Investment commentary - 31 December 2013

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

After months of speculation by investors on the potential scale back of United States (US) monetary stimulus, the US Federal Reserve (Fed) announced its decision to begin to taper its asset purchasing program.

The Fed stated on December 18 that it would reduce its monthly bond purchases by US$10bn per month from US$85bn per month commencing in January. It also stated it was likely to continue to further reduce these purchases at subsequent meetings. Notwithstanding the decision to taper, the Fed indicated that interest rates would be kept near zero “well past” the time unemployment drops below 6.5%. The tapering announcement did not have a major impact on equity markets, with investors opting to focus on recent positive economic data and the accommodative stance of the Fed with respect to interest rates.

In China, the People's Bank of China (PBOC) stepped in to alleviate a cash crunch by injecting funds into the financial system via a series of open market operations. The Bank of Japan vowed to maintain its bond buying program until a stable 2% inflation rate is achieved. European inflation fell in December and remains significantly below the European Central Bank's (ECB) target. This data sparked fears that the region may be entering a period of deflation. Despite the low inflation rate, the ECB kept interest rates unchanged at their January meeting, however stressed that these rates will "remain at present or lower levels for an extended period of time".

Locally, the Reserve Bank of Australia (RBA) did not meet in January, nevertheless the Board would be pleased the Australian dollar continued to fall in December following the US Fed tapering announcement.


Significant developments over the month were:

  • The Australian economy added 21,000 jobs in November, higher than that expected by the market. Despite the positive employment data, the unemployment rate edged up marginally to 5.8%. The participation rate remained unchanged at 64.8%.
  • US GDP growth for the September quarter was revised up to an annual rate of 4.1% from an earlier estimate of 3.6%. The revision was driven by larger personal consumption and non-residential fixed investment. This marks the fastest quarterly growth rate since the final quarter of 2011. US manufacturing activity continued to grow in December, although the ISM Manufacturing PMI edged down to 57.0 from 57.3 in November. The sector has grown for seven consecutive months. US employment data surprised on the downside with 74,000 jobs created in December. Despite the disappointing jobs data the unemployment rate fell to 6.7%, as the participation rate declined by 0.2% to 62.8%.
  • Chinese manufacturing continued to expand in December, even though the HSBC China Manufacturing PMI index edged lower to 50.5 from 50.8 in November. Inflation slowed in December to an annual rate of 2.5%, down from 3.0% in November and is well below the PBOC's 2013 inflation target of 3.5%.
  • The Euro area unemployment rate remained steady at 12.1% in November. Inflation in the region fell to an annual rate of 0.8% in December drifting further away from the ECB's inflation target of just below 2.0% p.a. Mario Draghi, the president of the ECB, dismissed the notion that the region is in deflation and declared that the Euro area is not close to a “Japanese scenario” of the 1990s.
  • The recovery in the Eurozone manufacturing sector continued in December with the Manufacturing PMI index rising to 52.7, a 31 month high. The data showed a marked improvement in the Greek manufacturing sector with the PMI rising to 49.6, a 52 month high and just shy of 50.0 which indicates the stabilisation point. On a negative note the decline in French manufacturing accelerated over the month.
  • The Bank of Japan's quarterly Tankan Survey showed widespread improvement in business conditions over the December quarter. Large manufacturers (index at +16) and large non-manufacturers (+20) experienced the strongest business conditions.

Australian Equities

The Australian sharemarket gained 0.8% in December, once again underperforming overseas markets. Stronger returns were posted down the market capitalisation spectrum with Mid Caps (+2.8%) and Small Caps (+2.5%) outperforming Large Caps (0.4%). The best performing sectors were Telecom Services (+4.3%), Energy (+3.3%) and Industrials (+2.6%). The weakest performing sectors included Property Trusts (-1.3%), Financials (excluding property trusts) (-1.0%) and Information Technology (+0.7%). The largest contributions to the return of the index were Telstra (+4.2%), BHP (+1.9%) and Wesfarmers (+3.0%). On the other hand, the most significant detractors from the performance of the index were QBE (-26.3%), Westpac (-1.1%) and AMP (-5.4%). Other significant developments on the local bourse included the credit rating downgrade of Qantas to junk status by S&P and the subsequent drop in the share price.

Overseas Equities

Global sharemarkets were generally stronger in December. The broad MSCI World ex Australia Index rose 2.4% in hedged terms and 4.4% in unhedged terms, as the Australian dollar depreciated against most of the major currencies. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (+4.6%) outperformed their Value (+4.1%) counterparts in A$ terms. The strongest performing sectors were Information Technology (+6.5%) and Industrials (+5.4%), while Consumer Staples (+2.9%) and Utilities (+2.5%) were the worst performers. In A$ terms, the Global Small Cap sector rose 4.6%, while Emerging Markets returned 0.7%.

In the US, the Dow Jones Industrial Average rose 3.2% in December, the NASDAQ returned 2.9% and the S&P 500 Composite Index gained 2.5%, all in local currency terms. In Europe, the DAX 30 (Germany) and the FTSE 100 (UK) both gained 1.6% and the CAC 40 (France) returned 0.3%. Asian markets were mixed over the month, with the Japanese TOPIX gaining 3.6% and the Indian BSE 500 returning 3.0%. On the other hand, the Chinese Shanghai Composite Index lost 4.7% and the Hang Seng dropped 2.4% in December.

Property and Infrastructure

Real Estate Investment Trusts (REITs) posted disappointing performance over the month; domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) lost 1.3%, while Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) fared better gaining 0.8% on a fully hedged basis. The unlisted property sector (as measured by the Mercer/IPD Index) returned 0.5% in November on the back of solid returns from Office (+0.6%) and Industrial (+0.6%) funds. Global listed infrastructure (as measured by the UBS Global Infrastructure and Utilities Hedged Index) returned 1.4% for the month.

Fixed Interest

Global Sovereign Bond yields generally rose across the major markets over the month. The US Federal Reserve's announcement on the commencement of tapering had the greatest impact on the long end of the yield curve. Ten-year bond yields rose: in the UK (+26bps to 3.03%), the US (+25bps to 3.01%), Germany (+25bps to 1.94%) and Japan (+12bps to 0.74%). Two-year bond yields were higher in Germany (+9bps to 0.19%) and the US (+8bps to 0.36%). Global Bond indices saw negative returns over the month, with the Citigroup World Government Bond (ex-Australia) Index losing 0.5% and the Barclays Capital Global Aggregate Bond Index returning -0.4%, both on a fully hedged basis.

Australian ten-year Bond yields increased by 11bps to 4.23% while five-year bond yields fell 1bps to 3.43%. Australian bonds produced positive returns in December. The UBS Semi-Government Index finished the month 0.7% higher, while the UBS Credit Index and UBS Treasury Bond Index both returned 0.4%.


The Australian dollar continued to depreciate against most of the major currencies in December. The Australian dollar fell 2.1% relative to the US dollar, finishing the month at US$0.895. Against other currencies, the Australian dollar depreciated 3.3% relative to the Euro, 3.2% against the Pound Sterling, however appreciated against the Yen by 0.5%. On a trade weighted basis, the local currency lost 1.3% over the month.


Commodity prices were mixed in December. The S&P GSCI Commodity Total Return Index returned 4.1% for the month. Gold prices fell 3.6%, finishing the month at US$1,207.85/oz. Iron ore prices ended the month unchanged at US$137.0/MT. The oil price strengthened by 0.1% to $111.39/bbl.


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