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Provided by Mercer: 13/11/08

October saw sharp declines in both domestic and global equity markets.

The markets continued to be volatile, due to a sharp worsening in the financial crisis. A deteriorating outlook for global growth and fears of a global recession.

Domestic bonds rallied after yields plunged due to the RBA’s substantial rate cut. Global bonds were extremely volatile, US 10-year bond yields ended the month higher. Listed Property Trusts fell significantly with debt refinancing an ongoing concern.

Significant developments over the month were:

Early October saw the Reserve Bank of Australia (RBA) cut official interest rates from 7.00% to 6.00%.
The Australian government announced a scheme to ‘guarantee’ bank deposits for the next 3 years. In addition, the government also announced a $10.4bn spending package to help counter the credit crisis’ impact on Australia economy.
Domestic economic data released was weak. Consumer confidence dropped 11.0% in October following a 7.0% jump in September and the unemployment rate jumped to 4.3%. Whilst CPI declined from 1.5% in Q2 to 1.2% in Q3.
On 8 October, the US Federal Reserve, the ECB, the Bank of England, Bank of Canada, Swiss National Bank and Sveriges Riksbank cut their respective cash rates by 50 basis points in an attempt to ease the impact of the credit crunch. Despite the rate cuts, equity and credit markets remained under intense pressure. The US Federal Reserve had a second rate cut of 50 bps in late October.
A number of government rescue packages were announced, including: bank deposit guarantees, direct equity stakes in financial institutions, liquidity provisions to financial institutions and the US $700bn TARP package, which was finally passed by the US Congress in early October having failed on the first attempt in late September.
US economic data was very poor. GDP fell an annualised 0.3% in Q3. Employment, industrial production, retail sales, consumer sentiment and total housing start figures all worsened over the month.
Oil ended the month at US$68.10 (WTI) per barrel, down 32.4% from its September close. Global economic weakness, higher than expected US inventory levels and a selling of oil exposed equities drove the sell off. An announcement by OPEC that production levels would be cut did little to help.
Gold followed other commodities lower as the US Dollar strengthened. It closed the month at US$739/oz, retreating 15.7% to its lowest monthly close since August 2007.

The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for October 2008 were -8.1% and -3.2% respectively.

Australian Shares

The S&P/ASX300 index fell 12.9% over October, its worst monthly fall since October 1987. This followed the 10.4% collapse in September bringing the twelve month return down to minus 38.3%. Small cap stocks (-24.8%) underperformed their large and mid cap counterparts. No sectors posted positive returns over the month.

Resource stocks were particularly weak as the global economic picture continued to worsen and commodities prices slumped. Property Trusts were the worst performing sector. It declined 25.4% over October and 56.4% over twelve months. Whist traditional defensive sectors including Healthcare (-2.8%), Utilities (-4.4%) and Consumer Staples (-5.8%) performed better.

Overseas Shares

The MSCI World ex Aus index lost -16.6% in local currency terms. With the AUD depreciating 16.4% against the USD over the month, the return was enhanced for unhedged investors to -2.9%. Emerging markets underperformed all other markets in AUD terms. The MSCI Emerging Market Index lost 13.2% and is now down 38.7% over twelve months.

All major share markets lost ground in local currency terms. The Dow Jones returned -14.1%, the S&P 500 -16.8% and the NASDAQ -17.4%. In Europe the FTSE 100 (UK) returned -10.7%, the DAX (Germany) -14.5% and the CAC 40 (France) -13.5% in local currency terms. Asian markets also saw a massive sell off. The Hang Seng (Hong Kong) returned -22.5%, the Shanghai Composite (China) -24.6%, the Indian BSE 200 (India) -26.4% and the Nikkei (Japan) returned -23.8%, again all in local currency terms.

Property

Domestic listed property trusts (A-REITs) dropped by 25.4% over October. The sector faces significant problems in refinancing debt in the face of a slowing economy. Domestic unlisted property returned an estimated 0.0% over the month.

Fixed Interest

After the 100bps rate cut by the RBA, Australian ten year bond yields ended the month significantly lower, falling 24bps to 5.15% at month end. The UBS Composite Bond Index returned +2.0% for the month. Despite the two 50 bps rate cuts by the US Fed Reserve, US ten year bond yields finished 14bps higher at 3.96% by month end. The Citigroup World Government Bond Index and the Lehman Global Aggregate Bond Index returned +0.9% and -0.8% respectively, on a fully hedged basis.

Currency

The Australian Dollar depreciated 16.4% against the US Dollar, 22.5% against the Yen (to a seven-year low), 7.7 against the Pound Sterling, 7.4% against the Euro and 13.7% on a trade weighted basis. Weaker commodities prices lower interest rates and the off-shore sale of domestic equities contributed to the decline.

Investment commentary - 31 October 2008