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Provided by Mercer: 19/3/09

Global equities lost ground again in February as economic data around the world continued to deteriorate and the global financial sector remained under pressure. Domestic equities outperformed global markets but continued their downward trend, falling for the sixth month on end.

Domestic bonds delivered a negative monthly return for the first time in 12 months due to supply concerns and the market being disappointed with the size of the RBA’s rate cut. Domestic bond yields rose and the spread to US yields widened. US 10-year bond yields also finished the month higher. Domestic listed Property Trusts again saw a massive sell-off due to downgrades in profit and refinancing concerns.

Significant developments over the month were:

The Reserve Bank of Australia cut interest rates by 100 bps to 3.25% on the 3rd of February. The cumulative reduction since September is now 400bps, the fastest fall since the recession of the early 1990s
The Australian government announced a stimulus package of $42bn or around 4% of annual GDP. Spending will be over several years. The main features were infrastructure initiatives and cash-payments to lower-income households
Domestic economic data released was mixed. Housing finance increased by a robust 6.4% in December, whilst December retail sales were also better than expected with a rise of 3.8%. Negative data included: the unemployment rate climbing to 4.8% in January (the highest since June 2006), building approvals dropping 2.9% in December, business confidence also dropped in January, whilst consumer confidence fell in February
US economic data remained poor. The unemployment rate rose to 7.6% in January – employment fell for the 13th straight month, recording the largest one month loss since 1974. Trade deficit, industrial production and home sales data all weakened. Annual CPI remained unchanged and on year PPI fell 1.0% in January. GDP fell -6.2% qoq in Q408, its worst quarterly performance since Q1 1982
Major governments and central banks: European Central Bank (ECB) and Bank of England (BoE) cut interest rates to 1.5% and 0.5% respectively, whilst the BoE announced plans to buy £150bn of government and corporate bonds. US congress passed the US$787bn stimulus package
Financial institutions around the world remained under pressure: a number of major institutions reported significant losses; Citigroup and AIG required capital injections
Oil ended the month up 5.8% at US$44.15(WTI) per barrel
Gold finished the month 1.8% higher at US$942.80/oz, supporting by safe heaven flows from deteriorating equity markets.

The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for February 2009 were -5.1% and -2.2% respectively.

Australian Shares

February witnessed the Australian share market weaken further, making it six losing months in a row. With the on-going weakness of the global economy, the local share market remained under pressure, but managed to outperform its international counterparts. The local index’s performance was attributable to: some solid reporting performance from local companies, the announcement of a A$42bn fiscal stimulus package and aggressive rate cuts by the RBA.

The S&P/ASX300 returned -4.6% in February, following a similar -4.8% drop in January. Mid cap and small cap stocks underperformed large cap counterparts and the broad index. Energy (+2.8%) was the only sector posting a positive return in February, whilst Consumer Staples (-0.1%) benefited from the government spending package. Conversely, Industrials (-20.6%) and Property Trusts (-16.4%) provided the biggest drag to the index, bringing their 12 month return to -56.3% and -58.2% respectively. CBA (+15.0%) and Wesfarmers (14.2%) led the positive contributors list, whilst miners attracting Chinese investor interest, including Rio Tinto (+12.4%) and Fortescue (+49.7%), also made significant contributions to the local index. Poor performance of base metals saw BHP’s (-5.2%) earning results below consensus, as such they provided the biggest drag to the index. QBE (-20.2%) was sold off after substantial losses due to disaster-related write-downs.

Overseas Shares

Global share market saw massive sell-offs in February. The MSCI World ex Aus index returned -9.1% in local currency terms. However, the appreciation of the AUD (measured by a 3.0% increase in trade weighted terms) saw the return for unhedged Australian investors worsen to -10.8%. The S&P 500 index dropped 11.0%, resulting in a 12 month return of -44.8%, the Dow Jones returned -11.7% and the NASDAQ -6.7% again in local currency terms.

In Europe, the FTSE 100 (UK) returned -7.7%, the DAX (Germany) -11.4% and the CAC 40 (France) -9.1% in local currency terms. Asian markets also declined, the only exception being the Chinese Shanghai stock market, which rose by 4.6%. The Nikkei (Japan) returned -5.3% and the Hang Seng (Hong Kong) returned -3.5%, all in local currency terms.

Property

Domestic listed property trusts (A-REITs) fell 16.4% in February and are down 58.2% over 12 months. Domestic unlisted property was flat over the month.

Fixed Interest

Australian bond yield rose despite the Reserve Bank of Australia cutting interest rate by 100 bps to 3.25%. The UBS Composite index returned -1.2% over the month and delivered a total return of 14.4% over the last 12 months. Global bond yield also finished the month higher. The Citigroup World Government Bond Index and the Barclays Capital Global Aggregate Index returned 0.5% and 0.2% respectively, on a fully hedged basis.

Currency

The Australian Dollar appreciated 0.5% against the US Dollar, 9.5% against the Yen, 1.6% against the Pound Sterling, 1.4% against the Euro, and 3.0% on a trade weighted basis.

Investment commentary - 28 February 2009