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Provided by Mercer: 17/2/09

Domestic and global equities lost ground over January as investors continued to be concerned over the prospect of a deepening global recession.

Domestic and US economic data released indicated further weakening in the economy and, there was further turmoil in the global financial sector. Domestic bonds continued to rally after the yield curve steepened sharply and shorter-term yields tracked cash expectations lower – despite the RBA not meeting in January. US 10-year bond yields surged as concerns rose over US bond supply. Domestic listed Property Trusts again saw a massive sell-off due to downgrades in profit and refinancing concerns.

Significant developments over the month were:

Domestic economic data was mixed. Housing finance increased 1.3% in November, higher than the expected 1.0%. Negative data included: building approvals dropping sharply, falling 12.8% in November, private sector credit declining 0.3% and the unemployment rate rising to 4.5% for the month of December.
US economic data was poor. The unemployment rate surged to a 16 year high of 7.2% over December. Trade deficit, retail sales and industrial production data was also weak. CPI plunged 0.7% and PPI fell 1.9% in December.
Major governments: US, UK and Germany announced more fiscal stimulus packages to counter recession, whilst the US was underpinning a plan to purchase impaired assets from banks and establish a “bad bank”.
The International Monetary Fund (IMF) downgraded its 2009 global economic growth forecast to 0.5%, the lowest level since the Second World War.
China released GDP figures showing the 12 month GDP growth figure plunged to 6.8% to December, down from 9.0% for the 12 months to September and the lowest since 2001.
Oil ended the month stable at US$39.78(WTI) per barrel.
Gold finished the month at US$922/oz.

The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for January 2009 were -2.5% and -0.6% respectively.

Australian Shares

January saw the Australian share market finished the month weaker. The S&P/ASX300 returned -4.8%, this was the fifth successive monthly decline in the local index. Global developments dominated sentiment with concerns over a deepening global recession intensified by very poor US economic data and continued fallout in the global banking sector. Local data released during the month further eroded investor confidence. Bleak retail sales and increasing unemployment indicated further weakening in the Australian economy. Mid cap stocks underperformed their large and small cap counterparts falling by 7.5%.

Defensive sectors: Healthcare (+6.3%) and Telecom Services (+0.1%) were the only sectors able to achieve a positive return over January. Conversely, Industrials (-11.0%) were the hardest hit, whilst Property Trusts (-9.6%) continued to fall, bringing their return over 12 months to -52.9%. Financials ex Prop (-8.6%) provided the biggest drag on the index.

Overseas Shares

January saw global share markets losing ground. The MSCI World ex Aus index returned -7.2% in local terms, but the depreciation of the Australian Dollar (-4.3% in trade weighted terms) enhanced returns for unhedged Australian investors to 0.2%. The S&P 500 index dropped 8.4%, resulting in a 12 month return of -38.6%, the Dow Jones returned -8.8% and the NASDAQ -6.4% again in local currency terms.

In Europe, the FTSE 100 (UK) returned -6.4%, the DAX (Germany) -9.8% and the CAC 40 (France) -7.6% in local currency terms. Asian markets also declined, the only exception being the Chinese Shanghai stock market, which rose by 12.5%. The Nikkei (Japan) returned -9.8% and the Hang Seng (Hong Kong) returned -7.7%, all in local currency terms.

Property

Domestic listed property trusts (A-REITs) fell 9.6% in January and are down 52.8% over 12 months. Domestic unlisted property returned an estimated 0.2% over the month.

Fixed Interest

Australian bonds rallied in January, with the UBS Composite index returning +1.4% over the month and delivering a total return of 15.2% over the last 12 months. Global bonds lost ground. The Citigroup World Government Bond Index and the Barclays Capital Global Aggregate Index returned -1.4% and -0.6% respectively, on a fully hedged basis.

Currency

The Australian Dollar depreciated 8.8% against the US Dollar, 9.6% against the Yen, 9.0% against the Pound Sterling, 1.1% against the Euro, and 4.3% on a trade weighted basis.

Investment commentary - 31 January 2009