Market Update:

The month of November has been dominated by European Sovereign debt crisis. The key issues at the moment can be summarised as follows:

  • The total debt of most EU countries is growing as governments continue to run budget deficits, 
  • Any significant measures to reduce the budget deficit are likely to slow economic growth and potentially result in a recession, 
  • The cost of refinancing government debt in the open market is increasing, which will increase the budget deficit, 
  • The European Stability Fund and IMF have limited resources to be able to assist countries such and Italy and Spain, 
  • At this point no adequate solution has been determined yet to give the market confidence that the debt issues can be managed in an orderly manner, 
  • There is a growing risk that the European debt issues will progressively get worse, resulting in a European liquidity crisis which could cause a second global recession. 

The EU will certainly be keen to find a solution.  However with 17 countries involved and a variety of political agendas in play, it will be difficult to put in place an adequate comprehensive solution in the next few months. 

We believe a cautious investment approach is appropriate in the short term (i.e. next 6-12 months) as investment market risks have increased significantly since July 2011. 

Equities are currently cheap on key historic valuation metrics, however if the debt crisis in Europe and the US gets worse equity markets are likely to continue to fall in the short term. 

Significant Economic/Market Indicators during October & November 2011 

  • In November, the Board of Reserve Bank of Australia decided to reduce the cash rate by 0.25% to 4.50%.  This change was due to worsening global economic conditions and September 2011 quarter inflation figures being softer than expected. Monetary policy would have scope to stimulate demand in the future, 
  • The consumer price index (CPI) figure was released towards the end of October.  The September quarter underlying inflation figure moderated compared to the June figure, with an increase of 0.6% quarter on quarter and 3.5% year on year, 
  • Unemployment remained steady at 5.2% on a seasonally adjusted basis, 
  • The US Federal Reserve released their “Beige Book”, which provides a snapshot of regional business conditions.  The report suggested a slowing US economic growth, with the survey concluding that although some sectors of the economy showed modest growth, soft labour hiring, muted consumer spending and stagnating wage growth still provided considerable headwinds, 
  • European leaders held crisis talks in Brussels, with two key outcomes: The European Financial Stability Fund’s financial scope was significantly increased & private investors agreed to take considerably large haircuts on Greek issued debt, 
  • Chinese economic growth slowed for the second consecutive quarter (2.3% qoq and 9.1% yoy), providing supporting evidence that control inflation measures taken by the PBOC have been effective,
  • Commodities had a good month in October, with most energy and precious metals rebounding strongly after a poor month in September.  Particularly strong returns were made by oil, which returned +17.7% for the month finishing at US$93.2/bbl. Gold also bounced positively, with the spot price settling at US$1,724.4/oz bringing the monthly return to 6.6%.

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

Australian Shares

The benchmark S&P/ASX 300 index snapped its six-month losing streak, returning 7.2% for the month, which was the largest monthly return since March 2009. Year to date still remains negative at -3.9%.

Large Caps (+6.9%) underperformed that Mid Cap (+9.6%) and Small Cap (+7.9%) counterparts.

The Energy sector rebounded from the sharp decline in previous months, returning +12.2%.  Local Financial stocks ex property (+10.3%) were boosted by positive news in Europe regarding bank recapitalisations and debt assurances made by the EFSF.  Not surprisingly, energy and financials made up the best individual stocks, with investors holding Iluka Resources (+29.7%), National Australia Bank (+15.5%) and QBE Insurance (+15.4%) benefitting most from the market rally.

Consumer Staples (+0.3%) and the Telecommunications (-0.1%) sector had a flat month after their September heights, and subsequently were the lowest returning sectors for the month.

Overseas Shares

On a hedged basis, the MSCI World ex Australia Index returned +8.6% for the month.  An appreciating $A relative to major currencies saw unhedged investors give-up some of these gains, as the unhedged index returned 0.8% for the month.  Based on the S&P Developed ex-Australia Large Mid-Cap Growth and Value Indices Value stocks (+1.0%) performed marginally better than Growth stocks (+0.9%) over the month, in $A terms.

In the US, the S&P 500 Composite Index was up 10.9%, the Dow Jones Industrials Index returned +9.7% and the NASDAQ Composite Index +11.1%, in local currency terms.

On the back of apparent progress towards a resolution to Europe’s sovereign debt woes, most European indices surged.  The FTSE 100 (UK) returned +8.2%, the DAX 30 (Germany) +11.6% and the CAC 40 (France) +8.7% in local currency terms.

In Asia, the Chinese Shanghai Composite Index returned +4.6% Hong Kong’s Hang Seng +12.9%.  India’s BSE 500 Index +5.9% and the TOPIX (Japan) returned +0.4% in local currency terms.
The MSCI Emerging Markets Index was up 3.7% in A$ terms.

Property

Domestic REITs as measured by the benchmark S&P/ASX 300 Property Index finished the month up 3.8%.  The FTSE EPRA/NAREIT Global Index (Global REITs) returned +3.2% on a hedged basis.

Fixed Interest

The local UBS Australia Composite Bond Index finished down 0.6%.  Overseas, the Citigroup World Government Bond (ex-Australia) returned -0.3%, whilst the Barclays Capital Global Aggregate Bond Index was up 0.3%, both on a hedged basis.

Currrency

The local currency appreciated against all major currencies.  During October, the $A returned +9.2% against the US dollar, parring its September losses, +10.4% against the Yen, +5.4% against the Pound Sterling and +5.0% versus the Euro.  On a trade weighted basis, the $A appreciated by 6.2%.

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© 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.