Provided by Mercer: 20/2/08
The month of January saw equity markets sold off as US sub-prime issues fuelled fears of a US recession and a slowdown in global growth. A trading scandal involving large European bank Societe General also saw investors continue to be cautious of equities.
Domestic and global bonds posted positive returns as investors sought the safety of quality bonds. Domestic listed property was avoided as investors continued to be sceptical of the level and structure of debt within the sector after the events of Centro Property Group.
Significant developments over the month were:
- Australian headline CPI rose 0.9% qoq to be 3% higher over the year. Underlying inflation rose 1.1% qoq to be up 3.6% and well above the RBA’s target band of 2-3%. The market priced in a rise in the official cash rate for February.
- Other domestic economic data released continued to underline the strength of the Australian economy. Building approvals, job vacancies, retail sales and employment all had strong readings.
- The US Federal Reserve cut interest rates by 125bps – the most aggressive rate cut in two decades. The accompanying statement focused on “appreciable downside risks to growth”, “broader financial market conditions deteriorating”, “credit tightening” and “some softening in labor markets.”
- Gold rose a strong 11.0% to close January at US$925.00/oz.
The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for January 2008 were -6.2% and -2.2% respectively.
Australian Shares
The first month of the New Year saw the Australian share market have its largest monthly fall since the crash of October 1987. Equities were sold off driven by continuing concerns over the impact of US sub-prime issues on the US economy, the likelihood of a US recession becoming more probable and a deterioration in the outlook for global growth.
The S&P/ASX300 index saw 12 consecutive days of selling, culminating in a 7% fall on the 22nd of January. The US Federal Reserve intervened cutting interest rates which stimulated markets somewhat, however by month end the local index had fallen a sharp 11.0%.
Large cap stocks (-10.3%) outperformed their mid (-11.8%) and small (-14.4%) cap counterparts. All sectors posted negative returns over January. Banks dominated the negative contributors list. Commonwealth (-16.4%), National Australia (-8.0%) and Westpac (-8.0%) all were sold off.
Overseas Shares
In aggregate, overseas shares returned -8.3% in local currency terms and -9.1% on an unhedged basis. Value stocks outperformed growth stocks for the first time since April 2007. US markets fell with the Dow Jones (-4.6%), the S&P500 (-6.1%) and NASDAQ (-9.9%) all falling in local currency terms.
European markets fell heavily. The DAX (Germany) returned -15.1%, the CAC (France) -13.3% whilst the FTSE (UK) returned -8.9%, again in local currency terms. Asian markets also fell sharply, with the Hang Seng (Hong Kong) falling a substantial -15.7%, the Shanghai (China) a massive -16.7%. whilst the Nikkei (Japan) also fell, returning -11.2%, all in local currency terms.
Property
Domestic listed property trusts lost signifcant ground, returning -14.3% over January, whilst domestic unlisted property returned an estimated +0.2% over the month.
Fixed Interest
Australian ten year bonds fell 23bps to 6.09% whilst the UBS Australian Composite Bond Index returned +1.2%. Global bond yields fell significantly with the US ten year bond yield falling 43bps to 3.60%. The Citigroup World Government Bond Index and the Lehman Global Aggregate Bond Index returned +2.0% and +1.8% respectively, on a fully hedged basis.
Currency
Over January the local currency gained 1.6% against the US Dollar, 1.8% against the Pound Sterling and 0.3% against the Euro, but depreciated 3.3% against the Yen. The local currency depreciated 0.6% on a trade weighted basis.
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
