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Provided by Mercer: 16/9/08

The month of August saw domestic and global equity markets rebound with a reduction in inflationary concerns and a falling oil price offsetting weaker global economic data and renewed concerns for financials. Bond returns were positive after yields fell markedly. Listed Property Trusts performed well as earnings results bettered sharply lowered expectations.

Significant developments over the month were:

As expected the RBA left interest rates unchanged at a 12 year high of 7.25% in August. Commentary released was unexpectedly dovish, stating that the “scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing”. Rates were subsequently dropped them by ¼% in September.
Domestic economic data released was mixed. Positive data: consumer confidence regaining 9.1% in August after falling 6.7% in July and employment figures remaining strong. Negative data: housing approvals fell for a fifth month and business confidence remained at -9%, its lowest level since September 2001.
The US Federal Reserve left the official borrowing rate at 2.0%. Commentary by the Fed was neutral stating “although downside risks to growth remain, the upside risks to inflation are also of significant concern to the committee.”
US economic data was also mixed. Payroll, trade deficit and a revised GDP number were better than expected whilst inflationary indicators, housing and consumer related numbers fared worse. The highlight was the revision to the Q2 GDP reading from +1.9% to +3.3%. This was largely driven by an increase in exports.
The price of Oil fell 6.9% to US$115.55/barrel.
Gold fell 9.1% to close at US$830.00/oz.

The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for August 2008 were 3.6% and 1.9% respectively.

Australian Shares

Following two consecutive months of selling the Australian market rebounded in August. The S&P/ASX300 rose 4% on the back of market expectations of an interest rate cut by the RBA, falling oil prices and solid increases in profits from companies across a range of industry sectors. However, the local index still remains down 14.2% over 12 months. Small cap stocks dropped 11.3% and 5.5% in June and July, respectively, and continued to underperform their large and mid cap counterparts this month. Resource stocks diverged as Energy (+8.7%) joined the list of top performing sectors led by Healthcare (+17.7%), whilst Materials (-0.2%) suffered due to a fall in commodities prices. Telecom Services (-1.0%) lagged all other sectors after leading performance in July (+5.9%). The largest positive contributors included BHP Billiton (+4.4%) who reported a robust increase in profits. Conversely, Macquarie Bank Group (-13.9%) made a significant negative contribution after posting a disappointing earnings result. As one of the worst domestic victim of global credit crunch, Babcock & Brown fell another 61.9% this month, bringing the year's slide to over 90%.

Overseas Shares

In aggregate, overseas shares returned +1.1% in local currency terms and +7.8% on an unhedged basis. Most major equity markets gained ground over the month. The Dow Jones returned +1.5%, the S&P 500 +1.2% and the NASDAQ +1.8% all in US$ terms. In Europe the FTSE 100 (UK) returned +4.2%, the DAX (Germany) -0.9% and the CAC 40 (France) +2.1%, again in local currency terms. Asian markets were generally weaker. The Hang Seng (Hong Kong) returned -6.5%, the Shanghai Composite (China) -13.6%, the Indian BSE 200 (India) +1.9% and the Nikkei (Japan) returned -2.3%, again all in local currency terms.

Property

Domestic listed property trusts (A-REITs) rose by a strong 10.0% over August. Domestic unlisted property returned an estimated +0% over the month.

Fixed Interest

Australian ten year bond yields finished the month sharply lower, falling 49bps to 5.74% at month end. The UBS Composite Bond Index returned +2.1% for the month. Global bond yields also fell, the US ten year bond yield fell 13bps and finished the month at 3.82%. The Citigroup World Government Bond Index and the Lehman Global Aggregate Bond Index returned +1.6% and +1.5% respectively, on a fully hedged basis.

Currency

Over August the local currency lost significant ground. It fell 8.4% against the US Dollar, 8.1% against the Yen, 0.6% against the Pound Sterling and lost 3.0% against the Euro. The local currency declined 6.2% on a trade weighted basis.

Investment commentary - 31 August 2008