Monthly Newsletter - February 2011

Editors Note

This edition includes an inspirational quote, a funny picture, a market commentary with the main index returns during Janaury 2011 and a feature article. I encourage you to make comments.

Global equity markets began the New Year in positive fashion due to improvement in the economic environment, particularly in the US. Domestically, the Australian market opened 2011 strongly ahead of the February reporting season.

Inspirational Quote

Plenty of people miss their share of happiness, not because they never found it, but because they didn't stop to enjoy it.

William Feather (Writer)

Funny Picture

Town planning should be kept simple such as this low bridge warning!

Market Commentary  

Global Equity markets began the New Year in positive fashion due to improvement in the economic environment, particularly in the US. Global bond yields stabilised in January after rising sharply in late 2010. The US 10-year Treasury yield rose 8bps, and was the fourth consecutive monthly increase and the longest streak since 2006.

Performance scorecard to 31 January 2011

Indexes used: Cash: UBS Australian Bank Bill Index, Diversified fixed interest: UBS Australian Composite Bond Index, Property: UBS Global Real Estate Investors Index (hedged in Australian dollars), Australian shares: S&P/ASX 300 Accumulation Index, International shares (hedged): MSCI World ex Australia Accumulation Index (hedged in Australian dollars) and International shares: MSCI World ex Australia Accumulation Index.

Significant developments over the month were: 

• Domestic economic data released during January was dominated by the floods in Queensland and parts of Victoria. The floods are expected to cost 0.5% to GDP growth in Q1 2011, mainly due to losses in agricultural production and coal exports. Infrastructure rebuilding should add to GDP growth in 2011 and into 2012. There is also an anticipated short-term impact on inflation through higher food prices. Other domestic economic data released was mixed. Consumer confidence fell 5.7% as a result of the floods. Inflation data for Q4 2010 was weaker than expected, 0.4% qoq and annual growth of 2.7%. Retail sales rose a soft 0.3%.

• In the US, the economy expanded by 3.2% annualised in Q4 driven by private consumption. Employment growth was sluggish with 103,000 jobs added in November. Unemployment is at 9.4% down from 9.8% in October. As widely expected, the US Federal Reserve left interest rates on hold. Commentary released retained the commitment to keep the federal funds rate low for an extended period of time. Inflation data released in January was subdued, headline inflation was 1.5% yoy, whilst core inflation was 0.8% yoy.

• In China, growth data exceeded expectations. GDP growth was 9.8% for Q4, up from 9.6% in Q3. The stronger than expected growth figure prompted speculation Chinese officials will commence further tightening measures by announcing plans to cool the property sector.

• Strong economic conditions in Germany lead to conjecture that the European Financial Stability Facility would be expanded.

• The oil price rose 0.9% to finish at US$92.15/bbl. Gold declined 6.0% to US$1332.16/oz.

Australian Shares

The Australian market opened 2011 strongly ahead of the February reporting season. However, investor sentiment was soon dominated by the floods in Queensland and Victoria and unrest in the Middle East. The S&P/ASX 300 index returned 0.1% over January.

Large cap stocks (+0.6%) outperformed their Mid cap (-1.7%) and Small cap (-2.2%) counterparts for the first time since June 2010. The Materials (-3.1%) sector underperformed the Australian market in January along with IT (-3.9%) and Utilities (-1.8%). Consumer Staples (+2.5%) outperformed all sectors, whilst Financials ex Property (+2.4%) also performed strongly.

Unsurprisingly given the strong sector performance, a number of financials dominated the positive contributors list, headed by Westpac (+4.0%). Similarly, given the performance of resources it was no surprise to see BHP Billiton (-2.0%) top the negative contributors list.

Overseas Shares

The MSCI World ex Aus Index returned +5.3% for an unhedged Australian investor. In local currency terms, the strong depreciation of the A$ saw returns eroded to +2.0%. The month of January saw Value stocks (+6.0%) outperform Growth stocks (+4.8%) in A$ terms, based on the S&P Developed ex-Australia Large Medium Cap Value and Growth indices.

In the US, the S&P 500 Composite Index returned +2.4%, the Dow Jones Industrial Index +2.9% and the NASDAQ Composite Index +1.8%, in local currency terms. In Europe, the FTSE 100 (UK) returned -0.6%, the DAX 30 (Germany) +2.4% and the CAC 40 (France) +5.3% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned -0.6%, Hong Kong’s Hang Seng +1.8%, India’s BSE 100 Index -10.4% and the TOPIX (Japan) +1.3% again in local currency terms.

Emerging markets returned a flat 0.0% over the month in A$ terms.

Property

Domestic listed property trusts (A-REITs) returned +2.4% for the month. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +1.8% over January.

Fixed Interest

The UBS Australia Composite Bond Index returned 0.9% for the month. The Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index returned -0.1% and 0.1%, over the month respectively.

Currency

The A$ depreciated over January. The local currency fell 2.7% against the US dollar, 1.7% against the Yen, 4.9% against the Pound Sterling, 4.8% against the Euro and 2.4% on a trade-weighted basis.

The Market Commentary has been sourced from Mercer (Australia) Pty Ltd.

Feature Article - The Retirement Time Machine

Will you have enough money when you retire? This is a tricky question. It all depends on what your retirement goals are. In this article we look at the "time value" of money and why it’s an important consideration when you’re planning for retirement.

You probably have a good idea of what you plan to do when you retire. When you’re working out how much you’ll need, you should also consider your family. Is it just you and your spouse? Do your kids still live at home? Do you want to do something for your grandkids? Do you plan to leave any money when you die?

Perhaps what’s more important is the time value of money. For example, in 1972 a litre of milk cost around 25c. Today it costs about $1.50.

The time value of money

If you’re thinking in terms of today’s money, you need to take account of inflation over the number of years until you retire and what it means in actual dollar terms at that time. The table below shows amounts in today’s terms and the equivalent in 10 years time, assuming inflation of 4%, a return on your income of 3.5% (50% franked) and a return on your capital of 5.5%.

So, for example, if you’re 10 years from retirement and need $40,000 a year in today’s terms, in 10 years time you’ll need $59,210. If you want to get the same annual payment for a 20-year period after you retire, you’ll need a lump sum capital amount of $786,200.

Let’s look at these same figures in relation to super. They assume you start a pension in retirement, so the funds grow tax-free. Also, if you are over 60, the $59,210 annual payments are tax-free.

If you were to do a similar comparison with investments outside super, because the tax on investments outside super is generally higher, you’d need a bigger lump sum for your retirement.

The difference between what you have now and what you will need is your savings gap. While returns on your current investments will take care of some of this, you should be planning for the balance of the gap. Your financial adviser can help you calculate your savings gap and advise you on strategies to help you bridge it.

The above article has been sourced from Investment Solutions prepared by Securitor Financial Group Ltd.

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Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.