Investment commentary - 31 May 2014


May 2014 was an encouraging month for financial markets with all asset classes delivering positive absolute returns supported by relief at the conclusion of the European and Ukraine elections, generally good economic data and signs of further easing in Europe on its way – in fact, at its 5 June 2014 meeting, European Central Bank (ECB) President, Mario Draghi, cut interest rates to records lows, imposing negative rates on overnight depositors, which is expected to encourage banks to generate greater levels of lending. The ECB's measures and its commitment to do more if necessary provides confidence that the Eurozone recovery will pick up pace and that deflation will be avoided.

In the US, the dampener was the March quarter growth which was revised down to a negative (-1.0%) annual rate.

However, this reflects some temporary factors including the impact of adverse weather early this year and is more than offset by positive news and data including a rise in the manufacturing index. The US economy broadly remains on track and expectations of a growth rebound in the current quarter seem supported.

In Australia, signs of non-mining and housing investment starting to offset the slump in the mining sector also supported the local market. Commodity prices were mostly lower including iron ore prices which fell below US$100 per metric tonne – the last time a sub-US$100 per metric tonne price was witnessed was during the depths of the global financial crisis in 2009, except for a short lived two-week period during September 2012. The Australian dollar continued to rise to US$0.93 at the end of May.



  • The Reserve Bank of Australia (RBA) board kept the cash rate unchanged at 2.50% at its June meeting, continuing its accommodative monetary policy which it states “should provide support to demand, and help growth to strengthen over time”. The RBA also expects inflation to be consistent with the 2% to 3% target over the next two years.
  • According to the Australian Bureau of Statistics (ABS), Australian retail sales rose to 0.2% (seasonally adjusted) in April 2014, much weaker than the strong gains of late last year that. In trend terms, Australian turnover rose 6.0% in April 2014 compared with a year earlier.
  • United States (US) real gross domestic product (GDP) growth for the March quarter was revised down to an annual rate of -1.0% in the first quarter, according to the revised estimate released by the Bureau of Economic Analysis (this is revised down 1.1% from the advance estimate released in April). This decline in real GDP is attributed to the significant decline in inventory investment by motor vehicle dealerships. In fact, GDP less inventory investment rose 0.6% in the first quarter. In contrast, consumer spending increased, notably in health care and in home utilities.
  • The US Purchasing Managers' Index (PMI) registered 55.4 in May, up from 54.9 in the previous month, indicating expansion in the manufacturing sector for the twelfth consecutive month. Of the 18 manufacturing industries, 17 reported growth in May.
  • The US unemployment rate held at 6.3% in May, following a decline of 0.4% in April. Over the year, the unemployment rate has declined by 1.2%.Total nonfarm payroll employment increased by 217,000 in May with most of the gains arising in professional and business services, health care and social assistance, and food services and drinking places. Over the past 12 months, employment growth had averaged 197,000 per month. Revisions to prior months were also released: after these revision, the change in total nonfarm employment for March remained +203,000, and the change for April was revised from +288,000 to +282,000. With these revisions, employment gains in March and April were 6,000 lower than previously reported.
  • The data out of China signals that operating conditions in China's manufacturing sector deteriorated only marginally in May. HSBC China Manufacturing PMI rebounded to 49.4 in May, up from 48.1 in April. Total new orders stabilised after a three-month sequence of decline while new export orders recorded an expansion. The PMI confirms that the economy is stabilising but it is too early to say that it has bottomed out.
  • The Euro area unemployment rate was 11.7% in April, down slightly from 11.8% in March 2014 and from 12.0% in April 2013.
  • The recovery in the Eurozone Manufacturing sector registered a modest slowdown in May with the PMI at 52.2, down from 53.4 in April. This is the lowest reading in six months but remained at a level consistent with solid improvement in operating conditions. Almost all nations covered saw their PMI remain above the 50.0 no-change mark, only Netherlands and Spain reported faster rates of growth, while France fell back into contraction after expanding in the prior two months.
  • Japanese manufacturers saw a decline in output for the second month in May since the rise in sales tax. New orders as well as new export orders continued to fall , albeit the rates of decline for both have eased compared to those seen in April.


Australian equities

Australian Equities rose by 0.6% in May. Modest positive returns were recorded across most of the market capitalisation spectrum – with Large Caps returning 0.7%, Mid Caps rising 0.8% while Small Caps rising by a modest 0.1%. The best performing sectors were Energy (+2.9%), Utilities (+2.7%) and Healthcare (+2.7%). The weakest performing sectors were Materials (-2.9%) and Consumer Discretionary (-0.9%). The largest contributors to the return of the index were CBA (+3.4%), Telstra (+2.8%) and CSL (+3.3%). On the other hand, the most significant detractors from the performance of the index were National Australia Bank (-4.7%), ANZ (-2.4%) and BHP Billiton (-1.7%).

Global equities

The broad MSCI World ex Australia Index returned 2.5% in hedged terms and 1.5% in unhedged terms. Based on the relative performance of the S&P Developed ex-Australia Large & Mid Cap indices, Global Growth (2.3%) outperformed its Value (1.2%) counterparts in Australian dollar terms. The strongest performing sectors were Information Technology (+3.0%), Consumer Discretionary (+2.2%) and Telecommunication Services (+2.0%), while Materials (0.0%) Energy (0.4%) and Utilities (0.8%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 0.7%, while Emerging Markets rose by 3.0%. In the US, the NASDAQ gained 5.0%, the S&P 500 Composite Index returned 4.6% and the Dow Jones Industrial Average finished 4.3% higher, all in local currency terms. European markets posted robust returns, with the CAC 40 (France) gaining 5.8%, the FTSE 100 (UK) rising 5.0% and the DAX 30 (Germany) returning 4.1%. In Asia, the Hang Seng gained 3.7%, the Indian BSE 500 rose 2.8% and the Chinese Shanghai Composite Index returned 1.1%. The Japanese TOPIX lost further ground over the month returning -0.7%.

In May, the NASDAQ gained 3.1%, the S&P 500 Composite Index returned 2.4% and the Dow Jones Industrial Average returned 1.2%, all in local currency terms.

European markets showed positive returns, with the FTSE 100 (UK) up 1.4%, DAX 30 (Germany) 3.5% higher, and the CAC 40 (France) returning 2.3%. In Asia, the Indian BSE 500 (+10.4%) led the region significantly higher while the Chinese Shanghai Composite Index rose +0.6%, and the Japanese Topix gained 3.4%.

Property and Infrastructure

Domestic Real Estate Investment Trusts (REITs) had a muted month in May, while Global REITs returned 3.5% on a fully hedged basis. The unlisted property sector rose 0.5% in March, with Industrial (+0.6%) funds posting strong returns. Meanwhile, global listed infrastructure returned 2.3% for the month.

Fixed interest

Global sovereign bond yields generally decreased over the month. Ten-year bond yields fell: in Germany (-16 bps to 1.31%), Japan (-4bps to 0.58%), US (-19bps to 2.46%) and in the UK (-10bps to 2.57%). Two-year bond yields were lower in the US (-5bps to 0.33%) and in Germany (-8bps to 0.07%). Global Bond indices rose higher, with the Barclays Capital Global Aggregate Bond Index gaining 1.2% and the Citigroup World Government Bond (ex-Australia) Index returning 1.0%, both on a fully hedged basis.
Australian bond yields also declined, led by 10-year bond yields which lost 29 bps to 3.66% followed by five-year bond yields (-22 bps to 3.11%). Australian bonds posted higher returns in May. The UBS Credit Index returned 1.0%, the UBS Semi-Government Index gained 1.5% while the UBS Treasury Bond Index finished the month also 1.5% higher.


The Australian dollar appreciated against the major currencies in May finishing the month at US$0.931. Against other currencies, the Australian dollar appreciated 0.8% against the Pound Sterling, 1.8% against the Euro and fell 0.4% relative to the Japanese Yen. On a trade weighted basis, the local currency gained 0.1% over the month.


Commodity prices were generally weaker in May. The S&P GSCI Commodity Total Return Index fell 0.6% for the month. Gold prices fell 3.8%, finishing the month at US$1,244.66 per ounce. The oil price rose modestly by 2.6% to $110.53 per barrel and iron ore prices dropped by 13.1% to US$93.0 per metric tonnes.

This information has been prepared by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. Any advice contained in this document is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek professional advice from a licensed, or appropriately authorised, financial adviser if you are unsure of what action to take. "MERCER" is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2014 Mercer LLC. All rights reserved.


SA Metropolitan Fire Service Superannuation Pty Ltd ACN 068 821 750 as Trustee for the SA Metropolitan Fire Service Superannuation Scheme ABN 99 439 309 855.

This website is provided by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. The Trustee pays a fee for the provision of this service, however this fee is not conditional on you using this service or acting on the information or advice provided through this service.