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Provided by Mercer: 17/6/09

The strength in global equity markets continued through May with positive economic data driving stocks higher. Domestic bond yields rose sharply, reflecting the lack of an RBA rate cut and a strong rise in US ten year bond yields. Domestic listed Property Trusts continued to stabilise posting a second consecutive monthly gain.

Significant developments over the month were:

The RBA left its cash rate unchanged at 3.00% citing cautious optimism in Australia’s growth prospects. Minutes from the RBA meeting indicated the decision was a close call.
The 2009/10 Federal Budget was unveiled with few surprises and a projected deficit of $57.6bn or 4.9% of GDP for the next 12 months.
Domestic economic data released over the month was largely positive. Employment, retail sales, trade surplus and housing data was better than market expectations. Consumer confidence fell due to negative reaction over the 2009/10 Federal Budget.
The US Federal Open Market Committee maintained a Federal Funds target range of 0% to 0.25%.
US economic data was generally positive with consumer confidence, manufacturing ISM and employment results coming in better than expected. On the downside, retail and housing start numbers were weaker than expected.
There has been an unprecedented amount of equity issuance globally. The US raised more than US$60bn in May alone. In Australia, A$14.7bn was raised in May, the largest month of equity issuance in Australian history (outside the late 2006 “T3” sale of Telstra shares).
Crude oil reached a 6 month high. WTI returned +31.7% for the month finishing at US$66.31 per barrel.
Gold finished the month 10.2% higher at US$978.55/oz.

The median returns of the Mercer Pooled Fund and Capital Stable Fund Surveys for May 2009 were +1.3% and +0.6% respectively.

Australian shares

For the first time since October 2007 the Australian market rose for the third consecutive month. The broad based S&P/ASX 300 returned +1.5%, but is down a substantial -29.2% over 12 months. The local market underperformed the US and its global peers but moved higher due to a stronger AUD and unprecedented capital raisings. The trend continued with small caps (+7.5%) again outperforming their large (+0.8%) and mid (+2.5%) cap counterparts.

Stronger commodities prices and an improved global outlook saw Materials (+6.6%) the best performed sector, whilst a strong rise in the price of oil also helped Energy (+6.6%) stocks produce robust returns. Defensive sectors underperformed. Healthcare (-7.0%), Telecoms (-6.2%), Consumer Staples (-5.0%) and Utilities (-3.6%) all lost ground.

Cyclical stocks dominated the positive contributors list. BHP Billiton (+4.5%) made the strongest positive contribution, whilst Woodside Petroleum (+13.2%) benefited from an increase in the price of oil. Defensive stocks were prevalent in the negative contributors list. CSL (-15.1%) posted the worst return, whilst Wesfarmers (-5.2%) and Woolworths (-5.1%) were also sold off. Telstra (-5.9%) also suffered on news of the departure of its CEO and the announcement of the National Broadband network.

Overseas shares

Global equity markets continued to rally through May. The MSCI World ex Australia returned +5.8% in local currency terms. The appreciation of the Australian dollar saw AUD returns eroded to +0.1%. In the US, the S&P 500 index returned +5.3%, the Dow Jones +4.1% and the NASDAQ +3.3%, all in local currency terms. In Europe, the FTSE 100 (UK) returned +4.1%, the DAX (Germany) +3.6% and the CAC (France) +3.7% in local currency terms. Asian markets posted the strongest rallies. The Chinese Shanghai Composite returned +6.3%, Hong Kong’s Hang Seng +17.1%, the Nikkei (Japan) +7.9% and the India BSE 200 Index posted the biggest monthly gain of +32.4%, again all in local currency terms.

Property

Domestic listed property trusts (A-REITs) showed signs of further stabilisation returning +4.2% for the month after also rising in April. Over 12 months they are still significantly down, returning -51.1%. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +9.2% over the month and over 12 months returned -45%. Unlisted property returned an estimated -0.3% over the month.

Fixed interest

Domestic ten year bond yields rose 70bps ending the month at 5.28%. The UBS Australian Composite bond index returned -0.7%, but over 12 months returned +11.8%. US ten year bond yields rose 34bps to 3.46% on the back of better economic news and concerns of over supply. The Citigroup World Government Bond (ex Australia) Index and the Barclays Capital Global Aggregate Bond Index returned -0.6% and +0.4% respectively, on a fully hedged basis over the month.

Currency

The Australian Dollar strengthened further in May. The local currency returned +9.0% against the US Dollar, +5.7% against the Yen, +0.1% against the Pound Sterling, +2.0% against the Euro, and +6.0% on a trade weighted basis.

Investment commentary - 31 May 2009