Investment commentary - 28 February 2013



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

Equities continued their positive start to 2013 with markets around the globe posting positive returns.

The proposed automatic spending cuts associated with sequestration were not enough to deter investor sentiment, while the Fed reaffirmed its commitment to the $85 billion-per-month program of quantitative easing. Elsewhere the new government in Japan has taken further steps toward stimulating the Japanese economy via quantitative easing with its nomination of a new Bank of Japan Governor. Economic data out of China continues to indicate that the recovery is gaining traction, though concerns over inflationary pressures remain. The politics of the Eurozone crisis threatened to plunge the region into turmoil, with the general elections in Italy resulting in a hung parliament indicating a rejection by voters of the austerity measures of the last 18 months. Locally, the RBA kept interest rates on hold in their March meeting, citing that downside risks appear to have lessened over recent months.

Significant developments over the month were:

  • The Reserve Bank of Australia continued to hold the official cash rate steady at 3.0% at their second meeting of the year in March. The RBA noted that an accommodative stance is appropriate given inflation expectations in line with the target, and projected growth at slightly below trend over the coming year.
  • Australia's economy grew 0.6% in the December quarter as government investment and exports increased, bringing annual GDP growth to 3.1% in the 2012 calendar year. This is the strongest annual growth since 2007, when the economy grew by 3.8%.
  • US Q4 2012 GDP has been revised from showing contraction to growth, with the second estimate showing that the economy grew at 0.1%. The revision was due to more exports and business investment than originally thought. In the advance estimate, real GDP declined 0.1%.
  • The US manufacturing sector expanded slightly faster in February but cost pressures intensified, with the ISM Manufacturing Index up to 54.2 from 53.1 in January.
  • The $85 billion in mandatory across-the-board federal spending cuts known as the sequester took effect on 1 March 2013, after Democrats and Republicans remained at an impasse over whether to include new tax revenue in broader deficit reduction deal.
  • A deadline to either fund the US Government or risk it shutting down comes 27 March 2013, though it is expected that the House of Representatives will act to extend the continuing resolution through the end of the fiscal year, 30 September 2013.
  • Chinese annual inflation slowed, rising 2.0% in January 2013, down from 2.5% in December. Despite the inflation slowdown, cost of living remains a major concern for the Chinese, with the PBOC suggesting inflation could touch 3.0% in 2013, compared with 2.6% in 2012. Neither the central bank nor the Chinese government has announced inflation targets for this year.
  • The recovery in China continued to gain traction. The HSBC Chinese Manufacturing PMI Index posted 50.4 in February, down from 52.3 in January, signalling a marginal strengthening of operating conditions in the Chinese manufacturing sector. The fall may be due in part to the timing of the Chinese New Year. The PMI has now posted above the 50.0 no-change mark for four successive months.
  • Eurozone unemployment rose to a record 11.9% in January from 11.8% the previous month, as the ailing European economy continued to weigh on the job market. The contraction in manufacturing activity remained unchanged in February at 47.9, with an upswing in new exports – especially for German goods – failing to offset weak domestic markets.
  • The inconclusive Italian election result refocussed attention on the politics of the Eurozone crisis, with the centre left winning the lower house but not the Senate. This leaves open the destabilising possibility of fresh elections in coming weeks, or a period of delicate negotiations between parties to bolster coalition numbers to governable levels.
  • In Japan, further monetary easing looks to be certain with the Government nominating Haruhiko Kuroda, a long time advocate of more aggressive balance sheet expansion, as the next Bank of Japan Governor.
  • Most commodity prices declined over the month. Oil prices fell 5.8% to $92.0/bbl, while the gold price was down 4.9% finishing the month at US$1,582.9/oz. Iron ore prices receded 0.7% over the month to US$152.0/MT, after hitting levels not seen since October 2011.

Australian Shares

Australian Shares ended February on a positive note as the S&P/ASX 300 Accumulation Index returned 5.3%. All but the Materials sector (-0.3%) finished higher with Consumer Staples (+10.8%), Financials ex Prop (+8.1%), Consumer Discretionary (+6.3%) and Industrials (+6.2%) being the stronger outperformers. Underlying the market's performance were strong returns from IAG (+15.5%),

QBE Insurance Group (+12.6%), Santos (+12.1%), Woolworths (+11.8%), NAB (10.9%) and Westpac Banking (+10.2%). The S&P/ASX Small Ordinaries Index edged up over the month, returning 0.9% in February.

Overseas Shares

International Share markets continued to move higher in February as positive news on the world economy sustained investor optimism. The broad MSCI World ex Australia Index rose 1.9% in unhedged terms and 1.5% in fully hedged terms. More specifically, based on the relative performance of the S&P Developed ex-Australia Large mid cap indices, global Growth (+2.3%) outperformed their Value (+1.9%) counterparts in A$ terms. As with the Australian market, all global sectors with the exception of Materials (-1.1%) finished the month higher with Consumer Staples (+4.3%), Industrials (+3.6%), Healthcare (+2.9%), Consumer Discretionary (+2.4%), and Information Technology (+2.2%) outperforming the broader market.

US stocks posted positive returns, with the S&P 500 continuing its strong run in 2013 returning 1.4% over February. The more concentrated Dow Jones Industrial Average and NASDAQ also rose 1.8% and 0.6% respectively, all in local currency terms.

Performance in European markets was mixed in February with the FTSE 100 (UK) 1.8% higher, the CAC 40 (France) down 0.3% and the DAX 30 (Germany) down 0.4% all in local currency terms. In Asian markets, the Japanese TOPIX continued its rise (+3.8%) while other major markets pared gains made in the previous month, with the Chinese Shanghai Composite Index (-0.8%), the Hong Kong Hang Seng Index (-3.0%), and the Indian BSE 500 (-6.5%) all falling in local currency terms.

In A$ terms, Emerging markets (+0.6%) posted marginal gains but underperformed most developed markets, as measured by the MSCI EM (Net) Index.


Real Estate Investment Trusts (REITs) had a positive month; Domestic REITs (as measured by the S&P/ASX 300 A-REIT Index) rose 3.5% and Global REITs (as measured by the FTSE EPRA/NAREIT Global Developed Index) gained 1.9% on a fully hedged basis.

Fixed Interest

Sovereign bond markets rose over February, with ten-year yields declining across the globe; the US (-10bps to 1.89%), UK (-13bps to 1.97%), Germany (-24bps to 1.38%), Japan (-9bps to 0.66%) and Australia (-10bps to 3.3%). Similarly, two-year yields fell across the major markets: in the US (-1bps to 0.24%), Germany (-22bps to 0.03%), UK (-16bps to 0.26%), Japan (-2bps to 0.04%) and Australia (-15bps to 2.63%).

Australian bonds rose over the month, with the UBS Treasury Bond Index and UBS Semi-Government Index returning 0.6% and 0.7% respectively while the UBS Credit Index rose 0.6% over the month. Global Bond returns also posted positive movements over the month. The Barclays Capital Global Aggregate Bond Index and the Citigroup World Government Bond (ex-Australia) Index both rose 0.8% on a fully hedged basis.


The Australian dollar's performance was mixed against the major currencies over February. The A$ fell 1.9% against the US$, finishing at US$1.02, and also fell 0.8% against the Yen. Meanwhile the A$ appreciated 2.5% relative to the Pound Sterling and 1.9% against the Euro. On a trade weighted basis, the local currency depreciated 0.4% over February.



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