Investment commentary - 31 July 2010

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
Equity markets rallied in July as investor risk appetite returned. A positive start to the earnings season in the US and relatively benign results from the European bank stress-tests saw markets move higher. In contrast to equities, fixed interest markets posted modest returns, putting a halt to the rally which began in mid-April. Listed Property Trust returns were positive.

Significant developments over the month were:

  • On Saturday 17th July, Prime Minister Julia Gillard called a federal election for August 21st 2010.
  • Domestically, the key piece of economic data released was 2Q CPI. Headline inflation rose by 0.6%/qtr which was less than expected. Given this, the RBA left the official cash rate on hold at 4.5% in early August for the third consecutive month and issued a very neutral statement signalling rates could be on hold over coming months.
  • The Australian Federal Government released an updated budget forecast. There were downgrades to real GDP growth forecasts to 3% in 2010/11 and 3.75% in 2011/12. However, there were upward revisions to inflation, commodity prices and the terms of trade which drove a stronger nominal GDP forecast.
  • China released 2Q 2010 GDP data, showing a slowdown in annual economic growth to 10.3% from 11.9%. Policy tightening in the property sector and restrictions on the amount of bank loans led the slowdown.
  • In Europe, results of stress tests to judge the financial health of European banks were released. Whilst there were question marks on the credibility of the results, it did provide further information to financial markets. Only seven of the ninety-one EU banks failed the stress test, including: one German, one Greek and five Spanish banks.
  • Julia Gillard successfully challenged Labor leader Kevin Rudd to become Australia's first ever female Prime Minister. One of her early moves was to foreshadow a softening of the RSPT (Resources Super Profit Tax) after consultation with the mining sector.

Australian Shares

July saw Australian equity markets post a positive start to the new financial year. The S&P/ASX300 rose 4.5%, claiming back its June loses. Investor sentiment improved after the Federal Government and major resource companies agreed on revised terms of the proposed Resources Super Profits Tax, now the Mineral Resources Rent Tax.

Small cap stocks (+5.2%) outperformed their Large (+4.4%) and Mid cap (+4.8%) counterparts for the first time since April. The best performing sector in July was Industrials (+7.1%), whilst defensive sectors such as Telecoms (-0.6%), Consumer Staples (+1.8%) and Healthcare (+1.0%) underperformed.

BHP Billiton (+6.8%) unsurprisingly (given the revised resources tax terms) topped the positive contributors list.

Overseas Shares

In aggregate, overseas shares returned 0.7% for the month for an unhedged Australian investor as measured by the MSCI World ex Aus Index. The strong appreciation of the Australian dollar saw the return in local currency terms enhanced to +5.8%. Value stocks (+1.2%) outperformed Growth stocks (+0.3%) in AUD terms over the month, based on the S&P Developed ex-Australia Large Mid Cap Value and Growth indices.

In the US, the S&P 500 Composite Index returned +7.0%, the Dow Jones Industrial Index +7.2% and the NASDAQ Composite Index +6.9%, all in local currency terms. In Europe, the FTSE 100 (UK) returned +7.1%, the DAX 30 (Germany) +3.1% and the CAC 40 (France) +5.9% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned +10.0%, Hong Kong's Hang Seng +4.5%, India's BSE 100 Index +1.2% and the TOPIX (Japan) +1.0% all in local currency terms.

Emerging markets gained 1.1% over the month in AUD terms.


Domestic listed property trusts (A-REITs) returned +1.1% for the month. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +7.4%.

Fixed Interest

The UBS Australia Composite Bond Index gained 0.3% for the month. The Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index rose 0.9% and 1.1%, both on a fully hedged basis.


The A$ appreciated strongly during July. The local currency appreciated 7.2% against the US Dollar, 0.8% against the Euro, +5.0% against the Yen, +2.4% against the Pound Sterling and +3.1% on a trade weighted basis.

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