Monthly Newsletter - January 2011

Editors Note

This edition includes an inspirational quote, a funny picture, a market commentary with the main index returns during December 2010 and a feature article. I encourage you to make comments.

Global equity markets finished the year on a high due to improved economic data in the US. Domestically, the Australian equity market moved higher driven by ongoing demand for raw materials.

Inspirational Quote

The road to happiness lies in two simple principles: (1) find what interests you and that you can do well, and (2) put your whole soul into it - every bit of energy and ambition and natural ability you have.

 John D. Rockefeller III (American philanthropist)

Funny Picture

Just when you thought you'd seen everything - a hearse being towed away at a funeral!

Market Commentary  

Global Equity markets finished the year on a high after the return of investor risk appetite due to improved economic data in the US. Domestically, the Australian equity market moved higher driven by ongoing demand for raw materials. Global bond yields continued to rise in response to the positive data emanating out of the US.

Performance scorecard to 31 December 2010

Indexes used: Australian shares: S&P/ASX 300 Index, Australian listed property: S&P/ASX 300 A-REIT Index, International shares: MSCI World ex-Australia Index (net dividends reinvested), Australian fixed interest: UBS Australian Composite Bond Index, International fixed interest: Barclays Capital Global Aggregate Bond Index (hedged into Australian dollars), Cash: UBS Australian Bank Bill Index.

Significant developments over the month were:

• Domestic economic data released during December continued to show a mixed picture. There are estimates the floods in Queensland could reduce March quarter GDP by as much as 0.4 percentage points, mainly due to a halt in coal mining and exports. Consumer spending continued to weaken, in line with reports from retailers about a weaker Christmas period. In contrast, employment remained very strong.

• In the US, President Obama announced a tax-break package which is expected to add 0.5% to GDP growth in 2011. Data released in December continued to indicate an improving US economy. Positive news was broad based and included housing, employment, confidence and manufacturing data. Employment data on the contrary was disappointing.

• Chinese policy makers announced attempts to control inflationary pressures by lifting capital requirements for banks and lifting the official interest rate by 0.25%.

• The oil price rose 8.5% to finish at US$91.32/bbl. Gold rose 2.3% to US$1417.63/oz.

Australian Shares

The Australian market closed 2010 on a positive note. The S&P/ASX300 rose 3.8% to finish the year up 1.9%. Small cap stocks (+7.1%) again outperformed their Mid cap (+6.0%) and Large cap (+3.1%) counterparts. Similar to November, the Resources (+6.4%) sector posted very strong returns. BHP Billiton (+6.1%) lead a number of resource companies to top the positive contributors for the third month in succession.

Overseas Shares

The MSCI World ex Aus Index returned +0.3% for the month and -2.0% over the calendar year, for an unhedged Australian investor. In local currency terms, the strong appreciation (over both the month and year) of the Australian dollar saw returns enhanced to +5.7% and +10.4% for the month and year.

In the US, the S&P 500 Composite Index returned +6.7%, the Dow Jones Industrial Index +5.3% and the NASDAQ Composite Index +6.3%, all in local currency terms. In Europe, the FTSE 100 (UK) returned +6.8%, the DAX 30 (Germany) +3.4% and the CAC 40 (France) +5.4% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned -0.4%, Hong Kong’s Hang Seng +0.1%, India’s BSE 100 Index +3.8% and the TOPIX (Japan) +4.5% all in local currency terms.

Emerging markets gained 0.2% over the month and 4.3% over the year in AUD terms.

Property

Domestic listed property trusts (A-REITs) returned +1.2% for the month to finish the year -0.7%. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +4.8% over December and outperformed all other asset classes over the year returning +19.6%.

Fixed Interest

The UBS Australia Composite Bond Index returned 0.0% for the month and +6.0% for the year. The Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index returned 0.0% and 0.0%, over the month. Over the year the Citigroup Index returned +7.9%, whilst the Barclays Index returned +9.3%, all returns are on a fully hedged basis.

Currency

The A$ rose 6.9% against the US dollar, 3.5% against the Yen, 6.3% against the Pound Sterling, 3.7% against the Euro and 3.8% on a trade-weighted basis. Over 12 months the Australian dollar appreciated 14.0% against the US dollar and 8.8% on a trade-weighted basis.

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

Feature Article - Investors Overestimate Property

Most investors are under the misconception that property has outperformed shares over the past 20 years and hold unrealistic views about property investment returns, according to a survey by BT.

7 out of 10 investors surveyed believed property was the best performing asset of the past 2 decades while just 22% correctly chose shares, according to the survey of 1,000 people who were representative of ABS weightings, a statistic BT investment specialist Michael Bailey described as “alarming”.

Even after the falls associated with the global financial crisis, shares remained the strongest performer, particularly when property maintenance costs were factored in, Bailey said.

This belief may undermine an investor’s long-term wealth creation and retirement income ambitions, Bailey said.

When asked how they would invest $200,000 over the next 20 years, just over half of respondents selected property, and only a third thought shares bought either directly or via a managed fund would generate a better return.

This denial of history represents a weakness within the investment community, Bailey said. Rather than trying to “shoot the lights out” investors should be satisfied with more easily attained market returns, he said.

The survey also revealed that half of the respondents expected to rely on the age pension when they retire, despite the fact that Australians in general have embraced a long-term view on investing and know their superannuation balance.

Many still believed that safe cash investments were the best option in retirement, raising the question of whether Australians had truly embraced the concept that diversified shares investing would lead to better outcomes even after retirement.

The above article has been sourced from Money Management.

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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.