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Provided by Mercer: 16/11/09

October saw global and domestic share markets finish lower, ending their seven-month winning streak. Strong momentum evident early in the month was superseded by massive profit taking, which was fuelled by disappointing economic readings from the US and UK.

The domestic bond yield moved higher over the month in line with its global counterparts, despite a late rally in the global bond market which witnessed investors moving back into safe-haven government bonds. The Australian Dollar continued its appreciation against most major currencies. Domestic listed property trusts were sold off.

Significant developments over the month were:

Australia became the first developed country in the G20 to tighten its official interest rate. The 25bps rate hike was backed by the RBA's hawkish commentary, stating that "the global economy is resuming growth" and "economic conditions in Australia have been stronger than expected and measures of confidence have recovered," while "underlying inflation remained higher than the target."
The US Federal Open Market Committee kept the Fed Funds rate target unchanged at 0-0.25%
Domestic economic data released over the month was largely positive. The level of employment jumped up 40.6k versus an expected loss of 10k, while the unemployment rate dropped to 5.7% in September from 5.8% in August. Consumer confidence showed another increase. Q3 CPI was 10bps higher than the market forecasted, coming in at 1.0%.
US economic data released over the period was mixed. Q3 GDP beat market expectations recording +3.5%. Existing home sales and industrial production in September both beat expectations. The unemployment rate remained unchanged at 9.8% for September. In contrast, October consumer confidence, September new home sales, building permits, housing starts, non-farm payrolls and ISM manufacturing all disappointed the market.
Crude oil climbed up to US$75 per barrel, benefiting from hopes for a global economy recovery and a better demand outlook.
Gold consolidated above the US$1000/oz level and finished the month +3.8% higher at US$1046/oz, attributable to the weak US Dollar and central banks seeking to diversify their foreign reserve holdings.

Australian shares

After seven consecutive months of increase, October saw the Australian share market record its first monthly loss since February 2009. Despite broadly stronger domestic economic data and higher base metal prices, the domestic market failed to hold on to any early gains and instead posted a sharp decline in the last week of the month which was attributable to mixed economic readings from US and UK which renewed concerns on the strength of the global economy recovery. The S&P/ASX 300 index dropped 2.1% for the month. Small Cap (-1.2%) stocks outperformed their Mid Cap (-3.4%) and Large Cap (-2.0%) counterparts.

Property Trusts (-9.0%) were the worst performing sector in October after posting double-digit gains in the last two months, followed by Energy (-5.4%). In contrast, defensive sectors were back in favour with Consumer Staples (+1.4%), Utilities (+0.7%) and Telecom Services (+0.1%) all taking the lead. Financial stocks were mixed with ANZ (-5.1%), Macquarie (-14.7%) and NAB (-2.5%) detracting from the broad market, whilst CBA (+1.0%) and WBC (+0.9%) delivered positive support. Rio Tinto (+7.8%) topped the positive contributors list as commodity prices were higher over the month, whilst Westfield (-11.2%) provided the biggest drag.

Overseas shares

The global share market finished the month lower with a significant increase in volatility. The market posted strong gains early in the month, fuelled by better-than-expected corporate earnings from the US reporting season. Poor economic readings from both the US and UK reinforced investor concerns over the sustainability of the economic recovery, which together with profit taking dragged the market into negative territory.

The MSCI World ex-Australia index lost -2.2% in local currency terms. As the AUD continued to appreciate, returns for unhedged Australian investors were further eroded to -4.1%. Small Cap (-6.2%) stocks significantly lagged behind the broad market while Value stocks (-5.0%) underperformed their Growth (-3.3%) counterparts as well as the broad market in AUD terms. In the US, the S&P 500 index returned -1.9%, the Dow Jones was flat and the NASDAQ -3.6%, all in local currency terms. In Europe, the FTSE 100 (UK) returned -1.7%, the DAX (Germany) -4.6% and the CAC (France) -4.9% in local currency terms. Results from Asian markets were mixed. The Chinese Shanghai Composite returned +7.8% and Hong Kong’s Hang Seng climbed +3.8%, whilst the Nikkei (Japan) lost 1.0% and the India BSE 200 Index returned -6.3%, again all in local currency terms.

Property

Domestic listed property trusts (A-REITs) declined 9.0% for the month, despite having recorded double digits gains in the previous two months. Returns over the last 12 months remained negative, returning -6.1%. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) was down by only -1.3% for the month yet posted a gain of +14.4% over 12 months.

Fixed interest

The UBS Australia Composite Bond index returned -0.1% for the month and was up +4.9% over the year. The Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index both returned +0.1% and +0.5% respectively, on a fully hedged basis over the month.

Currency

The Australian Dollar appreciated against most major currencies in October. The local currency returned +2.4% against the US Dollar, +3.5% against the Yen, +1.4% against the Euro, +3.7% on a trade weighted basis yet depreciated -0.7% against the Pound Sterling.

Investment commentary - 31 October 2009