View from the Hill - October 2011

View from the Hill

Hillross investment market performance at a glance including the feature article 'The not-too-cautious consumer'. 

Australian shares

For the sixth consecutive month, the Australian share market lost value, with the S&P ASX 200 Accumulation Index dropping by 6.1%. This was the largest monthly fall since May 2010 and brought the 12 month return down to negative 8.6%.

Once again it was the concerns over European Government debt, and the potential for government debt defaults to generate losses in the banking system, that dominated investor sentiment. With the concern escalating over September, there was a sell off on commodity markets with most base metal and energy prices falling significantly. Australia’s heavy exposure to commodity prices via the resources sector meant that Australia underperformed when compared to most other developed markets last month. Resource stocks bore the brunt of the decline, dropping in value by 13% over the month.

Given the heavy resources weighting, smaller companies also performed poorly last month. The Small Ordinaries Index fell by 10.6% and is now down 12.1% for the past year.

However, not all sectors on the Australian market declined over September. As was the case in August, there was some support for defensive stocks, with the telecommunications and the consumer staples sectors both increasing by 2%. Although also normally in the defensive category, the healthcare sector fell by 1% during the month. This was heavily influenced by a 40% drop in the price of Cochclear shares following their announcement of a product recall.

A significant fall in the value of the Australian currency over September also meant that there were pockets of stronger performance. Those companies heavily export orientated that were not impacted by falling commodity prices tended to perform relatively well over the month.

International shares

Conditions on global equity markets were highly volatile over September. Despite ongoing statements of support from various European authorities, the potential ramifications of government default in Greece saw a further downgrading of global growth expectations and significant selling pressure across global equity markets.

The MSCI World Index showed an average decrease in price of 6.3% for Australian investors. However, a fall in the $A over the course of the month from US 107 cents to US 98 cents meant that losses for investors with unhedged currency positions were neutralised. The MSCI World Index for unhedged investors actually increased by 1.0%.

Following the significant falls in the previous month, movements in continental European markets were in line with the global average in September. The German DAX Index, for example, was 4.9% lower, with this same rate of decline being recorded by the British FTSE Index. Losses in the U.S. were slightly higher, with the U.S. S&P 500 Index dropping by 7.2%. Japan was clearly one of the better performed markets over September, receiving some support as a “safe haven” away from falling commodity prices and the European banking sector woes. None-theless, the Nikkei Index still finished in negative territory, falling by 2.9%.

Emerging markets performed poorly over September as fears around a sharp lowering in the rate of global economic growth heightened. The Shenzhen Composite Index in China was 12% lower. Falling prices for energy commodities had a particularly big impact on the Russian share market, where losses of almost 20% were recorded.

Interest rates

Despite the general lowering of economic growth and inflationary expectations around the globe, the Reserve Bank has continued to leave monetary policy unchanged. Money markets, however, are now anticipating a reduction in the overnight cash interest from its current level of 4.75% sometime over the next few months.

Following the relatively sharp declines in longer term yields during August, there was some further flattening in yields curves over September. In the United States, the 10- year Government bond yield fell 0.3% to 1.9%. The 5-year yield was unchanged at 1.0%. Australian bond yields were 0.1% to 0.2% lower, with the 5-year bond finishing the month at a yield of 3.8%, whilst 10-year bonds were trading at 4.2%. The lowering of bond yields (and increase in prices) once again created positive returns for fixed interest investors.

Property

Volatility has returned to the Australian listed property market in recent months. Following large falls in July and a strong bounce back in August, there were once again significant falls in September. The S&P ASX 200 A-REIT Index dropped by 4.5% last month. The requirement for some listed property trust vehicles to shortly re-finance debt was a cause of some concern in the sector.

Following a 5.2% fall in August, it was another poor month for global listed property with the UBS Global Property Index ($A hedged) declining 10.1% in September. Heavy falls in the United States led the overall sector lower. The fact that global listed property prices have been trading at a premium to underlying asset backing values may explain why they have been targeted for heavy selling in the latest period of share market weakness.

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