Economic Update - 2010 January
February 18th, 2010In brief
The Reserve Bank of Australia (RBA) surprised markets by keeping interest rates unchanged (at 3.75%) at its first meeting for 2010.
Global government bond yields generally drifted lower. But a worsening fiscal situation in Greece encouraged investors to be more discriminating across markets.
Australian shares were heavily sold off in January, as investor risk aversion increased, despite strong local economic data.
Australian Cash
The Reserve Bank of Australia (RBA) surprised markets by keeping interest rates unchanged (at 3.75%) at its first meeting in 2010. The market was expecting a 0.25% increase, following a host of positive economic indicators. The RBA cited the extent of increases by major banks as one of the reasons for holding back, however comments by RBA suggested more rate rises are likely in the future.
The outcome ended a run of three consecutive monthly increases that began in October. Inflation has risen recently as temporary factors that had been holding it down are now abating. Inflation is expected to be consistent with the RBA target in 2010.
Australian Fixed Interest
Australian bond markets rallied in January with the UBSA Composite Bond All Maturities Index up 1.3%. Investors focussed on overseas developments rather than strong economic indicators. Retail sales grew 1.4% month on month in November. Unemployment fell to 5.5% in December. Building approvals were also strong, up 5.9%. December quarter CPI rose to 0.5%, slightly above market expectations of 0.4%. Year on year, CPI rose 2.1%, slightly above market expectations (of 2.0%).
Global Fixed Interest
The Barclays Capital Global Aggregate index rose 1.4% in January. Global government bond yields generally drifted lower, benefiting from the rise in risk aversion following the worsening fiscal situation in Greece, whose deficit ballooned to and estimated 12.7% of GDP. This prompted concerns about sovereign bond default by Greece and a potential bailout by the European Union.
In addition, there was a growing concern that the recovery will slow after China clamped down on borrowing. These events were supportive for bond markets, highlighting how bonds can respond if economic conditions do not improve as expected.
In the US, Treasuries returned 1.6% in January after posting a 3.7% loss in 2009. The graph in the next column shows the demand for US Treasuries rose as risk appetite dipped in January. The market is pricing in ales than 50% chance of an interest rate rise before July. Inflation remains manageable and is allowing governments around the world to borrow at cheaper rates (meaning lower yields on government bonds).

Australian Listed Property
The S&P/ASX 300 Property Accumulation Index was down 3.0% in January, outperforming the S&P/ASX 200 by 3.2%.
Over the month, Retail (0.1%) was the best performing sector. Industrial (-7.5%) was the worst.
The top performing trusts for the month were Westfield (0.8%) and CFS Retail Group (-1.6%). Westfield benefited from stronger US assets (off the back of the rising $US), and both trusts benefited from their high quality domestic retail portfolios in a month when the Retail sector was strong.
The worst performing trusts for January were Abacus Property Group (-9.9%) Mirvac Group (-7.7%) and Goodman Group (-7.3%). Abacus announced asset revaluations in January. Fears of rising interest rates weighed on Mirvac Group. Despite no material news flow from Goodman Group, it was the worst performer among the “leaders” category in January, after being the strongest in December.
Global Listed Property
The UBS Global Property Investors Index was down 3.7% in January. Japan (2.5%) and Continental Europe (-0.6%) were the best performers. The UK (-6.8%) and Canada (-5.2%) were the worst performers.
In the UK, data released in January showed that office values in central London fell 50% in the two years to July 2009, more than most other European cities. This data coincided with the view that, despite an increase in UK house prices in January, many of the leading indicators within the housing market and the UK economy have generally started to lose momentum. Growing talk of pressure on earnings together with the threat of major cuts in public spending weighed on the property market through the month.
On a positive note, sales of UK commercial property doubled in the December quarter of last year as funds started purchasing buildings after a two year hiatus. However this was not enough to prevent the UK Property market being the biggest drag on performance in January.
Australian Shares
Australian stocks, which significantly outperformed other developed market equities in 2009, sold off in January. This came despite strong economic data, with the S&P/ASX 300 Accumulation Index down 6.27%. Energy and Mining shares were the major drags on performance. Steel stocks and Resources contractors also suffered the latter following a profit warning from Worley Parsons.
Consumer Discretionary Stocks (David Jones, Myer, and Harvey Norman) underperformed as increasing competition and margin pressure began to emerge. However, banks held up relatively well helped by a profit upgrade from CBA. Companies under M&A scrutiny (AXA, CSR, Suncorp) Macquarie Infrastructure Group (demerger from Macquarie) and Ramsay (acquisition) also remained buoyant. Flight Centre announced a profit upgrade, and analysts upgraded their expectations for Tabcorp, Toll and Westfield.
International Shares
Regulatory developments in the US and China saw an abrupt end to the Christmas rally in equity markets. The MSCI World ex Australia index (hedged, $A) fell 3.2%. Performance was led by the Technology (6.8%), Consumer
China’s decision to restrain excessive bank lending in response to higher inflation raised doubts over the market’s hopes for a “V-shaped” recovery in the global economy. Disappointing US housing starts and unemployment data also contributed to the reversal in sentiment. Positive GDP data failed to turn this sentiment around.
US Financial stocks fell after some disappointing fourth quarter results (Bank of America, JP Morgan) and the surprise plan by the Obama administration to wean US banks off the high risk activities that were exposed by the GFC.
Negative earnings outlooks (Microsoft, Motorola) dragged the Telecommunications sector lower. Defensive Consumer Staples and Healthcare stocks held up the best, the latter helped by government plans for healthcare reform.
European share markets also fell (France -5.0%, Germany -5.9%, UK -4.1%,). Negative German data and Greece’s fiscal problems were a drag on performance. Asian markets also fell (China -8.8%, Japan -3.3%).
Global Emerging Markets
Emerging markets fell 4.5% in January (MSCI EM index ($A) dragged lower as risk aversion returned to markets. While the structural emerging markets story remains intact. The Asian emerging markets region experienced some pull-back from global investors in January as Asia was the first region to recover and is now the first region to see tightening by major Asian central banks.
A move by the Chinese government to clamp down on speculative behaviour by curbing new lending and restricting credit growth caused jitters. The graph shows the increase in Chinese household loans, particularly in the latter part of 2009.

The Chinese government requested that lenders raise interest rates on some mortgages and demand larger down-payments. The People’s Bank of China unexpectedly raised reserve requirements for large banks from 0.5% to 16%.
As a result, and in reversal of a recent theme, investors sold out of developing nations, with much of the flows heading back to the perceived safety of larger markets like the US, where the economic recovery has gathered momentum.
The MSCI EM index, which soared 74% (from its lows) in 2009 amid growing optimism about a global economic recovery, has fallen since its 17 month high on 11 January.
investment markets data
table 1 – investment market performance to 31 January 2010
| asset class |
Index |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
Australian Cash Sector |
UBSA Banks Bill Index |
0.3 |
1.0 |
1.8 |
3.4 |
5.4 |
5.8 |
5.9 |
|
Australian Fixed Interest Sector |
UBSA Composite Bond Index |
1.3 |
2.5 |
3.9 |
1.7 |
8.2 |
6.9 |
6.0 |
|
Global Fixed Interest Sector |
Barclays Capital Global Aggregate (Hedged) |
1.4 |
2.0 |
4.9 |
10.2 |
8.4 |
8.4 |
7.0 |
|
Australian Listed Property Sector |
S&P / ASX 300 A-REIT Index |
-3.0 |
1.3 |
17.8 |
17.6 |
-25.5 |
-24.8 |
-8.2 |
|
Global Listed Property Sector |
UBS Global Investors Index ($A Hedged) |
-3.7 |
4.6 |
21.3 |
40.9 |
-17.0 |
-19.1 |
n/a |
|
Australian Share Sector |
S&P / ASX 300 Accum Index |
-6.2 |
-1.0 |
9.9 |
35.7 |
-5.9 |
-3.5 |
6.6 |
|
International Share (Unhedged) Sector |
MSCI World Ex Australia ($A Unhedged) |
-2.9 |
3.4 |
0.7 |
-3.3 |
-10.6 |
-11.7 |
-1.4 |
|
International Share (Hedged) Sector |
MSCI World Ex Australia ($A Hedged) |
-3.2 |
4.0 |
9.1 |
32.5 |
-9.9 |
-8.1 |
2.2 |
|
Global Smaller Companies |
S & P / Citigroup World <US$1.5bn Cap (AUD Unhedged Net Div) |
-1.3 |
6.2 |
5.5 |
9.0 |
-5.6 |
-11.0 |
-0.3 |
|
Global Emerging Markets |
MSCI EM in $A (div reinvested) |
-4.5 |
4.1 |
4.2 |
28.9 |
-5.0 |
-1.2 |
11.0 |
table 2 – breakdown of Australian & global fixed interest market performance to 31 January 2010
|
asset class |
index |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
Australian Fixed Interest |
UBSA Corporate / Credit |
1.1 |
2.5 |
4.7 |
5.5 |
8.5 |
6.8 |
6.2 |
|
International Fixed Interest |
Barclays Capital Global Aggregate Credit (Hedged) |
1.9 1.0 1.7 |
3.0 1.6 2.3 |
7.8 3.6 5.6 |
19.2 6.6 11.8 |
8.1 8.1 9.7 |
7.5 8.5 9.5 |
6.3 7.1 7.6 |
table 3 – performance of major Australia share market indices to 31 January 2010
|
index |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
S&P / ASX 20 Leaders Accum Index |
-5.9 |
-1.3 |
10.7 |
36.73 |
-1.2 |
1.3 |
9.7 |
|
S&P / ASX 50 Leaders Accum Index |
-5.9 |
-0.8 |
10.3 |
34.2 |
-4.2 |
-2.2 |
7.3 |
|
S&P / ASX 100 Accum Index |
-6.1 |
-0.9 |
10.0 |
34.5 |
-5.2 |
-2.9 |
6.9 |
|
S&P / ASX 200 Accum Index |
-6.2 |
-0.9 |
9.8 |
35.2 |
-5.8 |
-3.4 |
6.7 |
|
S&P / ASX 300 Accum Index |
-6.2 |
-1.0 |
9.9 |
35.7 |
-5.9 |
-3.5 |
6.6 |
table 4 – breakdown of Australian share market performance to 31 January 2010*
|
sector name |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
Consumer Discretionary |
-4.9 |
-1.6 |
10.6 |
50.1 |
-15.0 |
-13.6 |
-3.8 |
|
Consumer Staples |
-8.4 |
-5.4 |
2.9 |
21.2 |
-0.2 |
2.5 |
9.6 |
|
Energy |
-9.8 |
-7.1 |
-4.5 |
26.1 |
6.6 |
10.7 |
18.5 |
|
Financials |
-4.1 |
-1.7 |
17.9 |
50.6 |
-6.1 |
-8.0 |
4.1 |
|
Financials Ex Property Trusts |
-4.3 |
-2.3 |
17.9 |
57.4 |
-1.7 |
-3.9 |
6.9 |
|
Health Care |
-5.5 |
-1.5 |
6.9 |
-4.4 |
-2.3 |
2.1 |
12.8 |
|
Industrials |
-4.6 |
0.9 |
18.2 |
36.8 |
-14.4 |
-12.1 |
-0.7 |
|
Information Technology |
-1.1 |
2.3 |
13.4 |
64.5 |
15.2 |
2.5 |
10.9 |
|
Materials |
-9.0 |
3.3 |
6.2 |
39.4 |
-6.6 |
5.4 |
13.9 |
|
Property Trusts |
-3.0 |
1.3 |
17.8 |
17.6 |
-25.5 |
-24.8 |
-8.2 |
|
Telecommunications |
-3.1 |
0.0 |
-3.2 |
-4.7 |
-7.2 |
-2.5 |
-0.9 |
|
Utilities |
-3.6 |
0.8 |
2.3 |
4.7 |
-9.4 |
-12.4 |
4.0 |
*Based on S&P/ASX 300 Accum Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).
top 5 performing Australian shares in January 2010*
|
share |
return % |
|
Macquarie Infrastructure Group |
15.04 |
|
Macquarie Group Limited |
3.64 |
|
Suncorp-Metway Limited |
2.42 |
|
Fortescue Metals Group Limited |
2.03 |
|
Computershare Limited |
1.40 |
bottom 5 performing Australian shares in January 2010*
|
share |
return % |
|
Lihir Gold Limited |
-15.55 |
|
Bluescope Steel Limited |
-15.76 |
|
Transfield Services Limited |
-15.76 |
|
Alumina Limited |
-16.30 |
|
Worley Parsons Limited |
-18.88 |
*Based on the universe S&P/ASX 100 Index.
table 5 – breakdown of international share market performance by country to 31 January 2010
|
index |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
United States: S&P 500 |
-3.7 |
3.6 |
8.7 |
30.0 |
-11.7 |
-9.3 |
-1.9 |
|
Germany: DAX |
-5.9 |
3.6 |
5.2 |
29.3 |
-9.5 |
-6.2 |
5.7 |
|
United Kingdom: FTSE 100 |
-4.1 |
2.9 |
12.6 |
25.0 |
-6.1 |
-5.8 |
1.3 |
|
France: CAC |
-5.0 |
3.7 |
9.1 |
25.7 |
-12.4 |
-12.6 |
-0.9 |
|
Japan: Nikkei |
-3.3 |
1.6 |
-1.5 |
27.6 |
-13.4 |
-16.3 |
-2.2 |
|
Hong Kong: Hang Seng |
-8.0 |
-7.5 |
-2.2 |
51.5 |
-7.4 |
0.0 |
8.0 |
Note: all returns are calculated in local currencies
table 6 – breakdown of international shares market performance by sector to 31 January 2010*
|
sector name |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
Consumer Discretionary |
-2.8 |
5.5 |
7.9 |
41.8 |
-10.3 |
-12.7 |
-3.1 |
|
Consumer Staples |
-1.0 |
3.8 |
9.7 |
20.5 |
-2.0 |
-0.6 |
4.2 |
|
Energy |
-4.8 |
-1.2 |
6.7 |
14.3 |
-8.4 |
-2.4 |
5.3 |
|
Financials |
-3.8 |
-2.6 |
2.9 |
38.7 |
-23.3 |
-22.9 |
-8.9 |
|
Health Care |
-0.3 |
9.2 |
11.3 |
16.3 |
-2.8 |
-4.4 |
1.8 |
|
Industrials |
-1.5 |
6.5 |
10.6 |
32.7 |
-14.5 |
-11.2 |
-1.0 |
|
Information Technology |
-6.4 |
2.9 |
7.3 |
45.3 |
-6.4 |
-5.4 |
0.8 |
|
Materials |
-7.9 |
5.2 |
6.9 |
43.7 |
-12.3 |
-4.9 |
6.0 |
|
Telecommunications |
-6.0 |
0.1 |
1.5 |
7.6 |
-14.0 |
-9.7 |
-2.1 |
|
Utilities |
-4.2 |
3.6 |
2.9 |
-0.4 |
-14.4 |
-8.9 |
2.0 |
*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).
Note: all returns are calculated in local currencies
economic indicators
|
|
At 31 January |
at 31 December |
|
official interest rates |
|
|
|
RBA cash rate |
3.75 |
3.5 |
|
US Fed Funds rate |
0.25 |
0.25 |
|
10 year bond yields |
|
|
|
Australian Interest Rates - 10 year bond yield |
5.38 |
5.64 |
|
United States Interest Rates - 10 year bond yield |
3.59 |
3.84 |
|
exchange rates |
|
|
|
AUD/USD Exchange Rate |
0.8889 |
0.8994 |
|
AUD/EUR Exchange Rate |
0.6395 |
0.6268 |
|
AUD/GBP Exchange Rate |
0.5547 |
0.5569 |
|
AUD/JPY Exchange Rate |
80.5787 |
83.7250 |











