'Economic Updates'

Australian Cash

At its June meeting, the Reserve Bank of Australia (RBA) left interest rates unchanged at  4.50%. Rates were also kept on hold at the July meeting. A key consideration was the deteriorating situation in Europe which affected investor sentiment and added to uncertainty around global growth prospects. At 4.5%, interest rates in Australia are around their average over the past 10 years.

Australian Fixed Interest

Yields on Australian bond declined in June amid market concerns that the global economic recovery may be stalling. Softer than expected economic data from China and the United States in particular, as well as falling equity markets lifted demand for government bonds in developed countries.

The yield on the three-year government bond fell 0.3% to 4.5% over the month, while the yield on the longer dated 10 year bond ended the month at 5.1% also 0.3% lower. The UBSA Composite Bond All Maturities Index rose 1.4%.

While heightened risk aversion saw credit markets weaken, new bonds to the value of A$3.25 billion were issued in June by companies such as NAB, Westpac, Telstra, Sydney Airport and Caterpillar Financial.

Global Fixed Interest

Risk aversion remained elevated in June on the back of growing concerns about global growth and softening economic data. This boosted demand for government bonds, sending the yields lower. The Barclays Capital Global Aggregate index (hedged $A) rose 1.2% in June. In the US, the yield on the 10 year government bond declined during the month to below 3%, the lowest level since April 2009. In Japan, 10 year bond yields fell to a seven year low following an unexpected rise in the jobless rate and a fall in household spending.  Yields in the United Kingdom government bonds also declined, following the release of a more severe emergency budget than expected.

Credit markets weakened in June, with US investment grade credit spreads widening by 0.18%, while global high yield spreads widened by 0.04% over the same period.

Australian Listed Property

The S&P/ASX 300 Property Accumulation Index was down 1.0% in June, outperforming the S&P/ASX 200 by 1.6%. The chart below compares the performance of the two indices since May 2010.

The Australian REIT sector started the month on a positive note with renewed interest from both domestic and offshore investors. Recently, the outlook for the sector has improved helped by relatively appealing valuations and improved balance sheets.

The Industrial sector (+2.2%) was the top performer for the month, followed by Commercial (+2.0%).  Both sectors reversed significant falls suffered in May.  Retail (-3.3%) was the worst performing sector in June, followed by Leaders (-1.2%). The worst performing trusts for June was Westfield (-4.4%), which was affected by the negative outlook for US economic growth.

Global Listed Property

The UBS Global Property Investors Index (local currency) decreased 2.9% over June. The poor performance was primarily attributable to broader share market concerns fuelled by the European debt crisis. This prompted investors to flee from riskier assets.  Singapore was the top performing region (+2.2%), followed by Continental Europe (+1.4%). The worst performing regions over the period were USA and Canada (-4.9%) as well as the UK (-4.7%).

US REITs experienced significant falls amidst increased risk aversion and concerns regarding the sustainability of the US economic recovery. On the positive side, US REITs continued to be active in raising equity capital in June to improve the quality of their balance sheets with a number of the stronger participants also raising cash to fund potential investment opportunities in distressed assets.

Australian Shares

While local shares started the month on a positive note, sentiment turned negative in the latter part of June as investor concern over the pace of the global economic recovery intensified. The S&P/ASX 300 Accumulation Index fell 2.6% for the month.

In an unexpected turn of events, Julia Gillard replaced Kevin Rudd as the Prime Minister of Australia. After only a few days in office, the new Prime Minister concluded a deal with the mining industry on the new resource tax. Some of the changes included cutting the headline tax rate to 30% and an increase in the threshold at which the tax applies.

Telecommunications (+9.5%) was by far the best performing sector for the month, followed by Utilities (+2.0%), while Industrials (-7.3%) was the poorest performer over the period.

The best performing domestic large cap stocks during the month included Metcash (+12.7%), Telstra Corporation (+10.5%) and Coca Cola Amatil (+9.9%). The worst performers included Downer EDI (-42.6%), which suffered following a write down warning, Transfield Services (-18.2%) and Brambles (-17.9%).  Positive business performance and acquisition activity boosted Metcash. Telstra’s solid performance followed an agreement reached with the National Broadband Network, in which Telstra will help the government to provide new, faster internet services. Brambles fell on concern about competition in the US market that may threaten their market share.

International Shares

Throughout the month international share markets remained highly reactive to the tone of the economic data, which was mostly negative. After a solid start to the month, the MSCI World ex Australia index (hedged, $A) gave up all its early gain to end the month 3.9% lower.

In the US, disappointing payroll numbers and a sharp decline in consumer confidence added to investors’ worries about the global economy. European share markets had to contend with sovereign debt issues in Hungary, a significant downgrade of Greece’s credit rating to non investment grade by Moody’s and falling consumer confidence. In this environment, volatility re-emerged as shown in the chart below.

China’s revaluation of its currency offered temporary relief to international share markets towards the end of the month. The increased caution evident in June saw defensive sectors outperform in the month, while cyclical sectors underperformed.

Global Emerging Markets

While the MSCI EM index (hedged $A) was down 1.4% in June, the sector performed relatively well on the back of strong performance from some of the Asian economies, most notably Sri Lanka (+8.9%) and the Philippines (+3.9%).

In June, manufacturing growth in China slowed for the second consecutive month. This added to investor fears that the global economic recovery might be stalling, and is a sign that recent tightening measures employed by the Chinese authorities to prevent the economy from overheating are having the desired effect..

During the month, China also announced an exit from the Renminbi’s peg to the $US dollar. This announcement was positively received, as it is expected to contribute to economic rebalancing in China and promote a necessary shift away from export driven growth to domestic demand led growth.

Investment markets data

table 1 – investment market performance to 30 June 2010

table 2 – breakdown of Australian & global fixed interest market performance to 30 June 2010

table 3 – performance of major Australia share market indices to 30 June 2010

table 4 – breakdown of Australian share market performance to 30 June 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 June 2010*

bottom 5 performing Australian shares in June 2010*

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

table 5 – breakdown of international share market performance by country to 30 June 2010

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 30 June 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

Australian Cash

As was widely expected, the RBA lifted its official cash rate by 0.25% to 4.50% in May. The RBA signalled a pause in the rate rise cycle, noting there were signs that rate rises delivered to date were impacting on consumer activity.

At its most recent meeting on 1 June, the RBA left interest rates on hold for the first time in four months amid concerns about Europe’s worsening sovereign debt crisis.  

Australian Fixed Interest

The UBSA Composite Bond All Maturities Index rose 0.5% in February. Yields on 10 Year government bonds rose to 5.49% (up from 5.38% in January). Sovereign risk indicators rose sharply as concerns escalated over Greece’s budget position and default risk. This dented risk appetite and caused some flight to higher quality markets.

Australia’s economy grew 0.9% in the fourth quarter, boosted by $22 billion in government spending on infrastructure.  Further, a rebound in consumer confidence, greater business optimism, surging house prices, a drop in unemployment, and signs of an investment boom in resources projects were forecast by the RBA to underpin sustained growth in Australia’s economy.

Gross operating profits jumped 2.2% in the fourth quarter from the previous quarter. Sales of newly built dwellings surged 9.5% in January, reinforcing RBA expectations for stronger growth in 2010.

Global Fixed Interest

Australian bond yields hit a low in May, following safe haven buying. The UBSA Composite Bond All Maturities Index rose 1.6%. Australian Bond Markets sold off slightly over the last few days of the month, but still rallied significantly overall.  Yields on 10 year Government bonds fell to 5.37% in May (down from 5.71% in April).

The graph below shows the fall in 10 year government bond yields in May, and the spread between Australian and US 10 year yields.

A barometer of monthly consumer prices, the TD inflation gauge, rose 3.7% from a year earlier in May, faster than the 2.9% increase in April. The jump in inflation was mainly due to the 25% tobacco tax introduced in April. Excluding tobacco, the inflation gauge rose 3.3% in May. The RBA’s inflation target range is 2-3%.

Global Fixed Interest

The Barclays Capital Global Aggregate index (hedged $A) rose 1.2% in May. The European Sovereign Debt crisis intensified during the month. Higher rated sovereign bonds rallied for most of the month as the European story dominated the news whilst spreads in higher risk markets widened. In the middle of May markets briefly stabilised following IMF/EU bailout packages and an ECB intervention.
However, Sovereign debt concerns once again resurfaced in Greece, Spain, Ireland and Portugal by the end of the month.
The debt issue was centred on developed markets. In the G20’s largest developed economies, sovereign debt burdens are now at about 100% of GDP (compared to debt in emerging markets, which represent around 40% of GDP).

Australian Listed Property

The S&P/ASX 300 Property Accumulation Index was down 4.3% in May, outperforming the S&P/ASX 300 by 3.2% broader share market by 5.2%.

Retail (-1.3%) was the top performing sector. Industrial (-11.8%) reversed the previous two month s as the best performing sector, being the worst performing sector in May,  followed by Commercial (-5.9%).

The top performing trusts for the month were CFS Retail Property Trust (0.5%) and Commonwealth Property Office Fund (-0.5%). Both trusts outperformed in a risk averse market. Investors’ preferred Goodman Group benefited from continued confidence that domestic retail assets with low gearing.

The worst performing trusts for May were Charter Hall Group (-17.6%) and Ardent Leisure Group (-22.1%). Charter Hall Group underperformed as investor macro shocks made refinancing and attracting capital more challenging. Ardent Leisure Group’s third quarter update was below expectations.

Global Listed Property

The UBS Global Property Investors Index (hedged, $A) decreased by 5.9% over May, with Australia the top performing region, despite falling (-4.3%) followed by the USA and Canada (-5.2%). The worst performing regions were Japan (-8.2%) and Continental Europe (-7.1%).

In Japan, the price index for residential, commercial and industrial land in the six major cities in Japan was down 3.5% from six months earlier (as of March 31). However, this represented a slower pace of decline for the second straight semi-annual period, suggesting an improvement in real estate transactions in central metropolitan areas.

In the US, at the International Council of Shopping Centres convention in May, owners anticipated a return to modest growth in leasing and retail sales in 2010-2011. Regional mall operators and higher quality properties expressed the most optimism. This helped buoy the US market.

Australian Shares

The S&P/ASX 300 Accumulation Index fell 7.5% in May. Events in Europe had a negative flow on impact for the Australian market. Resources stocks were additionally unsettled by the government’s proposed introduction of a Resource Super Profits Tax.

In addition, investors feared that China’s economic policy tightening could potentially impact on China’s growth prospects and consequently – commodity demand, adding to the negative sentiment towards the Resource sector.

Despite this, outperformers in May included resource tax targets BHP, RIO and Woodside. Gold stocks, large REITS (Westfield) and some defensives such as Consumer Staples and Healthcare also outperformed.

Some switching to ‘blue chip’ names within sectors appeared to be an outcome of the heightened risk aversion. However banks (ex ANZ) fell as GFC fears resurfaced and some trading updates were poorly received, as did Healthcare names Sonic and Primary (over difficulties recovering government funding cuts). Others that announced profit warnings (Spotless, Virgin) and steel, smaller resource names and contractors also suffered.

International Shares

Deepening concerns over Europe’s debt crisis caused widespread selling of equities in May. The MSCI World ex Australia index (hedged, $A) fell 7.9%.  Initial investor relief over the bailout package gave way to worries over how the region would navigate the difficult road to fiscal recovery for countries such as Greece and Spain.

Germany rekindled GFC fears by placing naked short selling bans on some securities. Markets also had to deal with China slowdown fears and more evidence of increasing sovereign risk – namely a global increase in mining taxes (led by Australia).

The surge in risk aversion caused investors to switch from ‘risk’ assets such as equities to ‘safe havens’ such as gold and the $US. The selling was generally broad based and not just confined to cyclical or other high beta sectors. In the US, BP’s Gulf of Mexico disaster plus a 14% fall in the oil price saw energy names hit hard. Stock markets in Europe also suffered major selling (UK -6.6%, France -8.1%, Spain -10.8%) with Spain’s credit rating being downgraded. However, some strong stock specific performance (autos), good company results and a somewhat safe haven (fiscally stronger) position in the region helped the German market to fall ‘only 2.8%. Asian markets fell significantly especially Japan (-11.7%) and China (-10.8%) where fears over an economic slowdown persist.

Global Emerging Markets

Easing global growth and the effects of Europe’s debt crisis on exports restrained emerging markets, but the MSCI EM

index (hedged $A) closed 1.2% higher in May. Losses were mitigated by the view that China wouldn’t be significantly hurt by the sovereign debt problems in southern Europe because the nation’s growth is largely driven by its domestic economy.

However, Europe is China’s biggest export destination, making up 20% of total overseas sales, and investors were still concerned about the impact of a faltering Euro zone economy on China. European Union leaders unveiled an almost $1 trillion loan package last month to halt the slide in the Euro after Greece’s budget deficit expanded to almost 14% of gross domestic product, exceeding the EU’s 3% limit.

China’s purchasing managers’ index showed manufacturing expanded at a slower pace than estimated in May, adding to concern that the world’s third largest economy may decelerate.

Investment markets data

table 1 – investment market performance to 31 May 2010                                         

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

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

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

bottom 5 performing Australian shares in May 2010*

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

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

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 31 May 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