Investment commentary - 31 May 2016

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
The month of May 2016 saw similar investor sentiment to April as growth asset markets again returned broadly positive returns.

However it will remain to be seen whether May will be the ‘calm before the storm’ as the referendum in the United Kingdom (UK) (Brexit) looms in June, along with a Spanish election and a potential interest rate hike from the United States (US) Federal Reserve (Fed).

An increase of 5.4% in the price of oil led commodities higher and developed market equities as a whole returned a solid 1.9% through May, as measured by the MSCI World ex Australia Index (hedged to the Australian dollar). This result means developed and emerging market equities have both provided a positive return for the calendar year to May; a strong rebound following the weak start in Q1. Domestically, the S&P/ASX 300 Accumulation Index returned 3.1% over the month for a 3.8% increase on the calendar year to 31 May 2016, spurred on by global market sentiment.  Healthcare and IT were particularly strong, returning 9.4% and 7.1% respectively.

Government bond markets stayed in positive territory as the Citigroup World Government Bond Index (hedged to the Australian dollar) returned 0.7% despite yields falling in many developed economies. Domestic bonds remained a positive contributor to portfolios as the Bloomberg Ausbond Composite Bond Index returned 1.3% for May.


  • The Reserve Bank of Australia (RBA) left the interest rate unchanged in its June meeting, at 1.75%.  RBA Governor, Glenn Stevens, noted in his release that Australian growth is continuing despite a large decline in business investment. Inflation remains quite low and is expected to for some time. Lower interest rates have been supporting domestic demand and a lower exchange rate has helped the trade sector. This wary but optimistic stance is consistent with previous recent statements and follows a cut of 25 basis points (bps) in May.
  • Australian seasonally adjusted employment rose 10,800 in April, behind expectations for 12,000 while March employment was revised down from 26,100 to 25,400. The unemployment rate remained at 5.7%, behind market expectations for 5.8%. The participation rate dropped 0.10% to 64.80%, also behind expectations of 64.90%. However, part time jobs rose 20,200 while full time jobs declined 9,300. In trend terms employment increased by 4,100 while the unemployment rate reduced to 5.8% and the participation rate was unchanged at 64.9%.
  • Australian Retail Sales rose 0.2% month on month (MoM) in seasonally adjusted terms over April, behind expectations for 0.3%, and the 0.4% increase in March. The strongest gains were in clothing, footwear and personal accessories (+0.8%) and the weakest was department stores (-0.1%). In trend terms, retail sales rose 3.4% year on year (YoY), down from 3.6% over the year to March.
  • US Non-Farm Payrolls increased by 38,000 in May, well below expectations for 160,000 while there downward revision of 59,000 to the prior two months employment. The unemployment rate dropped to 4.7%, below expectations for 4.9%, as the participation rate fell to 62.6% from 62.8%. Wages rose 0.2% MoM and 2.5% YoY, from 0.3% and 2.5% over the month and year, respectively to April.
  • The Institute for Supply Management (ISM) Manufacturing Index rose to 51.3 in May, ahead of consensus for 50.3, and 50.8 in April. Customer’s inventories, supplier deliveries and prices all increased, while Production, Backlog of Orders and Inventories were the most significant declines. The ISM Non-Manufacturing Index decreased to 52.7 in May from 55.7 in April, and expectations for 55.3. Prices and supplier deliveries increased while business activity/production, new orders, employment and new export orders were the most significant declines.
  • US Headline consumer price index (CPI) rose 0.4% MoM and 1.1% YoY to April, ahead of expectations for 0.3% and 1.1%, respectively. Core CPI rose 0.2% MoM and 2.1% YoY, on par with expectations for the month.
  • The China Caixin Manufacturing PMI printed 49.2 in May, in line with expectations and behind 49.4 in April. Production was increased, while new orders declined. Meanwhile, the official purchasing managers’ index (PMI) stayed at 50.1 in May, also in line with expectations. Production increased while employed persons decreased.
  • European Core CPI declined to 0.7% over the year to April, from 0.7% in March and was in line with estimates for 0.7%. The unemployment rate remained at 10.2% in April, in line with expectations.


Australian equity markets remained positive through to May, with the S&P/ASX 300 Accumulation Index returning 3.1% for the month. There were positive returns across the market spectrum, with the best performer being the ASX mid 50, returning 5.7% for the month. The best performing sectors were Healthcare (+9.4%) and IT (+7.1%). The weakest performing sectors were Materials (-3.0%) and Energy (-1.6%). The largest positive contributors to the return of the index were CBA, CSL and ANZ, with absolute returns of 4.8%, 10.2% and 5.6% respectively. On the other hand, the most significant detractors from performance were BHP, Rio Tinto and Wesfarmers with absolute returns of -7.3%, -12.8% and -4.6% respectively.


The broad MSCI World ex Australia Index was up 1.9% in hedged terms and 6.0% in unhedged terms over the quarter, as the Australian dollar depreciated over May. The strongest performing sectors were IT (+10.3%) and Healthcare (+6.8%), while Materials (+1.3%) and Energy (+3.0%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 6.7% while Emerging Markets returned 1.4%.

Over May, the NASDAQ returned 3.6%, the S&P 500 Composite Index returned 1.8% and the Dow Jones Industrial Average returned 0.5%, all in local currency terms. European markets experienced modest returns, with the FTSE 100 (UK) up 0.3%, DAX 30 (Germany) 2.2% and the CAC 40 (France) returning 3.5%. In Asia, equity markets saw mixed results, with the Indian BSE 500 up 3.4%, the Hang Seng Index returning -0.5%, the SSE Composite (China) returning -0.7% and the Japanese TOPIX rising 2.9%.


The Real Assets sector saw broadly positive returns over May with Global Core Infrastructure returning 1.0%, and Global REITs returning 1.5% (both in Australian dollar hedged terms). Domestic REITs posted a return of 2.7% in May to be up 20.3% for the financial year to date, while Australian Direct Property (NAV) returned 0.4% on a lagged basis.


Global sovereign bonds produced relatively modest returns over May for hedged Australian investors, with yields falling marginally over the period. Ten-year bond yields broadly rose across most developed economies with Germany (-13bps to 0.15%), the UK (-16bps to 1.44%), and Japan (-4bps to -0.11%) all experiencing falls while the US yields rose modestly (1bp to 1.83%). Two-year bond yields saw mixed results with the UK (-9bps to 0.43%) and Germany (-5bps to -0.52%) experiencing falls, while the US (10bps to 0.87%) rose marginally and Japan (-0.24%) was flat. Global Bond indices were positive for hedged investors, with the Barclays Capital Global Aggregate Bond Index returning 0.6% and the Citigroup World Government Bond (ex-Australia) Index returning 0.7% over the month, both on a fully hedged basis.

Domestically, Australian 10-year bond yields fell 22bps to 2.30% while five-year (-23bps to 1.83%) and two-year (-17bps to 1.70%) bond yields also fell. As a result, Australian bond returns were relatively strong for the month. Australian Government Bond Index returned 1.3% while the Australian Composite Bond Index also returned 1.3% for the month.


The Australian dollar depreciated against most major currencies over May, finishing at US$0.724 with a Trade Weighted Index of 61.7. The Australian dollar depreciated 3.2% against the Euro, 5.6% against the Pound Sterling, 1.9% against the Japanese Yen and 5.1% against the US dollar.  On a trade-weighted basis, the local currency fell 3.3% over the month.


In commodities, the S&P GSCI Commodity Total Return Index rose 7.7% for the month. Gold prices finished the month at US$1,214.28 per ounce for a 6.0% decrease over the period. The oil price rose over May, by 5.4% to $50.05 per barrel. Iron ore prices fell over the month, by 20.9% to US$51 per metric tonne.

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