View from the Hill - December 2011

View from the Hill

Hillross investment market performance at a glance including the feature article 'Why Australian shares are underperforming'. 

Australian shares

Following the strong rally on equity markets over October, investor sentiment was once again dented by concerns over the debt position of European governments. Rising European Government bond yields, including those of core countries such as France and Germany, was indicative of the lack of confidence in the debt management plans put in place to date. As a result of the worsening global sentiment, Australian resource and banking stocks were sold down heavily, with losses across these sectors averaging 7%. Concerns that a deterioration in confidence in the European banking system may lead to higher funding costs for Australian banks continues to weigh heavily on bank share prices.

There were, however, some better performances amongst the defensive sectors, with telecommunications, healthcare and utilities all recording small gains over the month.

Overall, the Australian share market posted a monthly loss, with the S&P ASX 200 Accumulation Index falling by 3.5% over November. This wiped out nearly half of the 7.3% gain recorded in October and brought the annual movement to negative 6.0%.

Smaller companies performed marginally worse than their larger counterparts, with the Small Ordinaries Index recording a decline of 3.7% over the month. Small cap stocks were weighed down by a 4.5% drop in the average price of the small mining sector. Interestingly this fall wasn’t as large as that recorded by larger resource stocks.

International shares

With lower average allocations to the resource and banking sectors, international share markets generally performed better than those of Australia last month. The MSCI World Index showed an average fall in price of 1.3% for Australian investors. However, a fall in the $A over the course of the month from US 105 cents to US 100 cents, meant that this loss for investors with unhedged currency positions was reversed by the currency movement (which increased the value of offshore investments in $A terms). The MSCI World Index for unhedged investors rose by 0.9%.

There was disparity in returns across global markets in November. Despite being at the centre of market concerns, share prices in some European countries held up relatively well. Losses in the United Kingdom and Germany, for example, were less than 1%. There were, however, more significant falls in other parts of Europe, with the French market losing 2.6% and Italy down 3.7%. Greece performed particularly poorly, with an 18% fall in prices taking its annual loss to 63%.

The United States market also fared relatively well with a decline of less than 1% recorded. There were some promising economic signs in the U.S. last month, with the probability of a recession appearing to be on the decline.

Emerging markets experienced larger losses than most developed markets over November. This could reflect their general sensitivity to global growth and commodity prices. In addition, concerns over the potential slowing of economic growth are having a significant impact on some Asian markets. The Chinese equity market was 8% lower, whilst Hong Kong was down 7%.

Interest rates

For the second consecutive month, the Reserve Bank announced a reduction in the overnight cash interest rate. The move in rates from 4.5% to 4.25% followed the Reserve Bank Board meeting in early December. The Board concluded “that the inflation outlook afforded scope for a modest reduction in the cash rate”.

Longer term interest rates also shifted significantly lower over November. Australia’s 5-year Government bond yield dropped from 4.1% to 3.4%, with 10-year bond yields now below 4%. The support for Australian bonds, which has the effect of driving up bond prices and pushing down yields, could be indicative of Australia increasingly being viewed as a “safe haven”, free from the debt problems entrenched in many other developed economies.

With yields already very low in the United States, there is little scope for further falls. Despite a more uncertain global outlook, the fall in U.S. Government 5-year bond yields was restricted to 0.03%, with 5-year yields closing the month at 0.96%.

In contrast to the perceived “safer” government debt securities of Australia and the U.S., there was a decline in support for some European government bonds. Italian 10-year bonds for example rose from 6.1% to 7.0% over the month. In addition, French yields were also higher, moving from 3.1% to 3.4%, which highlighted a widening of the concerns around European debt into the larger “core” economies of the continent.

Property

It was a strong month for Australian listed property. Despite a decline in the overall equity market, the S&P ASX 200 A-REIT Index rose by 2.6%, and is now 2.4% above its level recorded a year ago. Westfield Group led the sector high over November, with a price rise of 6.4%.

With interest rates falling, the yields available on property have become more attractive in relative terms, and this may be providing support for the sector.

Returns from global property were not a strong, with the UBS Global Property Index ($A hedged) declining by 3.5% during November.

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