Market Update:

After a very difficult start to the financial year, Global equity markets are up significantly in October 2011.  The Australian market is up around 8% for the month. The main influence driving markets has been some positive resolutions last week by Europe’s leaders to combat the Sovereign debt crisis.  Key initiatives agreed to include:

  • Bank recapitalisation by June 2012
  • Negotiations for the private sector holders of Greek government debt to take a “voluntary” 50% “haircut” on the value of their debt holdings
  • Increase in the EU stability fund to 1 trillion euros through one or both of the following methods:
    • Potential for a special investment vehicle to enable other investors (such as China and Emerging market governments) to provide funds to lend to European countries,
    • Potential first loss insurance on new European Sovereign debt being issued.

Corporate profit results from the US for the quarter ending 30 September have generally been in line with expectations and have also been a positive contributor to the performance of US equity markets.

In the Australian market inflation information released last week is pointing to inflation slowing.  Market expectations are that this will flow through to a reduction in the official interest rate before the end of 2011.  Such a move would be received positively by the Australian equity market.

The European initiatives and recent key global economic indicators provide support that these major economies will continue to grow in 2011 and 2012, although probably at a slow pace of between 1% and 2.5% pa.

Equity market movements in October seem to confirm that equity markets had been oversold in the period July to September 2011.  Unfortunately resolution of the key global financial issues will take time. Equity markets have increased sharply in October, however, they are likely to continue to remain volatile.

The remainder of this newsletter provides an overview of market action in major asset class for the month of September 2011. 

Australian shares

September saw the sixth consecutive monthly decline in the Australian share market. The S&P/ASX 200 Accumulation Index traded in a fairly wide range and declined by 6.1% in the month as a whole.

Sentiment continued to be dominated by offshore events rather than domestic economic indicators and company news flow. Defensive areas of the market continued to outperform, while those companies whose earnings are more correlated with economic activity tended to struggle.

The Materials sector was a notable example, declining in value by 12.5% during the month. The Energy and Industrials sectors were other notable underperformers.

Since most companies had updated the market in August during the earnings reporting season, there was limited company news released.

Foster’s Group did, however, accept an improved takeover proposal from UK–based brewer SAB Miller, while the proposed takeover of toll road operator ConnectEast Group was approved by shareholders. The stock will be de-listed in early October.

Conglomerate Wesfarmers, sold a small part of its coal business during the month, while National Australia Bank was rumoured to be considering a sale of its Clydesdale business in the UK.

Global shares

Global equity markets fell sharply in September on continuation of sovereign debt concerns and lower economic growth forecasts. Investors continued to move out of risk assets and into US Treasuries despite further stimulus by the Federal Reserve, with US bond yields falling sharply over the month.

Equity market volatility led to Spain, Italy and France extending the short selling ban that was implemented in August in an attempt to restore calm to markets.

The MSCI World Net Index fell 8.9% in US$ terms over the month of September. Over the past three months the Index is 17.1% lower. In A$ terms, the Index returned 0.4% given a sharp 9.2% fall in the A$ over the month of September.

The Dow fell 6.0%, the S&P 500 was down 7.2% and the NASDAQ fell 6.4%, with all markets trading with considerable volatility over the month and intra–day. Out of 21 trading days, there were 14 days of moves greater than 1% in either direction.

 European markets were weaker, with the Financial sector the hardest hit with rising concerns in particular over French banks. The French CAC Index fell 8.4% in September, after falling 11.3% in August. French banks are among the largest holders of Greek government debt. The German DAX fell 4.9% after recording losses of 19.2% in August, the largest loss since September 2002. Spain (–2.0%) and Italy (–4.2%) also experienced falls during September.

Economic growth in Europe has stalled with many economists now expecting a recession late in 2011 and into 2012. EU GDP growth was just 0.2 for the quarter and 1.6% for the year to 30 September. The Greek share market fell 12.8% in September after falling 23.9% in August on further austerity measures and a weaker growth outlook.

In Asia, markets recorded losses across the board. Japan (–2.9%), Hong Kong (–14.3%), Singapore (–7.3%), South Korea (–5.9%), Taiwan (–6.7%), Thailand (–14.4%) and Malaysia (–4.2%) all recorded losses during September.

In terms of sector performance, the Materials sector was the worst performer, down 17.7%. Commodity prices fell sharply on lower global economic growth forecasts and concerns that the Chinese economy was slowing faster than expected.

Commodity price moves included copper (–24.3%), lead (–23.1%), nickel (–20.7%), zinc (–18.9%) and tin (–17.9%). There were expectations that some of this selling was driven by ETFs and margin calls for equities.

Other sectors to record sharp falls included Energy (–12.5%), with the oil price falling 10.8% over the month. Financials fell 11.5%. Defensive sectors such as Utilities (–2.5%) and Telecommunications (–4.8%) outperformed but still fell.

Global emerging markets

Emerging markets fell sharply lower in September and significantly underperformed developed equity markets. There were rising concerns over the impact of emerging economies from developments in the US and Europe, particularly the outlook for Chinese economic growth.

The MSCI Emerging Markets Index fell 14.8% in US$ and 6.1% in A$ terms during September. The largest falls in emerging equity markets occurred in Russia (–19.5%), Argentina (–17.5%) and Hungary (–14.6%). Other falls included the Czech Republic (–10.9%), Brazil (–7.4%), the Philippines (–6.0%) and Mexico (–6.2%). Turkey (+10.4%) and Saudi Arabia (+2.2%) went against the trend.

Global fixed interest

Global bond markets saw sharp falls in yields (prices rose) in September. Most developed world bond markets were boosted by the continued ‘flight to safety’ from riskier assets as investors’ confidence continued to be eroded by a vicious circle of declining equity markets, falling liquidity and credit availability, and a deteriorating global economic outlook.

Market participants continued to focus on the policy makers’ responses to the European sovereign debt crisis and recessionary concerns in the US.

The Europeans continued to ratify the increase to the European Financial Stability Fund (EFSF) to €440bn. This is the bailout fund used for Ireland and Portugal. There is growing expectation this will eventually need to be lifted to €2trn through leverage to cope with bank recapitalisations, a Greek default and assistance for liquidity in Italian government bonds.

However, the slow response to the crisis in Europe and concerns over the credibility of some policies, contributed to ongoing market disappointment, with investors driving down 10-year US Treasury yields to a record low of 1.72% on 22 September. Eventually, yields finished the month at 1.92%, down by 30 bps from August month-end.

The European Central Bank kept its key policy rate unchanged at 1.5% in September, but signalled a change in its stance to neutral from its previous tightening bias. The change was a product of the recent turmoil in Eurozone financial markets and declining upside inflation risks. German 10–year bonds declined by 33 bps to 1.89% at September month–end.

In the UK, the Monetary Policy Committee voted 9–0 to leave the Bank of England rate at 0.5%. The Committee signalled a clear bias towards further quantitative easing (QE2) as “most members thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point”. The UK 10–year government bond yield decreased by 39 bps to 2.43% at month–end.

The Australian bond market saw yields fall (prices rise) in September for a ninth consecutive month (including a virtually unchanged June) with the downtrend in yields driven largely by weak sentiment about the domestic and global economic outlook, together with concerns over European sovereign debt risk.

Over the month, domestic bond markets continued to price in aggressive monetary policy easing by the Reserve Bank of Australia (RBA).

Furthermore, the bond market continued to be supported by demand from overseas central banks and offshore institutional investors lured by the developed world’s highest government bond yields, strong liquidity and the relative safety of the AAA–rated Australian government bond market, given the country’s sound fiscal position.

Australian 10–year Commonwealth Government Security (CGS) yields fell by 15 bps to 4.22% at September–end, having ended the previous month at 4.37%. The downward movement in 10–year yields tracked global market movements, which were driven by events in Europe and the US.

 During the month, amid the offshore market turmoil, ratings agency Standard & Poors (S&P) affirmed Australia’s long–term sovereign rating as AAA with a stable outlook.

The RBA retained its official cash rate at 4.75% as widely expected at its September meeting. The post–meeting statement and minutes highlighted the risks to the global growth outlook, given the recent bout of uncertainty in financial markets and the prospects for weaker economic growth in both Europe and the US.

The early October meeting signalled a move to an easing bias highlighting that “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary”.

Listed property

A–REITs (–4.5%) outperformed the broader S&P/ASX 200 (–6.1%) by 1.6% in September, although still recorded a negative return. The REITs were more defensive than the wider market in a volatile period for equity markets. To date, in calendar year 2011, A–REITs have outperformed Australian equities by 7.4%.

September was a fairly quiet month for stock specific news. Key A–REIT news included Mirvac Group’s announcement of the sale of 50% of its Hoxton Park project for $97.4m on 7.5% yield in addition to announcing plans to sell off four further assets.

In other stock news Westfield Group opened its $1.8bn Stratford City retail project and Australand Property Group announced $550m of new bank debt at an average term of 4.3 years.

 The UBS Global Property Investors’ Index (local currency) decreased 9.4% over the month of September, with Japan the top performing region (–4.2%) followed by Australia (–4.5%). The worst performing regions were the US & Canada (– 10.6%) and Continental Europe (–8.9%).

Australian Dollar

The A$ was volatile over the month in line with global share markets and swinging investor sentiment.  Falling commodity prices, and increasing expectation that the next move in Australian interest rates will be down also weighed on the currency.  The A$ closed down 9.2% against the US$ during September.  However at during October the $A was up over 10% against the $US.

 

GENERAL ADVICE WARNING
© 2011 Harvest Financial Group Pty Ltd. This Newsletter has been prepared for clients of Harvest. This document contains confidential and proprietary information of Harvest Financial Group (‘Harvest’), and is intended for the exclusive use of the recipient to whom it is addressed. The document, and any opinions on investment products it contains, may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Harvest’s prior written permission. Information on investment management firms contained herein has been obtained from the firms themselves and other sources. While this information is believed to be reliable, no representations or warranties are made as to the accuracy of the information presented, and no responsibility or liability, including for consequential or incidental damages, can be accepted for any error, omission or inaccuracy in this report or related materials. Opinions on investment products contained herein are not intended to convey any guarantees as to the future investment performance of these products. In addition, past performance cannot be relied on as a guide to future performance. This information has been sourced from Harvest’s independent research house Mercer Investment Consulting Research and other sources.