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<p class="greenHeader">Investment commentary - 31 December 2009</p><p><em>Provided by Mercer<br />15/1/10</em></p><table width="100%" cellpadding=0 cellspacing=0 border=0><tr valign=top><td width="100%"><p><p><strong>December witnessed global share markets posting a modest gain, shrugging off sovereign risk concerns in some European countries. December also remained focused on the gradual recovery of the global economy and largely upbeat economic readings from the US.</strong> </p><p>Domestic equity markets also followed their global counterparts and found support in local economic data released during the month. Both global and domestic bond yields moved higher, buoyed by the gradual global economic recovery and diminished concerns over the fear of default by Dubai World. The Australian dollar lost ground against the US dollar as the greenback rallied against most major currencies over the month, whilst the yen’s depreciation against other major currencies including the Australian dollar provided support to the Japanese stock market. Domestic listed property trusts kept pace with the broader market with anticipation of better operating conditions.<br /></p><p /><h2>Significant developments over the month were:</h2><p /><ul><li>The RBA raised the official cash rate by another 25  basis points to 3.75% in early December, which was the third consecutive monthly increase.</li><li>Domestic economic data released over the month was mixed. Q3 GDP recorded a 0.2% increase quarter on quarter, which was below the expectation of 0.4%, bringing the annual growth rate to 0.5%. The Westpac-Melbourne Institute Consumer Sentiment Index fell 3.8%. The October trade deficit widened to $2.4billion. On the positive side, the Australian labour market continued its strong recovery. The November unemployment rate dropped to 5.7% compared with market expectations of 5.9%, and the employment change figures climbed up 31.2k. October retail sales went up 0.3% in line with forecasts and the NAB November Business Confidence survey also went up 3bps to finish at 19.</li><li>US economic data released over the period was mainly positive. Consumer confidence and retail sales both increased during November and the October trade deficit narrowed to -$32.9bn. The November unemployment rate was down from 10.2% to 10%. The housing market continued its recovery with existing home sales for November jumping up 7.4%. The annualised figure for Q3 GDP was revised down from 2.8% to 2.2% and the FOMC maintained the Federal Funds rate at 0-0.25% </li><li>Crude oil (WTI) finished 3.1% higher on the month at US$79.67 per barrel.</li><li>Gold lost 7.0% to finish at US$1096/oz after the massive gain in November, largely attributable to the appreciation of US dollar.<br /><br /></li></ul><p /><h2>Australian shares</h2><p /><p>The Australian share market recorded a strong gain in December but with relatively light trading volumes. Economic indicators released over the month continued to provide support for the local market, with employment and business confidence improving, while consumer confidence softened slightly and Q3 GDP recorded a gain of 0.5%. The S&P/ASX 300 index climbed 3.7% for the month, and returned 37.6% for the calendar year. Mid Cap (+5.7%) stocks significantly outperformed their Large Cap (+3.4%) and Small Cap (+4.3%) counterparts.</p><p>Industrials (+7.4%) was the best performing sector in December, followed by IT (+4.6%) which gained solid support from an earnings upgrade in the firm Computershare. In contrast, Telecom Services (+1.0%) lagged behind as Telstra wound back its revenue forecasts. Defensive sector Consumer Staples (+2.0%) also underperformed. Three of the big four banks (Westpac, Commonwealth, ANZ), together with the top two miners (BHP Billiton, Rio Tinto) provided a significant positive contribution to the index. However NAB (-3.8%) was the biggest drag on the index after announcing its bid for AXA Asia Pacific. Gold miners Lihir Gold (-8.9%) and Newcrest Mining (-3.9%) were also major detractors with the gold price down over the month.</p><p /><h2>Overseas shares</h2><p /><p>The MSCI World ex Australia index gained 3.7% in local currency terms. Small Cap (+6.4%) stocks outperformed the broader market while Value stocks (+3.1%) underperformed their Growth (+4.4%) counterparts as well as the broader market in AUD terms. In the US, the S&P 500 index returned +1.9%, the Dow Jones +0.8% and the NASDAQ +5.8%, all in local currency terms. In Europe, the FTSE 100 (UK) returned +4.3%, the DAX (Germany) +5.9% and the CAC (France) +7.0% in local currency terms. Results from the Asian markets were all positive. The Chinese Shanghai Composite returned +2.6%, Hong Kong’s Hang Seng climbed +0.2%, the India BSE 200 Index returned +3.5% and the Nikkei (Japan) soared up 12.8%, again all in local currency terms.</p><p /><h2>Property</h2><p /><p>Domestic listed property trusts (A-REITs) edged 3.4% higher for the month, bringing the 12 month return to 9.6%. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) was up by 5.6% for the month and posted a gain of +33.0% over 12 months. </p><p /><h2>Fixed interest</h2><p /><p>The UBS Australia Composite Bond index lost 0.4% for the month and is up 1.7% over the year. The Citigroup World Government Bond (ex-Australia) Index and the Barclays Capital Global Aggregate Bond Index both returned -0.7% and -0.6% respectively, on a fully hedged basis over the month.</p><p /><h2>Currency</h2><p /><p>The Australian Dollar was mixed against the major currencies in December. The local currency depreciated 1.7% against the US Dollar, 0.2% against the Pound Sterling and 0.3% on a trade weighted basis, but appreciated 6.2% against the Yen and 2.8% against the Euro. </p><p /><p /><p><table width="100%" cellpadding="0" cellspacing="0" border="0">
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