoY and Germany 1.3%.
  • European Core CPI rose 0.7% over the year to February, behind estimates for 0.9%, and 1.0% recorded over the year to January.
  • The Eurozone composite PMI declined to 53 in February from 53.6 in January, ahead of expectations for 52.7. Activity slowed in Germany, Italy and Spain, and contracted in France.


Australian Equities brought flat returns over February as the S&P/ASX 300 Accumulation Index fell 1.7%. From a sector perspective, Materials (+9.1%), Industrials (+5.8%) and Property Trusts (+2.8%) were the strongest performers, while Financials ex Prop (-7.0%), Telecom Services (-5.5%), and IT (-5.5%) were the weakest. The Australian Small Companies Index outperformed Australian large caps, with a return of 1.0% for the month.


Global Equities returned -1.4% in hedged (Australian dollar) terms, and -1.7% in unhedged (Australian dollar) terms as the Australian dollar appreciated against the US dollar over the month. Global Small Caps outperformed the broad cap index returning -0.3%, while emerging markets retraced further, returning -1.1% (both in Australian dollars unhedged). In the US, the S&P500 returned -1.1%, while the NASDAQ returned -1.2% in US dollar terms. Outside of the US, Japan returned -9.3%, the United Kingdom (UK) 0.8%, India -8.1% and Germany -3.1%, all in local currency terms. In other regions, China fell 1.8% while Hong Kong fell 2.9% (returns in local currency terms). Across the sectors, Materials (+5.3%), Industrials (+1.3%), and Telecommunication Services (+0.2%) were the strongest performers, while Financials (-4.4%), IT (-2.4%) and Healthcare (-2.2%) were the weakest (all in Australian dollar terms).


The Real Assets sector saw mixed returns over February, with Global Core Infrastructure returning 0.6% and Global REITs returning -0.3% (both in Australian dollar hedged terms). Domestic REITs posted a return of 2.8% in February while Australian Direct Property returned 0.5% on a lagged basis.


Ten-year sovereign bond yields saw falls across most major economies with notables being the US (-19bps to 1.74%), Japan (-17bps to -0.06%), the UK (-24bps to 1.34%) and Germany (-22bps to 0.05%). Two-year sovereign bond yields rose in the US (1bp to 0.80%) and the UK (4bps to 0.38%) and fell in Germany (-8bps to -0.56%) and Japan (-17bp to -0.23%). Overall, hedged Global Government Bonds returned 1.4% for the month as measured by the Citigroup World Government Bond Index. Australian bond markets also saw a fall in the yield curve over the month, with the 10-year (-24bps to 2.40%), five-year (-17bps to 1.92%) and two-year (-14bps to 1.78%) yields all shifting downward. The Australian Government Bond Index returned 1.3% while the Australian Composite Bond Index returned 1.0% for the month.


Over February, the Australian dollar saw mixed results with falls of -5.2% against the Japanese Yen, but gains against the Pound Sterling (+4.1%), Euro (+0.5) and the US dollar (+1.0%), finishing the month at USD0.714 on 29 February 2016. On a trade-weighted basis, the Australian dollar fell 0.2% for the month.


The late 2015 slide in commodities continued through the first few months of 2016 as demand generators struggled to pick up. The broad S&P GSCI Commodity Total Return Index fell by 3.0%, while iron ore prices saw a recovery of 15.4% – finishing the month at USD49.4 per metric tonne. The price of oil rose (+6.2% to US$36.43 per barrel), while gold also rose (+10.4%), finishing the month at USD1,232.88 per ounce.

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