Investment commentary - 31 October 2012

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

Global markets lost momentum during October as investors focused on the uncertainties surrounding the US election and the looming 'fiscal cliff'. Positive developments at the start of the month from favourable central bank actions and the stronger-thanexpected US economic output barely lifted investor sentiment after a raft of disappointing corporate earnings from a number of large US corporates.

Economic data over the month continued to point to weak global demand particularly from Europe although Chinese economic data came in ahead of market consensus with growing expectations that the Chinese slowdown has bottomed. Towards the end of the month, Hurricane Sandy which hit the US east coast further dampened the appetite for risk. Domestic markets were one of the best performing markets over the month with all local sectors positive at month end. Locally, the RBA kept interest rates on hold on the back of slightly more positive global economic outlook and domestic conditions.

Significant developments over the month were:

  • The RBA kept the official cash rate steady at 3.25% as the global and domestic medium-term outlook was slightly more positive despite acknowledging major downside risks remain.
  • CPI figures for Q3 2012 were materially higher than market expectations. Headline CPI surged 1.4% over the quarter bringing the annualised figure to 2.0% while underlying CPI (average of the trimmed mean and weighted median) rose 0.75% quarter-onquarter increasing 2.5% over the year.
  • The October seasonally adjusted unemployment rate further supported the RBA's decision to keep interest rates on hold as it remained at 5.4% over the month despite a marginal fall in participation rate.
  • The initial estimate of US Q3 2012 GDP grew by a better-than-expected 2.0% over the year. This was mainly driven by improved housing market conditions as US housing starts surged 15% in September to its highest level in four years.
  • Uncertainty over the US presidential election and negotiations relating to the fiscal cliff curtailed business investments over the month as cash continued to pile up on the sidelines.
  • Preliminary estimates of the economic damage from Hurricane Sandy ranged within $30 - $50 billion, translating to an estimated loss of 0.7% GDP over the fourth quarter.
  • Chinese GDP over the September quarter increased 0.4% to 2.2% despite the annualised GDP growth decelerating for the
    seventh consecutive quarter falling to its slowest pace in 3.5 years bottoming 7.4% y.o.y.
  • Chinese manufacturing output (measured by the HSBC PMI Index) reached its highest levels in eight months increasing from 47.9 in September to 49.5 signaling further signs of a stabilising Chinese economy.
  • Uncertainties in Europe receded in October as policy actions by the ECB alleviated the tail risk of an imminent break-up of the Euro. However, the overall unemployment rate for the EU rose for the 17th consecutive month to a record high of 11.6% on the back of a shrinking manufacturing sector falling for a 15th consecutive month to an overall PMI of 45.4.
  • Commodity prices dipped over October as oil prices declined 6.5% to US$86.2/bbl and gold prices dropped 2.8% finishing the month at US$1,724.19/oz. Importantly for Australia, the price of iron ore continued its recovery from the September lows soaring 29.8% to end the month at US$122.0/MT.

Australian Shares

The local market ended the month higher as investors continued to search for high-yielding stocks. The ASX 300 finished the month up 2.9% driven by Telecommunication Services (+5.7%), Property Trusts (+5.3%), Industrials (+3.6%) and Financials ex Property (+3.2%). Underlying the performance were strong returns from Fortescue Metals Group (+17.1%), Macquarie Group (+12.6%), Rio Tinto (+6.9%), Telstra (+6.3%) and Westfield Group (+5.4%). Small company stocks also delivered positive returns increasing by 1.3% over the month.

Overseas Shares

October was a weak month for global share markets as concerns of the US fiscal cliff lingers on the back of a difficult earnings season in the US and disappointing economic data in Europe. Global shares returned -0.8% in US$ terms, which translated to -0.5% in unhedged Australian dollar (A$) terms in line with a 0.3% A$ depreciation. Growth Stocks (-1.6%) underperformed Value (+0.5%) stocks in A$ terms based on the S&P Developed ex-Australia Large Medium Cap Value and Growth indices over the month. Global small caps also ended the month lower (-0.4% in A$ unhedged terms) as did Emerging Market equities (-0.3% in A$ unhedged terms). Information Technology (-5.3%) and Telecommunication Services (-4.2%) were the worse performing sectors over the month while Financials (+2.6%) and Utilities (+1.0) generated stronger gains.

US stocks posted negative returns as investors were concerned about the outcomes of the US election. The S&P500 Composite Index was down 1.8% over the month in local currency terms. The more concentrated Dow Jones Industrial Average and NASDAQ also plummeted 2.4% and 4.5% respectively. In Europe, returns were slightly more positive as Europe continued to benefit from the reduction in tail risk following ECB's bond purchasing program with the FTSE 100 (UK) 0.9% higher, the DAX 30 (Germany) up 0.6% and the CAC 40 (France) increased 2.2% all in local currency terms. Asian markets were mixed over the month. There was particularly strong performance in Hong Kong as the Hang Seng Index surged 4.0% while the Japanese TOPIX gained 0.7% in local currency terms. The Indian BSE 500 dropped 1.2% and the Chinese Shanghai Composite Index fell 0.8% over October all in local currency terms.


Real Estate Investment Trusts (REITs) gained over the month as investors continued their search for yield. Domestic REITs as measured by the S&P/ASX 300 A-REIT Index boosted 5.3% and Global REITs as measured by the FTSE EPRA/NAREIT Global Developed Index returned 1.4% on a fully hedged basis.

Fixed Interest

Sovereign bond yields rose modestly over the month in most major economies. In the UK, bond yields rose strongly after Home Secretary Theresa May informed her EU counterparts that her government planned to opt out of various EU measures before they come into force in 2014. Bond yields also rose in Australia, despite the cut in the local cash rate and concerns over the longevity of Australia's mining boom. Ten-year yields rose materially in the UK (+31bps to 1.85%) and in Australia (+15bps to 3.06%), while rises were more modest in the US (+5bps to 1.69%), Germany (+2bps to 1.35%), and Japan (+2bps to 0.77%). Two-year yields also rose - in the US (+5ps to 0.29), Germany (+3bps to 0.04%) and in the UK (+7bps to 0.28%).

Australian sovereign bonds were relatively negative over October, with the UBS Treasury Bond Index down 0.3% while UBS Credit Index was flat over the month. Global bond returns posted more solid gains. The Barclays Capital Global Aggregate Bond Index and the Citigroup World Government Bond (ex-Australia) Index rose 0.6% and 0.4% respectively during the month, both on a fully hedged basis.


The Australian dollar fell against all major currencies with the exception of the Japanese Yen over the month. The A$ eased against the US$ by 0.3%, finishing the month at US$1.04. Against other currencies, the A$ dropped 1.0% relative to the Euro and fell 0.1% against the Pound Sterling while the dollar appreciated against the Japanese Yen by 2.4% over the month. On a trade weighted
basis, the local currency depreciated 0.5% over October.

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