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Provided by Mercer: 16/4/09

Global equity markets recovered in March after major policy announcements in the US and UK and suggestions that some economic indicators were bottoming. The Australian sharemarket also rose strongly, registering its first positive monthly return since August 2008.

Domestic bond returns were marginally positive after the yield curve flattened reflecting waning hopes for a lower domestic cash rate against a decline in US 10 year bond yields. Global bond prices rose. Domestic Listed Property Trusts stabilised as policies to protect credit markets were put in place.

Significant developments over the month were:

The Reserve Bank of Australia left interest rates unchanged at 3.25% despite expectations of a 50 basis point cut.
Domestic economic data released was largely negative with the exception of retail sales which rose 0.2% in January and housing finance approvals which rose 3.5% in January. The unemployment rate reached a 4-year high of 5.2%, and Q4 2008 saw the first negative growth in GDP in 8 years as the economy decreased by 0.5%. Consumer confidence stabilised in March after a slump in February.
US economic data was on the whole poor although there were some signs of recovery as consumer sentiment rose and housing starts bounced 22.2% off record lows in February. The unemployment rate rose to 8.1% in February – the highest rate since December 1983 and the 14th straight month that employment has fallen. Industrial production also weakened. GDP fell -6.2% qoq in Q4 2008, its worst quarterly performance since Q1 1982.
Several central banks continued their monetary easing with the European Central Bank, Bank of England (BoE), Canada's central bank and New Zealand's central bank all cutting their cash rates. The US Federal Reserve, BoE and Bank of Japan announced plans to increase purchase of fixed income securities.
Financial institutions raised hopes that the worst of the financial crisis was over after firms such as Citigroup, Bank of America and JP Morgan announced profits for the first 2 months of 2009. Citigroup announced their best quarter since 2007.
Oil had a strong month finishing up 12.5% at US$49.67(WTI) per barrel, it’s highest level since December 2008.
Gold finished the month 2.6% lower at US$918.20/oz.

The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for March 2009 were +3.0% and +1.1% respectively.

Australian shares

The Australian market rallied off its lows in March and followed the lead of the US to have a strong month. The S&P/ASX300 Index recorded a gain of 8.1%, the best monthly return since December 1993. Over 12 months the local market is still down 29.8%.

Fundamental factors supporting Australian shares included reasonable valuations, high dividend yields, lower cash rates and well capitalised banks relative to global peers. In contrast to last month small cap stocks outperformed large cap counterparts and the broader index. The announcement of the Public Private Investment Program (PPIP) unveiled by US Treasury Secretary Tim Geithner buoyed markets and helped the Australian Financials ex-Property sector rise 14% in March.

Among sectors, Industrials (+15.3%) performed strongly, offsetting recent falls in the hope that financing conditions were improving. Materials (+9.5%) also posted a strong month assisted by gains in commodity prices and renewed investor interest. Healthcare (-7.1%) and Telecoms (-4.9%) were the worst performers as defensive sectors moved out of favour during the month. BHP Billiton (+11.0%) led the positive contributors list as the mining sector continued to benefit from ongoing Chinese investor interest in securing commodities and resource supply lines. CBA (+16.5%), Westpac (+13.8%), ANZ (+19.3%) and NAB (+13.4%) also were strong contributors as Australian Banks reacted positively following the PPIP announcement. Laggards included Telstra (-8.9%) which continued to drag down Telecoms in the wake of its exclusion from the National Broadband Network process. CSL (-11.3%), Sonic Healthcare (-7.4%) and Cochlear (-6.1%) also dragged down the index as the rising AUD buffeted their revenue potential.

Overseas shares

The MSCI World ex Aus index returned +6.3% in local currency terms. However, the appreciation of the AUD (measured by a 4.7% increase in trade weighted terms) resulted in a -1.4% return for unhedged Australian investors. The S&P 500 index rose 8.5%, the Dow Jones returned +7.7% and the NASDAQ +10.9% again in local currency terms. In Europe, the FTSE 100 (UK) returned +2.5%, the DAX (Germany) +6.3% and the CAC 40 (France) +3.9% in local currency terms. Asian markets also rallied, the Chinese Shanghai stock market, posting the biggest gain of 13.9%. The Nikkei (Japan) returned +7.1% and the Hang Seng (Hong Kong) returned +6.0%, all in local currency terms.

Property

Domestic listed property trusts (A-REITs) rose 0.4% in March resulting in a return of -58.1% over 12 months. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +5.4% over the month and -55.6% over 12 months.

Fixed interest

Australian bonds (UBS Composite Bond Index) returned 0.1% in March for a return of 12.8% over the past 12 months. Global bond yields decreased amid news of monetary easing. The Citigroup World Government Bond Index and the Barclays Capital Global Aggregate Index returned +1.2% and +1.1% respectively, on a fully hedged basis.

Currency

The Australian Dollar rallied in March returning +8.8% against the US Dollar, +9.8% against the Yen, +8.2% against the Pound Sterling,+ 4.0% against the Euro, and +4.7% on a trade weighted basis.

Investment commentary - 31 March 2009