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Provided by Mercer: 20/8/09

Global and domestic equity markets delivered strong returns in July. Improving economic recovery hopes were buoyed by better than expected results from the US reporting season, better economic readings especially in the US housing sector, upgraded global economic forecasts from the IMF and strong recovery momentum in China.

The domestic yield curve flattened with the market view on monetary policy shifting from easing to tightening and as a result, the Australian Dollar appreciated against most major currencies. Domestic listed property trusts managed to post a fourth consecutive monthly gain, but underperformed most other sectors.

Significant developments over the month were:

The RBA again left official rates unchanged at 3.00%. Minutes from the RBA meeting revealed their increasing confidence on the global and Australian economic recovery, while reiterating that "the outlook for inflation allows some scope for further easing of monetary policy, if needed."
Domestic economic data released over the month was largely positive. May retail sales figures increased by 1.0%, the June unemployment rate was better than expected at 5.8%, building approvals in June soared up to 9.3% compared with a forecast of 8.0%. Conversely, the May trade balance reported a worse than expected deficit of A$ 0.56bln.
US economic data released over the period was also buoyant. The housing sector figures surged strongly with June housing starts, building permits, existing home sales and new home sales all beating expectations. The June unemployment rate stood at 9.5% compared with a market forecast of 9.6%. Q2 GDP contracted by 1.0% verses an estimated 1.5%. Retail sales and industrial production figures were also better than expected. In contrast, ADP employment figures and non-farm payrolls were below expectations.
The US reporting season has provided more upside surprises than downside in major sectors such as banking, resources and industrials.
The International Monetary Fund (IMF) revised its numbers for global economic growth to contract by 1.4% for CY09. It has also upgraded its forecast for global growth to expand by 2.5 percent in 2010, which is 0.6 percentage points higher than the forecast figure in April 2009, stating that “The world economy is stabilizing, helped by unprecedented macroeconomic and financial policy support. However, the recession is not over and the recovery is likely to be sluggish.”
The Chinese authorities released figures showing that its economy expanded 7.9% in the June quarter on a year on year basis.
Crude oil dropped 2.0% for the month finishing at US$68.6 per barrel.
Gold finished the month -0.4% lower at US$934.3/oz.

Australian shares

The Australian share market posted the fifth consecutive monthly gain in July and finished the month strongly at a level not seen since early November 2008. Rocketing momentums were fuelled by better than expected economic indicators worldwide and US companies’ earnings which supported hopes of a recovery and pushed commodities prices significantly higher. The S&P/ASX 300 index surged 7.3% for the month and a cumulative 33% from the trough in early March 2009. Mid cap (+9.8%) stocks posted better returns than Small Cap (+9.0%) and Large Cap (+6.9%) counterparts.

Most sectors posted strong returns over July with Materials (+9.5%) and Financials ex Property (+8.6%) providing the most positive contribution to the broad index, supported by increasing commodity prices and better than expected banking sector results from US. In contrast, the defensive sector Healthcare (-2.8%) sold off with investors switching into cyclical stocks while Property Trusts (+2.4%) also underperformed the overall market.

Big banks and mining giants dominated the positive contributors list led by BHP Billiton (+9.3%). Conversely, CSL (-4.8%) provided the most negative contribution to the broad index as defensive stocks lost favour. Gold miners were also sold off, with Lihir Gold (-6.1%) and Newcrest Mining (-1.6%) suffering from globally diminished demand for gold as a safe haven.

Overseas shares

The global share market witnessed a robust rally in July starting from the middle of the month. The MSCI World ex Australia gained 7.4% in local currency terms, but with the Australian Dollar appreciating against most major currencies, returns for unhedged Australian investors were eroded to 5.4%. Value stocks (+6.1%) outperformed their Growth (+5.4%) counterparts and the broad market in AUD terms. In the US, the S&P 500 index returned 7.6%, the Dow Jones +8.6% and the NASDAQ +7.8%, all in local currency terms. In Europe, the FTSE 100 (UK) returned +8.5%, the DAX (Germany) +10.9% and the CAC (France) +9.1% in local currency terms. Results from Asian markets were also strong. The Chinese Shanghai Composite returned +15.3%, Hong Kong’s Hang Seng +11.4%, the Nikkei (Japan) +4.0% and the India BSE 200 Index returned +8.1%, again all in local currency terms.

Property

Domestic listed property trusts (A-REITs) advanced further returning +2.4% for the month after rising in June. Returns over the last 12 months however are still significantly down, returning -37.7%. This pattern was also prevalent in Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index), where the return for the month was +9.1% but is still -33.1% over 12 months.

Fixed interest

The UBS Composite bond index returned 0.3% for the month, and a cumulative of 9.2% for the last 12 months. The Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index returned +0.9% and +1.5% respectively, on a fully hedged basis over the month.

Currency

The Australian Dollar appreciated against most major currencies in July. The local currency returned +2.8% against the US Dollar, +1.5% against the Yen, +1.7% against the Euro, +2.1% against the Pound Sterling, and +1.6% on a trade weighted basis.

Investment commentary - 31 July 2009