Provided by Mercer: 15/10/08
September saw domestic and global equity markets decline sharply. Renewed concerns over financial sector prospects and worsening credit market conditions culminated in the failure of some major global financial institutions.
Markets experienced considerable volatility and US economic data weakened further. Domestic bonds were positive as yields fell after the RBA interest rate cut. Global bond returns were close to zero. Listed Property Trusts also followed the downward trend of equity markets.
Significant developments over the month were:
- As expected the RBA commenced its interest rate easing cycle by cutting the official cash rate by 25 bps to 7%. The first interest rate cut since December 2001.
- Domestic economic data released was mixed. Positive data: consumer confidence jumped 7.0% in September following a 9.1% increase in August and employment figures remained strong. Negative data: 2Q GDP growth was 0.3%, lower than the expected 0.4% - the third successive deceleration in growth.
- There were significant changes in the global financial landscape. The US Federal Government announced the nationalisation of mortgage giants Fannie Mae and Freddie Mac, as well as acquiring an 80% stake in AIG. Lehman Brothers filed for Chapter 11 bankruptcy and Merrill Lynch was acquired by Bank of America.
- US treasury announced the $US 700 billion Trouble Asset Relief program (TARP) aiming at taking toxic assets off the balance sheets of financial institutions.
- A number of countries, including the US, UK and Australia, introduced prohibition against short-selling.
- The US Federal Reserve left interest rates unchanged at 2.0% noting “downside risks to growth and the upside risks to inflation are both of significant concern.”
- US economic data was mainly negative. Employment, trade deficit, retail sales, industrial production and total housing start figures all worsened over the month. Whilst consumer sentiment saw the largest rise in four years, attributable to a falling petrol price.
- The price of Oil fell 12.9% to US$100.70/barrel.
- Gold increased 4.8% to close at US$869.60/oz.
The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for September 2008 were -5.4% and -2.2% respectively.
Australian Shares
The S&P/ASX300 fell 9.9% over September and is down 27.1% over twelve months. Small cap stocks underperformed their large and mid cap counterparts. Resource sectors were the hardest hit in the current environment, as chaos in credit markets dimmed the outlook for global growth and commodities prices. Energy (-13.0%) and Materials (-22.5%) provided the biggest drag on the index, whilst Financials (-1.6%) outperformed all other sectors. Unsurprisingly resource stocks led the negative contributors as falling commodities prices saw BHP Billiton (-25.0%) and Rio Tinto (-33.6%) sold off.
Overseas Shares
The MSCI World ex Aus index returned -10.8% in local currency terms, the worst monthly performance since September 2002. With the AUD depreciating 8.4% against USD over the month, the return was enhanced for unhedged investors to -3.6%. All major equity markets lost ground over the month. The Dow Jones returned -6.0%, the S&P 500 -9.2% and the NASDAQ -12.0% all in US$ terms. In Europe the FTSE 100 (UK) returned -13.0%, the DAX (Germany) -9.2% and the CAC 40 (France) -10.0% in local currency terms. Asian markets declined sharply. The Hang Seng (Hong Kong) returned -15.3%, the Shanghai Composite (China) -4.3%, the Indian BSE 200 (India) -12.7% and the Nikkei (Japan) returned -13.9%, again all in local currency terms.
Property
Domestic listed property trusts (A-REITs) dropped by 5.9% over September. Domestic unlisted property returned an estimated -0.3% over the month.
Fixed Interest
After the RBA rate cut Australian ten year bond yields finished the month sharply lower, falling 35bps to 5.39% at month end. The UBS Composite Bond Index returned +1.3% for the month. Global bond yields were stagnant; the US ten year bond yield remained at 3.82%. The Citigroup World Government Bond Index and the Lehman Global Aggregate Bond Index returned +0.6% and -0.7% respectively, on a fully hedged basis.
Currency
Over September the local currency lost significant ground. It fell 8.4% against the US Dollar, 10.4% against the Yen, 6.3% against the Pound Sterling and lost 4.0% against the Euro. The local currency declined 6.4% on a trade weighted basis.
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
