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Provided by Mercer: 21/8/08

The month of July saw equity markets continue to fall as banks continued write-downs of credit exposures and concerns remained over the slowing global economy. Bond prices were positive after yields fell marginally. Listed Property Trusts fell further as investors continued to remain nervous about debt levels within the sector in the face of rising interest rates and a slower economy.

Significant developments over the month were:

As expected the RBA left interest rates unchanged at a 12 year high of 7.25%. Dovish commentary from the RBA suggested the Bank was prepared to look past the high inflation report printed on 23 July due to slowing economic growth. Data released at the end of the month further refuelled hopes of the RBA entering an easing cycle.
Domestic economic highlights: headline and underlying Q2 CPI was stronger than the RBA’s published forecasts. Consumer confidence slumped to its lowest level since January 1992. High interest rates saw housing finance approvals for owner occupier’s fall for the fourth month. Retail sales declined. Business confidence fell to its lowest level since September 2001. Employment figures continued to remain strong.
The US Federal Reserve left the official borrowing rate at 2.0%. Whilst inflation remained a concern, Chairman Bernanke commented about the “significant downside risks” for growth thereby indicating that the Fed remained ‘uncomfortably’ on hold.
US economic data was generally weak with employment, retail sales and CPI all coming in worse than expected. However, the manufacturing sector continued to hold up.
The ECB raised interest from 4.0% to 4.25%, the first increase in 13 months. The Bank of England kept rates hold at 5.0%.
Oil prices reached a high of US$145/barrel in early July but pulled back on declining US oil inventories, easing concerns over Iran’s nuclear ambition and deterioration in the global growth outlook. Oil closed the month down 11.3% at US$124.17/barrel.
Gold fell 1.3% to close at US$913.00/oz due to declining oil prices, and a strengthening USD.

The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for June 2008 were -1.6% and -0.1% respectively.

Australian Shares

The Australian equity market recorded a 4.7% loss for July, its seventh negative month of the last nine (April and May the exceptions). Lower commodity prices and deterioration in the outlook for consumer spending saw the S&P/ASX 300 index lose ground to be down 16.0% over 12 months. Mid cap stocks outperformed their large and small cap counterparts. Resource stocks such as Energy (-13.8%) and Materials (-10.6%) were sold off due to a fall in the price of oil and other commodities. Unsurprisingly given the poorer commodities prices, BHP Billiton (-9.0%) and Woodside Petroleum (-20.2%) topped the negative contributors list. Westpac (+8.4%) and Telstra (+6.7%) and a number of infrastructure related stocks topped the positive contributors.

Overseas Shares

In aggregate, overseas shares returned -1.7% in local currency terms and -0.3% on an unhedged basis. Most major equity markets lost ground over the month. The Dow Jones returned +0.2%, the S&P 500 -1.0% and the NASDAQ -1.4% all in local currency terms. In Europe the FTSE 100 (UK) returned –3.8%, the DAX (Germany) -1.0% and the CAC 40 (France) -1.0%, again in local currency terms. Asian markets (Japan aside) were stronger over the month. The Hang Seng (Hong Kong) returned +2.8%, the Shanghai Composite (China) +1.4%, the Indian BSE 200 (India) +6.4% and the Nikkei (Japan) returned -0.8%, again all in local currency terms.

Property

Domestic listed property trusts fell by 4.9%. Domestic unlisted property returned an estimated +0.2% over the month.

Fixed Interest

Australian ten year bond yields finished the month lower, falling 21bps to 6.23% at month end. The UBS Composite Bond Index returned +1.8% for the month. Global bond yields fell slightly, the US ten year bond yield fell 2bps and finished the month at 3.95%. The Citigroup World Government Bond Index and the Lehman Global Aggregate Bond Index returned +1.6% and +1.2% respectively, on a fully hedged basis.

Currency

Over July the local currency lost ground. It fell 2.0% against the US Dollar, 0.1% against the Yen, 1.5% against the Pound Sterling and lost 1.0% against the Euro. The local currency declined 1.6% on a trade weighted basis.

Selected market indicators commentary - 31 July 2008