'Tax Updates'

Australian Cash

The Reserve Bank of Australia (RBA) raised its official cash rate by 0.25% to 3.75% in December. An improving labour market, better prospects for business investment and increasing housing prices all prompted the increase.

The RBA has implemented three successive rate rises in the last quarter of 2009 as GDP growth in Asia, created firmer demand for Australian resources exports.  

Australian Fixed Interest

The UBSA Composite Bond All Maturities Index fell 0.4% in December, as yields on 10 year government bonds rose to 5.64% (up from 5.24% in November).

Credit markets returned 0.2% in December. Domestic corporate bond issuance reached $100 billion for the first time. The record issuance was largely due to extensive use of the government guarantee for financial companies, which accounted for 50% of total supply for 2009.

Global Fixed Interest

The Barclays Capital Global Aggregate index fell 0.6% in December. Yields on US 10 year government bonds rose to 3.84% (up from 3.20% in November). US Treasuries rose as the US government sold $US2.1 trillion of bonds in order to bolster the economy and financial markets.

Bond investors demand higher yields when they believe the economy will grow fast. Inflation often accompanies a surging economy – and inflation erodes the value of the bonds. The rising 10 year yields reflects the bond markets view that the US Federal Reserve will raise rates in 2010 to dampen inflation. Recent economic reports have shown that US GDP rose 2.2% in the third quarter of 2009.

As the graph in the next column shows, the difference in the yield between 2 year and 10 year government bonds steepened to a record in December as investors bet an accelerating recovery would fuel inflation and hurt demand during unprecedented government debt sales.

Australian Listed Property

The S&P/ASX 300 Property Accumulation Index was up 3.4% in December, slightly underperforming the S&P/ASX 200 by 0.3%.

Outperformance was seen from the Commercial and Industrial Real Estate Investment Trusts (REITs) as sentiment towards commercial property improved and risk appetite increased. Over the month and year, Industrial (9.3% in December, 12.4% in the calendar year 2009) was the best performing sector followed by Commercial (8.6% for the month). Diversified (2.3%) was the worst performing sector for the month.

The top performing trusts for December were Ardent Leisure Group (20.2%), Charter Hall Group (15.5%); and ING Industrial Fund (12.98%). Ardent Leisure Group was added to the S&P/ASX 200 index. Charter Hall Group benefited from an improved outlook and increased appetite for domestic real estate markets. ING Industrial Fund rebounded from a poor November performance when it was in the midst of a $700 million capital raising, and completed this in December.

Only one REIT registered negative performance in December. The worst performing trusts for December were Abacus Property Group (0.0%) and CFS Retail Property Trust (-0.3%).

Global Listed Property

The UBS Global Property Investors Index was up 5.7% in December. Japan (7.5%) and Singapore (7.3%) were the best performers. Continental Europe (2.9%) and Australia (3.4%) lagged.

In December, the Japanese Government unveiled its first long term blueprint to underpin the expansion of the world’s second largest economy.  The plan aims to secure average annual real GDP growth of approximately 2% over the next 10 years. It envisages the economy expanding 20% from JPY 500 trillion now to JPY 650 trillion by 2020. In addition, the Bank of Japan announced their intention to keep interest rates at close to zero and fight deflation. A weaker yen boosts the value of Japanese companies’ overseas sales when converted into their home currency. This has helped Japanese REITs trading overseas.

Major Japanese REIT, Tokyu, announced the disposal of two properties, netting capital gains from these transactions.
Over 2009, Singapore (84.2%) and Continental Europe (48.7%) were the best performers. Japan (-3.7%) and Australia (8.3%) were the worst performing regions. The chart below shows the performance of major regions (in local currency) over the month and year (to 31 December 2009):

Australian shares

The Australian market rally continued in December, with the S&P/ASX 300 Accumulation Index up 3.7%. The market was buoyed by mergers and acquisitions activity and some respite for companies with earnings in $US, as the $US strengthened. Performance was led by the Industrials (6.9%) and Information Technology (4.6%) sectors. For the year, the Information and Technology (54.8%) and Materials (47.7%) were the best performing sectors.

Several banks announced bad debt had peaked, helping to underpin the general recovery tone. Capital goods and services companies Downer, Leighton, Worley Parsons and Transfield all traded significantly higher. NAB (-4%) launched an all cash offer for AXA APH (13%), trumping a bid by AMP, and triggered speculation of further takeover activity in the wealth management and insurance sector.

The fall in the $A benefited QBE (15%), health care providers Resmed, Sonic and Cochlear, as well as other industrials like James Hardie, Amcor, News Corp and PaperlinX. Gold stocks were weaker. Qantas rose 15% on improved business outlook and Incitec Pivot rose 25% on improving fertiliser prices.

International shares

Global equity market continued their recovery in December, with the MSCI World ex Australia index (hedged, $A) up 4.0%. Performance was led by the Technology (6.8%), Consumer Discretionary (6.5%) and Utilities (5.2%) sectors. For the year, international shares rose 26.7%, led by Technology (50.1%) and Materials (46.8%).

In December, the US market advanced. Gains in the S&P 500 (1.8%) were hampered by large equity raisings announced by the Bank of America, Citigroup and Wells Fargo to repay bail-out funds. Exxon Mobil fell 9% despite the rising oil price, following its large takeover announcement for XTO energy. Better than expected retail sales, consumer sentiment, unemployment claims and housing starts saw talk of interest rate increases. 

European markets also gained (UK 4.2%, Germany 5.8 %,). Bank shares were hurt by credit rating concerns in Spain and Greece but benefited from speculation that new capital rules may be deferred. Hong Kong advanced (0.2%) and Japan soared (12.8%) as the $US rose against the yen.

Global emerging markets

Emerging markets rose in December with the MSCI EM index ($A) up 5.8%. Emerging markets closed 2009 with record annual inflows as the outlook improved for developing nation exporters. The IMF expects developing economies to expand 5.1% in 2010, compared with 1.3% growth in developed nations.

The IMF said that the unprecedented scale and scope of the measures taken by emerging market economies during the past year to manage the impacts of the GFC, as well as the degree of multilateral policy coordination involved in their design and implementation appear to have succeeded in averting a severe downturn in 2009.

In China, the purchasing managers’ index, a barometer of manufacturing, rose to the highest level since April 2004. China’s economy led the global recovery for 2009. The 2009 rally in shares boosted the price-to-book value ratio of the MSCI Asia Pacific Index to 1.62 times, the highest level since September 2008.

table 1 – investment market performance to 31 December 2009                                         

table 2 – breakdown of Australian & global fixed interest market performance to 31 December 2009

table 3 – performance of major Australia share market indices to 31 December 2009

table 4 – breakdown of Australian share market performance to 31 December 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 December 2009*

bottom 5 performing Australian shares in December 2009*

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

table 5 – breakdown of international share market performance by country to 31 December 2009

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 31 December 2009*

*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) increased interest rates by 0.25% to 3.25% in October. The RBA was the first major central bank to do so, and marked the start of the policy tightening cycle.

At its most recent meeting in early November, the RBA raised the cash rate a further 0.25% to 3.5%, citing stronger than expected economic condition and measures of confidence in Australia. The RBA expect underlying inflation to continue to moderate in the near term, but is not expected to fall as far as earlier thought.  

Australian Fixed Interest

Australian Bond yields rose following heightened expectations of policy tightening and positive economic data. The UBSA Composite Bond All Maturities Index fell 0.1% in October. Yields on 10 year government bonds rose to 5.54% (up from 5.54% in September). The CPI was in line with expectations although core inflation remained above the RBA target range.

The prospect of rising interest rates led to a sell off on the bond market. Bond yields move in the opposite direction to bond prices. Higher yields signal that investors are driving down prices as they sell out of the sector.

The sell off was exacerbated by rising confidence in the economy. Consumer confidence rose for its 5th consecutive monthly gain (to 121.4). Unemployment fell to 5.7%.
The cash rate increases had a more muted impact on the corporate bond market. The spread corporate pay over the cash rate to access debt finance continued to narrow for lesser quality securities, reflecting confidence in corporate earnings prospects and a perceived reduction in bankruptcy risk.

Global Fixed Interest

The Barclays Capital Global Aggregate index rose 0.5% in October. Bond Yields in the US were mixed: slightly lower at the short end and slightly higher at the long ends. Yields on US 10 year government bonds rose 3.39% (up from 3.31% in September). 

A record sale of US Government debt drew the strongest demand since the start of the financial crisis, fostering fears investors were losing faith in the recovery of the US economy. US Treasury sold a record and Europe fell $US44 billion worth of treasury notes, as consumer confidence fell in October. The Conference Board’s index of consumer confidence dropped to 47.7 in October from 53.4 in September. The chart below shows the movement by investors back into Treasuries as risk aversion arises.

In credit markets, strong credit fund inflows saw secondary corporate bond spreads continue their tightening trend during October, despite some profit taking early in the month.

Australian Listed Property

The S&P/ASX 300 A-REIT Index was down 9.0% in October, underperforming the broader share market index by 6.9%. As the chart below shows, October saw a reversal of recent strong performance, despite having rebounded strongly from March lows.

Office REITs were relatively strong performers. Retail (-10.4%) was the worst performing sector.

The top performing trusts for the month were ING Office Fund (7.1%) and Macquarie Office Trust (6.7%). Both trusts benefited from improving sentiment towards the domestic office sector.  ING Office Fund also announced an asset sale in the US at a good price.

The worst performing trusts were Westfield Group (-11.7%) Charter Hall Group (-13.5%) and GPT Group (-14.6%). Westfield Group suffered from waning US consumer confidence, and the impact it would have on the US retail conditions. GPT Group announced the disposal of an asset at a 10% discount to its book value.

Global Listed Property

The UBS Global Property Investors Index (hedged $A) fell 3.3% in October. The UK (1.1%) and Europe (-0.2%) were the best performers, while Australia (-9.0%) and Japan (-4.7%) were the worst.

UK house prices posted their first annual gain in 19 months in October. An increased demand for homes and a lack of properties for sale pushed up values. Home values have dropped as much as 20% from their 2007 peak.

German REITs led a revival in acquisitions in Europe as the $US131 billion industry recovers from its crisis. German funds made 1.05 billion Euros of purchases in Europe in the third quarter, 22% more than in the first half of 2009, accounting for about 6% of all commercial property deals in Europe. Total European commercial real estate investment was 42 billion Euros in the first nine months of 2009, 57% less than a year earlier. This has reflected the difficulties most buyers have had in obtaining debt finance.

In Japan data released in October showed that Tokyo’s office vacancy rate was 7.6% in August, unchanged from July, ending 18 months of gains. Average land prices declined 4.4% in the 12 months ended June 2009.

Australian shares

The Australian share market rose strongly in the first half of the month, but fell back in the latter half on rising risk aversion, finishing the month down 2.1% (S&P/ASX 300 Accumulation Index). Stock specific performance varied widely across sectors.

BHP, Rio Tinto and some defensive names (like TABCORP) outperformed, as did stocks that gave encouraging comments in their annual general meetings (Amcor, APN, Challenger, CSR, Downer, Ten, Telstra, Transurban). In contrast, news from AMP, Aristocrat, Brambles, Harvey Norman and Sims disappointed. Woodside fell despite the higher oil price after announcing a setback to their liquefied natural gas (LNG) prospects.

The start of bank reporting season saw mixed performance among the major banks, with CBA and Westpac outperforming their peers (ANZ, NAB). Similarly, recent ‘high0beta’ (market driven) winners like Asciano, REITs and Macquarie suffered following a sell-off later in the month as risk appetites cooled.Stocks exposed to the rising $A (Billabong, Caltex, PaperlinX, United Worley Parsons) fell, while Cocoa Cola and Pacific Brands benefited.

International shares

After early gains in the month, international share markets finished lower in October, down 2.0% (MSCI World ex Australia index - hedged, $A). The US S&P 500 fell 2% as investors saw discouraging economic data as evidence that the market was overextended following a significant seven month rally.

Optimism about a US economic recovery was evident early in the month, also following third quarter corporate earnings that were largely ahead of expectations. Most notable were Amazon, Caterpillar, Intel and Microsoft. However, unexpected declines in consumer confidence, spending and home sales saw sentiment turn negative.

Consumer staples and energy stocks rose, the latter buoyed by a 9% rise in the oil price as the $US continued to weaken. However, the previously high-flying financials sector gave back some recent outperformance as fears over increased regulation rose (Bank of America, JP Morgan).

European and Asian markets mostly followed the US lead, ending the month in negative territory (Germany -4.6%, the UK -1.7%, Japan -1%, Korea -5.5% and China 7.8 %,). The adverse impact of a falling $US on export earnings continued to cause concern. Resources stocks rose due to higher commodity prices.

China’s outperformance was due to optimism over positive economic data, confirming the strength of their domestic economic recovery.

Global emerging markets

Emerging markets fell 2.2% in October (MSCI EM index - $A). A surging Chinese market helped to mitigate larger losses.

Chinese manufacturing expanded at the fastest pace in 18 months, according to a purchasing managers’ index (PMI), which rose to a seasonally adjusted 55.4 (from 55 in September).

Premier Wen Jiabao’s stimulus package and an unprecedented $US1.27 trillion in new loans this year have sustained China’s rebound. The Shanghai Composite index (in local currency) closed 7.8% higher in October as stocks fell elsewhere in Asia. China Q3 GDP rose 8.9% (year on year), in line with expectations. This compares with US GDP, which grew at a 3.5% annual rate in the third quarter.

In Brazil, the government placed a 2& financial transactions tax on foreign investments in Brazilian stocks and fixed income securities in a bid to curb excess capital inflows. These inflows were thought to have caused an appreciation in the local currency. This triggered concern, that more capital control measures may be considered.

Investment markets data

table 1 – investment market performance to 31 October 2009

table 2 – breakdown of Australian & global fixed interest market performance to 31 October 2009

table 3 – performance of major Australia share market indices to 31 October 2009

table 4 – breakdown of Australian share market performance to 31 October 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 October 2009*

bottom 5 performing Australian shares in October 2009*

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

table 5 – breakdown of international share market performance by country to 31 October 2009

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 31 October 2009*

*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