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Wednesday, 23 November 2011

Market Update August 2010
Monday, 21 November 2011

Market Update August 2010

In Brief

• Australian shares fell 1.1% in August.
• Global shares ended the month 2.1% lower. In August, the US was the worst performing major market as fears grew of a double dip recession and possibly a deflationary period.
• Global bond prices rallied during August in reaction to worsening reports on the global economic recovery resulting in yields in late August falling as low as 2.5% for US 10 Year bonds.
• This rally in bonds sucked cash out of the stock market as US stock prices were sold down to levels more undervalued relative to earnings than the bottom of the recession in 2008.
• A string of data releases in early September seemed to demonstrate that fears of a recession were false. The realisation that the US is not in deep recession should allow a recovery in bond yields. As bond yields rise and bond values fall, money should flow from the bond market into the equity market.
• US Federal Reserve Chairman Ben Bernanke's acknowledged that the Fed had the tools to undertake further stimulus if needed and he remains fairly optimistic on a slow economic recovery in 2011.
• Data out of Europe largely surprised on the upside, particularly in the key economies.
• Japan has now been overtaken by China as the world's second largest economy as Japan recorded lower than expected growth.
• In Australia the key piece of news was the Federal election on August 21 resulting in a hung parliament. From an economic point of view the outcome is somewhat irrelevant. The key drivers of Australian economic growth over coming years will be the resources boom, strong mining and gas investment and the resulting strength of the domestic Australian economy.
• In early September GDP data was released indicating that the Australian economy is gaining momentum quickly with the annual growth rate the fastest since March 2008, indicating the transition from government stimulus to private demand is underway. This is leading to a surge in income flowing into the Australian economy, a key driver the RBA will be watching in setting interest rates.

Asset Class Returns

The following outlines the returns across the various asset classes to the 31st August 2010.

Returns shown for periods less than 1 year are periodic returns, while returns of 1 year and more are annualised.

Asset Class Commentary

Australian Shares
The Australian share market weakened slightly in August, with the S&P/ASX 200 Accumulation Index declining 1.2%. Most listed Australian companies released their earnings for the 2009/10 fiscal year to the market and these announcements dominated investor attention during the month. Profit announcements while rising did not appear to meet the lofty expectations of the market.

While the Federal Election impasse attracted a great deal of scrutiny and media interest, it did not appear to have a discernible impact on the local share market.

The best and worst performing Australian large-cap stocks during the month of August are shown below.

* Based on the universe of S&P/ASX 100 Index.
Domestic economic data released throughout August was mostly positive. Solid employment figures, a rebound in retail sales and building approvals as well as a narrowing current account deficit reflected a strengthening Australian economy. The Australian economy grew at the fastest pace in three years in the second quarter on the back of strong household spending and an Asian-driven export boom.

Global Shares

Global equity markets started the month on an upbeat note following positive economic data and firmer earnings from major European banks. Thereafter, investors became progressively more fearful of a double dip recession in the US after a fresh flow of data that showed a sharp drop in new and existing home sales, declining durable goods orders and a downward revision of US second quarter economic growth.

The MSCI World Index ex Australia (unhedged) ended the month 2.1% lower. A weaker Australian dollar added to returns for local investors, depreciating 1.7% against the USD over August to US 89.01 cents

In August, the US was the worst performing major market, while Asia-ex-Japan recorded the highest gains. Shares in Japan fell 7.5% for the month on worries that the strong Yen would hurt the country's exports. The Yen has rallied sharply in recent months against the USD, up 8.4% since May and reached its highest level in 15 years during the month. The stronger Yen hurts earnings of large Japanese exporting companies and has weakened equity prices.

European markets also lost value but not to the same degree as the US. France (-4.2%), Spain (-3.0%), Germany (-3.6%) and the UK FTSE 100 (-0.6%) all fell despite the better than expected GDP data out of the region.

Elsewhere, China rose 8.1%, contrary to the global trend and is now 38% higher over 12 months. There seems to be a growing level of comfort with the sustainable slowdown in the Chinese economy. Thailand (+6.7%) and Malaysia (+4.5%) also gained while Hong Kong (-2.4%), Singapore (-1.3%) and South Korea (-0.4%) posted falls.

Global Emerging Markets

Emerging markets outperformed the developed global equity market in August, although still posted losses. Emerging economies continue to post reasonable growth rates and given they now almost make up 50% of the global economy this growth is helping drive the global economic recovery.

The MSCI Emerging Markets index (unhedged, AUD) was down 0.3% in August.

China was a key outperformer up 8.1%, Sri Lanka (+9.6%) and the Philippines (+3.4%) were also key performers. Latin America was weak with Brazil (-3.5%), Argentina (-4.0%) and Mexico (-2.0%) suffering falls. In Europe, Russia (-5.8%) and Poland (-0.6%) fell while Turkey (+0.3%) and Hungary (+1.3%) rose despite concerns remaining over the state of Hungary's fiscal position.

Indonesia was by far the worst performing market for the month, after the government removed the foreign exchange restrictions and its currency weakened. Thailand also suffered on concerns that the package sponsored by the International Monetary Fund would not fully address the problems in the country's financial sector.

Economic data showed that South Korea's economy expanded by 7.2% in the second quarter. Economies in India and Indonesia have grown more than 6% over the same period, while China overtook Japan to become the world's second largest economy. Japan's gross domestic product for the second quarter of this year, totalled $1.28 trillion, compared to $1.33 trillion for China.

Australian Fixed Interest

At its August meeting, the Reserve Bank of Australia (RBA) left the official interest rate unchanged at 4.50% for a third straight month. This widely anticipated decision was influenced by favourable inflation data and further signs of weakening global economic growth, particularly in the US. In the accompanying statement, the RBA Governor said that “the inflation forecast of 2.75% had proved to be accurate and inflation was not a big worry”.

Deepening concerns about the fragile state of the global economic recovery lifted demand for government bonds in specific developed countries. A sharp drop in US home sales, a further slowdown in Japan's export growth as well as volatile global equity markets were some of the key factors that pushed the yields on Australian government bonds lower in August. The yield on the three-year government bond fell 0.33% to 4.23% over the month, while the yield on the longer dated tenyear bond ended the month at 4.77%, 0.44% lower.
The UBS All Maturities Composite Bond Index returned 1.9% in the month and 9.10% over 12 months.

Global Fixed Interest

Global bond prices rallied during August in reaction to worsening reports on the global economic recovery. The Barclays Capital Global Aggregate index (hedged, AUD) rose 2.1% in August. In the United States weak economic data and expectations resulted in the yield on 10-year government bonds to fall 0.47% in August to 2.53%, its biggest monthly fall since the end of 2008, while the yield on the two-year government bond fell 0.07% to 0.48%. While corporate bonds had a good start to the month on the back of a satisfactory corporate reporting season, weak US data later in August intensified concerns that the US economy may experience a double-dip recession. This led to some weakness as the month concluded.

Listed Property

Unlike the broader Australian share market, which declined modestly, listed property securities generally performed well in August with the S&P/ASX 300 Property Accumulation Index adding 3.5%. Given the ongoing economic uncertainty globally, investors appeared to favour defensive exposures and the relative earnings stability of listed property trusts appealed against this background.

The positive reporting season added to the improved outlook for the sector. During the month, Moody's Investors Service maintained its stable rating for the sector on the back of stronger balance sheets and lower debt levels.

The top performing trusts for the month were Charter Hall Retail (+12.3%) and GPT Group (+6.0) helped by good earnings results. The worst performing trusts for August were Ardent Leisure Group (-9.3%) and Bunnings Warehouse Property Trust (-3.1%), with both announcing earnings below market expectations.

Important Notes

Data Source
The market indices used for the various asset class returns were as follows;

• Cash: UBS Warburg 90 Day Bank Bill index
• International Bonds: Citigroup World Government Bond Index
• Australian Bonds: UBS Warburg Aust Composite Index All maturities
• Property: S&PASX300 Property Trusts Accumulation Index
• Australian Shares: S&PASX200 Accumulation Index
• Global Shares: MSCI World ex-Australia Index (unhedged)

Disclaimer
Information in this document is based on sources believed to be reliable, and all opinions expressed are honestly held as at the applicable date. Lifestyle & Retirement Planning does not necessarily endorse the views expressed in this document nor express any view about the accuracy or completeness of the information.
The contents are not to be relied upon as a substitute for financial or other professional advice. While the sources for the material are considered to be reliable, no warranty of accuracy, reliability or completeness is given and, except for liability under statute which cannot be excluded, no liability for errors or omissions is accepted. Past performance is not indicative of future performance.