View from the hill - August 2011

View from the hill

Hillross investment market performance at a glance. August 2011.

Australian shares

For the fourth consecutive month, the Australian share market lost value with a fall of 4.0% in the S&P ASX 200 Index. This represented the largest monthly decline since last May. Despite the fall, the Australian market is still in positive territory for the past year as a whole, with a 2.7% increase recorded.

Negative sentiment persisted over July, with escalating concerns over the sovereign debt levels in Italy and nervousness around the negotiations over the United States debt ceiling influencing the mood of investors. Banks led the Australian market lower with a 6.3% decline. This mirrored global trends, where potential banking sector exposure to global sovereign debt securities saw support for the sector drop away.

Defensives sectors continued to perform better than the market average, with the telecommunications and utilities two of the better sectors. Despite the magnitude of the global economic concerns, confidence in commodities and mining stocks largely remained intact, with the 1.9% fall in resource stocks being less than the overall market decline. Smaller companies also finished the month ahead of the average and actually posted an increase of 1.4%. This represented a bounce back from the losses of the previous month.

The profit reporting season for the period ending June 30th comes into full swing in August. This should help reveal the extent to which earnings are being impacted by a softer local economy and a higher $A.

International shares

Despite relatively positive earnings results being announced by U.S. companies, global share market sentiment was dominated by the twin concerns over European and U.S. government debt management. The MSCI World Index showed an average decrease in price of 2.4% for Australian investors. However, a US 2.1 cent rise in the $A over the course of the month to US 109.5 cents, meant that the losses for investors with unhedged currency positions were greater. The MSCI World Index for unhedged investors decreased by 4.3%.

Despite all the focus on the stalled negotiations around the raising of the U.S. debt ceiling, the U.S. stock market once again performed better than the Australian market, with the losses on the U.S. S&P 500 Index being restricted to 2.2%. Annual gains on the U.S. market still stand at 17.3%, despite a general lowering of the outlook for economic growth in recent months.

The potential for European sovereign debt issues to impact on the banking sector was the main influence on European markets over July. Losses were heaviest is those countries closest to the areas of concern, with France (down 7.8%) and Spain (down 7%) providing large negative contributions. Declines in Germany and Great Britain were more moderate at less than 3%.

Asia proved to be a brighter spot for share investors last month, being somewhat immune to the concerns in Europe and the U.S. The Japanese Nikkei Index finished marginally in positive territory (up 0.2%), whilst Hong Kong was also higher by a similar amount. A 2.0% rise in China also helped offset losses recorded in emerging markets in other regions.

Interest rates

There was no change in the Reserve Bank’s policy stance last month, despite the higher inflation result in the June quarter. Softer local demand combined with concerns over the strength of the global economy have added to the case for holding cash interest rates at 4.75%.

Longer term interest rates fell quite sharply over July, as money markets adjusted to the down grading of growth forecasts. With any tightening of U.S. monetary policy now appearing to be a long way off, U.S. 5-year bond yields declined from 1.8% to 1.4% over the month. In Australia, falls were of a similar magnitude with the 5-year government bond yield dropping 0.4% to 4.5%. With longer term yields now below the cash interest rate, the yield curve has become negative – suggesting the outlook for economic growth and inflation is relatively benign.

The decline in longer term interest rates that took place over July created positive returns for investors in the fixed interest asset class as bond prices rise when interest rates fall. These lower longer term yields may soon start to flow through to lower bank term deposit and fixed rate home loan interest rates.

Property

After several months of relative stability, the Australian listed property sector saw a significant price drop of 6.5% over July. Shopping centre trusts, including Westfields, dragged to the sector lower. Falling retail sales and dwindling consumer confidence have lowered the outlook for rental growth from shopping centres. Longer term concerns over the impact of on-line shopping are also taking on more prominence.

In contrast to the sharp declined in the shopping centre sub-sector, office orientated property trusts were flat for the month. Evidence from recent sales activity suggests there may be some firming in office property prices, with little in the way of new supply creating favourable supply and demand dynamics in the sector.

Global listed property prices declined over July, for the second consecutive month. However, the sector performed better than global equities and didn’t experience the same significant sell-off as was recorded in Australia. The UBS Global Property Index ($A hedged) declined 0.5% over the month but remains 19% ahead for the past year.

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