View from the Hill - September 2011

View from the Hill

Hillross investment market performance at a glance including the feature article 'The search for a safe haven'. 

Australian shares

The negative run on equity markets continued over August, which was the fifth consecutive month of decline for the Australian share market. Led by falls on overseas markets, the S&P ASX 200 Accumulation Index dropped by 1.9%. Despite the fall, the Australian market is still in positive territory for the past year as a whole, with a 1.9% increase recorded.

The Australian market followed global markets lower early in the month, but a strong bounce back limited losses with the local market outperforming. Defensive sectors in Australia were viewed as "safe havens" with utilities being the best performer with a 4% increase. A general lowering in the outlook for global growth saw the resources sector underperform. Banks were also sold down off the back of the wider global concerns over financial sector health.

The profit reporting season for the period ended 30 June was generally in line with expectations, with most companies reporting improved earnings. Outlook statements, however, were downbeat, matching the general mood of the market and consistent with the very cheap valuations available.

In line with the decline in risk appetite over August, smaller companies under performed the general market. The Small ordinaries Index was 2.7% lower, but remains 7.2% ahead on an annual basis.

International shares

August marked the most volatile month on global share markets since the financial crisis. Escalating concerns over the debt positions of Italy and Spain, further weak US economic data and the confirmation that the US government will be tightening spending earlier than many had hoped all culminated in a significant withdrawal of support for equities.

The MSCI World Index showed an average decrease in price of 6.8% for Australian investors. However, a US 3 cent fall in the $A over the course of the month to US 107 cents (after briefly dipping below US 100 cents mid month), meant that losses for investors with unhedged currency positions were not as great. The MSCI World Index for unhedged investors decreased by 4.7%.

Losses were significantly heavier on continental Europe than elsewhere over August as concerns over the state of government debt in Italy and Spain pushed the potential severity of a debt crisis to a new level. The German DAX Index was 19% lower, whilst the French market lost 11%. The British FTSE avoided the worst of the sell-off, dropping 7% over the month.

In the US, the delay over the signing of the debt ceiling agreement and S&P’s downgrading of the US sovereign debt rating both took their toll on investor sentiment. None-the-less, falls were more contained than in Europe, with the S&P 500 Index falling 6%.

After a positive July, Asia was brought back to the pack in August. The Japanese Nikkei Index fell 9%, whilst Hong Kong’s Hang Seng Index dropped 8%. Asia’s emerging markets were also weak as were the Eastern European markets, where falling oil prices combined with the general European debt concerns saw heavy losses. Overall emerging markets lost 7% over the month.

Interest rates

An easing labour market, soft consumer spending and global headwinds have continued to provide the Reserve Bank with a rationale to keep monetary policy steady and maintain overnight cash interest rates at 4.75%.

Whilst shorter term interest rates remained steady, the outlook for lower global growth and lower inflation meant that longer term interest continued to fall. US Treasury Bonds continued to attract “safe haven” investor support despite S&P downgrading the US sovereign credit rating from ‘AAA’ to ‘AA+”. US 5-year bond yields declined from 1.4% to 1.0% over the month. In Australia, falls were of a similar magnitude with the 5-year government bond yield dropping 0.5% to 4.0%.

The relatively sharp declines in longer term yields over August meant that bond prices rose strongly over the month. This created positive returns for fixed interest investors. Australian fixed interest returns were up 2.0% for the month, whilst the overseas fixed interest sector generated an average 2.4%.

Property

Following large falls in July, the Australian listed property sector rebounded in August, supported by an investor preference for more defensive listed assets. Some property trusts also benefited from management announcing share buy-backs, whilst a takeover offer for the Charter Hall Office Trust by a Macquarie Group consortium also added support to the sector. The A-REIT sector posted a 3.1% increase over the month, but still remains 2.7% below the level recorded one year ago.

Australia had the best performing listed property trust sector over August as losses were recorded in other regions. The UBS Global Property Index ($A hedged) declined 5.2% over the month but remains 13% ahead for the past year.

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