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Australian Cash

The Reserve Bank of Australia (RBA) lifted the cash rate by o.25% to 4.00% in March. The RBA noted that it was more appropriate to restore interest rates “closer to average’.

At its most recent meeting in early April, the RBA took a further step in this process, increasing rates another 0.25% to 4.25%.

Australian Fixed Interest

The UBSA Composite Bond All Maturities Index fell 0.6% in March. Government bond yields rose, in line with the global trend and firmer domestic economic fundamentals. The Australian economy recorded growth of 0.9% in the fourth quarter of 2009, taking the annual growth rate to 2.7%. Further interest rate rises are expected by the market over 2010, with the market pricing in a 5% cash rate by year end.

Shorter term bond yields rose slightly more than the long end due to a reassessment of the RBA outlook. 3-year yields increased by 0.46% in the month, while 10-year yields rose 0.34% to 5.78%.

Global Fixed Interest

The Barclays Capital Global Aggregate index (hedged $A) was up 0.6% in March, despite global bond yields rising in most developed markets. As the graph in the next column shows US 10-year yields reached their highest point since mid 2009 (up to 3.38%, from 3.61% in February). Signs of firming US economic activity, the impact of sovereign risk concerns in Europe and rating agencies’ continued warning about unsustainable fiscal deficits all put upward pressure on US yields.

Credit spreads continued to tighten in global markets. The continued improvement in credit markets occurred despite the poor performance in peripheral sovereign debt markets.

Australian Listed Property

The S&P/ASX 300 A-REIT Index was flat in March, underperforming the broader share market by 5.7%.

Over the month, Industrial (8.6%) was the best performing sector followed by Retail (0.2%). Commercial (-2.1%) was the worst performer.

The top performing trusts for the month were Goodman Group (9.2%) and ING Industrial Trust (6.6%). Goodman Group benefited from increased confidence that management could deliver on planned developments outlined in its earlier results commentary. ING Industrial Trust recovered, benefiting from favourable sentiment toward the Industrial REIT sector.

The worst performing trusts were Abacus Property Group (-4.8%) and Commonwealth Property Office Fund (-4.7%), as investor enthusiasm towards both stocks dampened.

Global Listed Property

The UBS Global Property Investors Index (hedged, $A) rose 7.1% in March, with the USA/Canada the top performing region (9.5%) followed by Continental Europe (6.7%). The worst performing regions were Australia (0.0%) and Singapore (1.7%).  The graph on the next page shows the returns of the various regions over the month and year to 31 March 2010 (in local currency).

In the US, commercial sales have strengthened. In New York, commercial property sales tripled in value in the first quarter compared to a year earlier as sellers took advantage of rising demand. Fundamentals also started to stabilise. Approximately $US 3.3 billion of transactions priced at $US 10 million or more were closed, almost matching the $3.5 billion sold during the whole of last year.

Investors returned to the New York market, encouraged by signs of growing demand after the US recession and job losses at financial companies sent rents down 24% from their 2008 peak. Approximately 529,000 square meters of office space was leased in the first quarter, 84% more than a year earlier.

Australian Shares

Double digit gains in mining and energy shares drove the Australian market 5.7% higher in March (S&P/ASX 300 Accumulation Index). Booming spot iron ore prices and moves to quarterly rather than yearly contracts enabling more frequent price negotiation excited the market. There was also a re-emergence of positive sentiment toward coal seam gas, with Shell/PetroChina raising their takeover offer for Arrow.

In line with what was a global theme, most cyclical sectors and stocks outperformed, particularly Billabong, Bradken, Fairfax, Flight Centre, Kathmandu, Pacific Brands and Ten. The expectations were Harvey Norman, Downer and Hardie (US housing).

Most lower-beta (less market driven) sectors lagged, especially consumer staples, insurance (due to recent storms), REITs, telecommunications and rural stocks, the latter not helped by Nufarm’s poor result and another share sell-down plus a profit warning from AWB. Health names kept pace with the market, although Sigma fell 48% after disclosing a severely deteriorating operating environment and major write downs to recent acquisitions.

International Shares

Global share markets enjoyed a relief rally in March due to easing fears over the Greek debt crisis and positive US economic data. The MSCI World ex Australia index (hedged, $A) rose 6.7%.

A government bond issue and other measures announced in Greece had a positive impact. Improved US consumer spending, manufacturing, payrolls and retail sales data saw investor confidence return to the market.  The US Federal Reserve’s decision to keep interest rates at very low levels, plus the passing of the Obama health care reforms, were also encouraging.

M&A activity and a strong investor preference globally for cyclical stocks were favourable for international share markets. Other high-beta sectors (industrials, IT, Financials) outpaced defensive parts of the market (Consumer Staples, Healthcare, Telecommunications, Utilities).

Most Asian markets also rose strongly, especially Japan (9.5%) where the encouraging US economic data and a fall in the Yen raised hopes of a brighter outlook for Japanese exporters. However China’s Shanghai Composite (1.9%) underperformed on worrying inflation data and fears of more government intervention that will slow surging economic growth.

Global Emerging Markets

Emerging markets outperformed broader developed markets in March, with the MSCI EM index up 5.4% ($A).  India 6.7% and Brazil (5.8%) rose strongly China recorded muted gains rising 1.9% as expectations of further policy tightening gained pace.

The good performance seen in emerging markets was a reflection of the confidence in the US economy. Renewed US job growth and increased US home sales bolstered optimism that the global economy is rebounding, which was positive for the commodity driven Brazilian market.

The US, Brazil’s second largest trade partner, added the most jobs in three years in March. Service Industries expanded in March at the fastest pace in more than three years, a sign the US recovery is extending beyond manufacturing.

In China, data showed that manufacturing also expanded in March and was evidence for the central bank that the nation’s economic rebound had been “further cemented”.

investment markets data

table 1 – investment market performance to 31 March 2010

table 2 – breakdown of Australian & global fixed interest market performance to 31 March 2010

table 3 – performance of major Australia share market indices to 31 March 2010

table 4 – breakdown of Australian share market performance to 31 March 2010*

*Based on S&P/ASX 300 Accum Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).

top 5 performing Australian shares in March 2010*

bottom 5 performing Australian shares in March 2010*

*Based on the universe S&P/ASX 100 Index.

table 5 – breakdown of international share market performance by country to 31 March  2010

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 31 March 2010*

*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

Cash

The Reserve Bank of Australia (RBA) left interest rates on hold at 3% in September, reminding investors that such a low rate was only a temporary ‘emergency’ measure.

At its most recent meeting in October, the RBA raised the official interest rate by 0.25% to 3.25%, a stark contrast to this time last year, where the RBA made the biggest cut in 16 years. The board noted that the global economy is resuming growth, economic conditions in Australia have been stronger than expected and measures of confidence have recovered in reaching its decision.

The hike makes Australia the first G20 nation to start tightening monetary policy, and the first stage of withdrawing the stimulus.

Australian bonds

The UBSA Composite Bond All Maturities Index rose 0.7% in September. Australian government bond yields were steady. Yields on 10 year government bonds fell to 5.36% in September (down from 5.42% in August). The Australian government revised its forecast for the 2008-9 budget deficit, saying it is likely to be approximately $27.1 billion, compared to expectations in May 2009 of $32 billion. The lower deficit will allow the government to scale back its bond issuance program from $280 billion to$220 billion.

The potential for reduced bond supply increased the attractiveness of holding Australian government securities. For the first time since January, Australian 10 year bonds outperformed US treasuries (by 0.7%).

In credit markets, corporate bond issuance in Australia surged 77% to $108 billion, it’s highest since September 2008. The cost for companies to borrow funds has fallen significantly. These conditions favour large Australian companies looking to tap credit markets due to strong global demand for investment grade bonds.

International bond

The Barclays Capital Global Aggregate index rose 1.1% in September. Yields on US 10 year government bonds fell to 3.31% (down from 3.43% in August).

Corporate bond issuance continued to surge as the cost of borrowing by companies on bond markets in the US and Europe fell significantly. At the same time, bank funding costs have eased dramatically as shown by the London Interbank offered rate (LIBOR) – a key borrowing rate for lending between financial institutions. The LIBOR has fallen from a high of 4.8% at the peak of the crisis in September 2008 to 0.3%.

New issuance of credit in Europe rose 12% to $US808 billion since September 2008. The US recorded a 44.5% jump to $US1.3 trillion. Influencing this turnaround has been a stabilisation of the US housing market and the unprecedented policy response from the governments and central banks around the world.

The graph below shows the spread in 10 year yields between US Treasury bonds and US investment grade bonds. During the credit crisis this spread widened sharply in response to heightened investor anxiety, but has reversed to a large extent, demonstrating improvement in financial conditions. Historically, credit spreads narrow when fundamentals and the quality of companies show improvement across the board.

Australian listed property securities

The S&P/ASX 200 Property Accumulation Index was up 10.0% in September, outperforming the broader share market by 3.7%. All A-REITs posted a positive return. Yet again, capital constrained and growth oriented REITs continued to outperform their more defensive peers.

Top performers over the month were ING Industrial Trust (24.8%), Abacus Property Group (22.2%) and Charter Hall Group (18.9%). ING Industrial Trust posted good results which included details of a debt extension. Abacus Property Group and Charter Hall Group benefited from improved sentiment and positive momentum. Charter Hall Group is one of the most highly levered REITs, and benefited from an increased risk appetite.

The worst performing trusts was Bunnings Warehouse Property (1.7%) – despite recent strong performance – and Macquarie Countrywide Trust (1.6%), whose joint venture with First Washington saw the stock subject to earnings dilution as it de-gears.  

Global real estate securities

The UBS Global Property Investors Index (hedged $A) rose 5.8% in September. Singapore (10.5%) and Australia (9.7%) were the best performers. Japan (-3.5%) and the UK (-0.8%). were the worst.

Australian shares

The Australian market followed a similar pattern to overseas markets, finishing 7.3% higher in July (S&P/ASX 300 Accumulation Index). Strong domestic economic data (consumer sentiment, employment, retail sales) helped market gains in July, with government fiscal stimulus measures and low interest rates underpinning consumer demand and housing investment.

Reflecting the recent increased risk appetite of investors to support more closely linked to economic growth trends, cyclical sectors generally led the gains while defensive stocks lagged.

Banks (especially the regionals) also joined in the rally. Consolidates Media and Nufarm were well bid after coming onto the M&A radar, and capital raisings (NAB, Virgin) continued. ABB Grain (who issued a profit warning), Amcor and QBE underperformed. Macquarie Airports bounced but fell back late in July after announcing a large ($345 million) equity payment to Macquarie to terminate their management agreement.

Singapore’s economy grew for the first time in a year last quarter as the global recession eased. Residential property prices also rose for the first time in over a year, with the price index of residential property up 16% to 154.5 (from 133.3 in the previous quarter).

One of Singapore’s major REITs benefited from the strength of the housing market. CapitaLand LTD, Southeast Asia’s largest real estate developer, sold most of its units released for sale.  Mapletree Investments also announced plans to list a real estate investment trust in Singapore. Its assets include Singapore’s biggest shopping mall, VivoCity; the PSA Building, which houses the nation’s port authority; and a major Power Station.

 This was an indication of some restoration of confidence and increased risk-appetite.

Australian shares

The S&P/ASX 300 Accumulation Index was up 6.3% in September, benefiting from positive sentiment following a strong company reporting season. Financials and REITs continued to experience strong momentum. Cyclical Retailers (David Jones, Harvey Norman) media stocks (Fairfax), and transport stocks (Qantas) also enjoyed strong gains as the economic picture continued to be supportive. Many US exposed cyclical like Billabong, Brambles and James Hardie also did well.

IPOs and mergers and acquisitions activity also strengthened the market, with activity from Myer, Nufarm, and ANZ/ING.

Energy shares lagged, as did insurance, steel and some defensive areas of the market like healthcare and consumer staples. Mining companies BHP, Fortescue and Iluka also lagged the market. Stocks exposed to the surging $A (Amcor, PaperlinX, Resmed) underperformed.

Investors in the telecommunications sector were concerned about government regulation, with a “structural separation” threat for Telstra, and a similar development for Telecom New Zealand.  

International shares

All major developed market equity indices rose (except the Japanese Nikkei Index) and the MSCI World ex Australia index (hedged, $A) rose 3.0% in September. However, the rise in the Australian dollar relative to the major currencies caused the unhedged version of the MSCI World ex Australia index to fall 0.9%.  The chart in the next column shows the US S&P 500 index has recovered strongly from the lows seen earlier this year.

In the US, investors drew comfort from positive economic data and comments by the Federal Reserve Chairman that the US recession was “very likely over”.

A return of mergers and acquisitions activity helped stimulate the market (Kraft/Cadbury, Abbot Laboratories/Solvay, Xerox/Affiliated Computer Service). Negative news – namely unexpected falls in consumer sentiment, home sales, and rising unemployment – had only a modest impact.

The breadth of the market rally also continued to widen, with nearly all sectors enjoying gains. Cyclical stocks (Alcoa, Boeing, Caterpillar, GE) continued to do well. Some energy names reversed recent underperformance, as did consumer staples (like Coca Cola) and telecommunications companies. Health names continued to lag over government reform fears, and homebuilders cooled after a streak of positive housing data ended.

European share markets also rose following the positive US lead (France and Germany up 3.9%, the UK up 4.6%). Asian markets rose strongly (China 4.2%, Hong Kong 6.2%, Korea 5.1%). Japan was the exception, down 3.4% as the rising Yen hurt exports, and there was some pre-election political uncertainty.

Global emerging markets

Emerging markets rose 4.2% in September (MSCI EM index - $A). Data released in September showed that foreign direct investment in China increased by 7% in August, for the first time in 11 months. This compares with a 35.7% drop in July.  Hyundai, South Korea’s largest car maker, confirmed that it will raise 500 000 vehicles to 600 000.

South Korea’s economy showed signs of recovery, which helped to draw overseas funds, as part of a broader shift back towards Asian equities. Consumer sentiment reached a seven year high at 114.

China’s purchasing manager index (PMI) rose to 54.3. A reading above 50 indicates an expansion. This figure compares to a record low of 38.8 in November 2008.

After some uncertainty in August, the Chinese government pledged to maintain its stimulus policies to strengthen the recovery of the world’s fastest growing major economy.

Investment markets data

table 1 – investment market performance to 30 September 2009

table 2 – breakdown of Australia and international fixed interest market performance to 30 September 2009

table 3 – performance of major Australia share market indices to 30 September 2009

table 4 – breakdown of Australian share market performance to 30 September 2009*

*Based on S&P/ASX 300 Accum Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).

top 5 performing Australian shares in September 2009*

bottom 5 performing Australian shares in September 2009*

*Based on the universe S&P/ASX 100 Index.

table 5 – breakdown of international share market performance by country to 30 September 2009

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 30 September 2009*

*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).

Note: all returns are calculated in local currencies

While All Financial Services Pty Ltd ABN 56 055 133 018, AFSL No 239187 believes that the information contained in this document is correct, no warranty of accuracy, reliability or completeness is given and , except for liability under the statute which cannot be excluded, no liability for errors or omissions is accepted.
The information provided in this document is general information only.  In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision you need to consider whether this information is appropriate to your needs, objectives and circumstances, and we recommend you seek independent financial advice.

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