Investment commentary - 31 October 2011

16/11/2011
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

October saw investors showing strong support for equity markets across the board, as global indices rallied from the previous months sell-off.

Locally, investor confidence was buoyed by the future prospect of an RBA interest rate cut, and progress towards a resolution to European debt concerns. This positive sentiment drove investment flows out of cash and bond investments, curtailing their impressive run of positive returns over the calendar year thus far.

Significant developments over the month were:

  • Early in the month, the Board of the Reserve Bank of Australia decided to leave the cash rate unchanged at 4.75%. Members agreed that should the September inflation figure soften as expected, monetary policy would have scope to stimulate demand in the future.
  • The consumer price index (CPI) figure was released towards the end of October. The September quarter underlying inflation figure moderated compared to the June figure, with an increase of 0.6% qoq and 3.5% yoy.
  • Unemployment remained steady at 5.2% on a seasonally adjusted basis.
  • The US Federal Reserve released their ‘Beige Book’, which provides a snapshot of regional business conditions. The report suggested a slowing US economic growth, with the survey concluding that although some sectors of the economy showed modest growth, soft labour hiring, muted consumer spending and stagnating wage growth still provided considerable headwinds.
  • European leaders held crisis talks in Brussels, with two key outcomes: the European Financial Stability Fund’s financial scope was significantly increased, and private investors agreed to take considerably larger haircuts on Greek issued Euro debt.
  • Chinese economic growth slowed for the second consecutive quarter (2.3% qoq and 9.1% yoy), providing supporting evidence that measures taken by the PBOC to control inflation have been effective.
  • Commodities had a good month, with most energy and precious metals rebounding strongly after a poor month in September. Particularly strong returns were made by oil, which returned +17.7% for the month finishing at US$93.2/bbl. Gold also bounced positively, with the spot price settling at US$1,724.4/oz bringing the monthly return to 6.6%.


Australian Shares

The benchmark S&P/ASX 300 Index snapped its six-month losing streak, returning 7.2% for the month, which was the largest monthly return since March 2009.

Large Caps (+6.9%) underperformed that Mid Cap (+9.6%) and Small Cap (+7.9%) counterparts.

The Energy sector rebounded from the sharp decline in previous months, returning +12.2%. Local Financial stocks ex property (+10.3%) were boosted by positive news in Europe regarding bank recapitalisations and debt assurances made by the EFSF. Not surprisingly, energy and financials made up the best individual stocks, with investors holding Iluka Resources (+29.7%), National Australia Bank (+15.5%) and QBE Insurance (+15.4%) benefitting most from the market rally.

Consumer Staples (+0.3%) and the Telecommunications (-0.1%) sector had a flat month after their September heights, and subsequently were the lowest returning sectors for the month.

Overseas Shares

On a hedged basis, the MSCI World ex Australia Index returned +8.6% for the month. An appreciating $A relative to major currencies saw unhedged investors give-up some of these gains, as the unhedged index returned 0.8% for the month. Based on the S&P Developed ex-Australia Large Mid-Cap Growth and Value Indices, Value stocks (+1.0%) performed marginally better than Growth stocks (+0.9%) over the month, in $A terms.

In the US, the S&P 500 Composite Index was up 10.9%, the Dow Jones Industrials Index returned +9.7% and the NASDAQ Composite Index +11.1%, in local currency terms.

On the back of apparent progress towards a resolution to Europe’s sovereign debt woes, most European indices surged. The FTSE 100 (UK) returned +8.2%, the DAX 30 (Germany) +11.6% and the CAC 40 (France) +8.7% in local currency terms.

In Asia, the Chinese Shanghai Composite Index returned +4.6%, Hong Kong’s Hang Seng +12.9%, India’s BSE 500 Index +5.9% and the TOPIX (Japan) returned +0.4% in local currency terms. The MSCI Emerging Markets Index was up 3.7% in A$ terms.

Property

Domestic REITs as measured by the benchmark S&P/ASX 300 Property Index finished the month up 3.8%. The FTSE EPRA/NAREIT Global Index (Global REITs) returned +3.2% on a hedged basis.

Fixed Interest

The local UBS Australia Composite Bond Index finished down 0.6%. Overseas, the Citigroup World Government Bond (ex -Australia) returned -0.3%, whilst the Barclays Capital Global Aggregate Bond Index was up 0.3%, both on a hedged basis.

Currency

The local currency appreciated against all major currencies. During October, the $A returned +9.2% against the US dollar, parring its September losses, +10.4% against the Yen, +5.4% against the Pound Sterling and +5.0% versus the Euro. On a trade weighted basis, the Australian dollar appreciated by 6.2%.

 

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