'Economic Updates'

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

Australian Cash

As was widely expected by the market, the RBA increased the cash rate by 0.25% to 4.25% in April.

At its most recent meeting on 4 May, the RBA raised the cash rate further 0.25% to 4.50%, citing the better economic environment domestically, strong growth in Asia and a rising terms of trade. They also noted that inflation appears likely to be in the upper half of the 2-3% target zone over the coming year.

The RBA indicated that interest rates are now “around average levels”.  

Australian Fixed Interest

The UBSA Composite Bond All Maturities Index rose 0.6% in April. Market concerns about Greece led to a flight-to quality rally in the long end of the Australian yield curve. Government bond failed to match the rally in US bonds. Yields on 10 year Government bonds fell to 5.7% in April (down from 5.78% in March).

At the shorter end of the yield curve, bank bill yields rose as the RBA lifted the cash rate and markets priced in more risk of further tightening later in the year. Expectations for further RBA tightening were supported by solid business and consumer confidence surveys, and another 19,600 rise in employment in March.

Elsewhere, for most of the month the tension between domestic strength and offshore concerns was resolved by Australian bond markets trading sideways.

Global Fixed Interest

The Barclays Capital Global Aggregate index (hedged $A) rose 0.9%.  Yields in key major markets drifted lower in April as safe-haven buying trumped improved economic data. Investors favoured highly rated major bond markets, particularly the US, in preference to more peripheral European markets where sovereign risk concerns were elevated. As the graph in the next column illustrates, the Euro zone debt crisis widened as Greek sovereign debt was downgraded to “junk” status, Fears of contagion crystallised, with subsequent downgrades of Spain and Portugal. Yields on 10-year US Treasury fell to 3.66%, (down from 3.83% in March).

In the US, consumer spending climbed 0.6% in March – the most in five months, after increasing 0.5% the previous month. The Institute for Supply Management’s index of manufacturing rose to 60.4 in April, the highest level since June 2004, from 59.6 in March. Readings greater than 50 signal expansion.

Corporate credit markets remained resilient during April, as many global issuers were pre-occupied by Q1 earnings season, Euro sovereign concerns, and global corporate bond issuance was muted during April.

Australian Listed Property

The S&P/ASX 300 A-REIT Index was up 3.9% in April, outperforming the broader share market by 5.2%. Investors continued to pursue stocks that they believed could surprise on earnings as the global recovery continued.

For the second month running, the top two sectors over the month were Industrial (6.7%) followed by Retail (6.3%). Diversified (0.2%) was the worst performing sector.

The top performing trusts for the month were Goodman Group (9.2%) Charter Hall Group (8.5%) and Westfield Group (7.1%). Goodman Group benefited from continued confidence that management can deliver on their results. Charter Hall Group enjoyed similar positive sentiment, while Westfield Group saw strong performance with US retail sales exceeding forecasts.

The worst performing trusts for April were ING Industrial Trust (-2.2%) and Mirvac Group (-4.7%). 

Global Listed Property

The UBS Global Property Investors Index (hedged, $A) rose 4.1% in April. The USA/Canada was the top performing region (6.8%) followed by Singapore (5.6%).   . The worst performing regions were Continental Europe (-4.0%) and the UK (-1.6%).

An index of US pending home resales climbed 5% in March following an 8.2% jump a month earlier. The housing market, which triggered the worst recession since the 1930s, has received a boost from a tax incentive, provided buyers signed the contracts by the end of April.

Housing starts increased for the second straight month in March and building permits, a sign of future building, jumped to the highest level in more than a year.

DR Horton Inc, The second largest US homebuilder by revenue, reported its second straight quarterly profit as net orders jumped 55%. US property trusts have surged more than 20% in 2010.

Australian Shares

The S&P/ASX 300 Accumulation Index fell 1.4%in April, with weakness in the resource and related sectors (contractors, steel) dampening the overall market.

Speculation of a new federal tax on resources following the Henry Review (subsequently confirmed) – in addition to negative overseas leads – weighed heavily on resources stocks. Outperforming M&A targets Lihir Gold and MacArthur Coal were the exceptions that outperformed.

Healthcare stock CSL, fell particularly hard following poor results from its US rival Baxter, who gave a downbeat assessment of the US plasma market when it released its results. Domestic retailers continued to struggle, not helped by a disappointing Q3 sales result from Harvey Norman. ANZ and Asciano’s profit results were also not well received.

In contrast, earning from the Bank of Queensland and Macquarie were welcomed, while builders (strong leads from US peers), CBA, News Corp (strong US movie and TV releases), Paperlinx (closure of Burnie mill), Telstra (NBN deal speculation) and REITs outperformed. NAB rose despite the ACCC rejecting their takeover of AXA’s Australian and New Zealand businesses.

International Shares

Europe’s sovereign debt crisis stifled the global equity market rally in April, with the MSCI World ex Australia index (hedged, $A) up 0.7%.  The unhedged return was -1.4%. In the US, the S&P 500 climbed in April following strong Q1 earning results (Apple, Caterpillar, Citigroup, Intel and Yahoo!) and encouraging economic data (especially employment and housing). The VIX (volatility) index fell to its lowest level in almost three years.

Consistent with the economic trends, cyclical Consumer, Consumer and IT stocks outperformed defensive Health and Consumer Staple names.

Risk aversion returned late in April as Greek government bond yields soared after being downgraded to ‘junk’, with investors contemplating a real risk of sovereign default. This led to fears of another credit crunch if the contagion spread to other highly indebted Euro members such as Spain and Portugal. Fears of increasing financial regulation also scared the market, fuelled by civil action against Goldman Sachs (-15%) over its behaviour prior to the GFC.

European markets (France -4%, Germany -0.3%, UK -2.2%) were hit hard by the worsening local debt crisis. Asian markets (Japan -0.3%, Korea 2.9%, Taiwan 1.1%) performed much better, helped by the more positive regional and US outlook.

Global Emerging Markets

The MSCI EM index ($A) was down 0.2% in April. China fell on concerns of an overheated property market, and the subsequent clampdown by the government on property speculation. Up to 60% of the country’s gross domestic product relies on construction.

The Government in April banned loans for third homes and raised mortgage rates and down payment requirements for second home purchases. Prices rose 11.7% across 70 cities in March compared to a year earlier; however, the government has stopped short of raising interest rates to contain property prices. The Government said it remained committed to expansionary policies to cement the nation’s recovery.

China’s economy grew 11.9% in the first quarter, the fastest pace in almost three years. The Government projects gross domestic growth for the year at around 8%.

investment markets data

table 1 – investment market performance to 30 April 2010

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

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

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

bottom 5 performing Australian shares in April 2010*

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

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

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 30 April 2010*

*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).
 
Note: all returns are calculated in local currencies

*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

economic indicators