Market Updates

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

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