Monthly Newsletter - September 2011

Editors Note

This edition includes an Inspirational Quote, a Funny Picture, Economic News and a Market Commentary.

Inspirational Quote

History has demonstrated that the most notable winners usually encountered heartbreaking obstacles before they triumphed. They won because they refused to become discouraged by their defeats.

Bertie Charles Forbes (Author and founder of Forbes Magazine)

Funny Picture

This must be close to the world record luggage stack? I'd like to see them move the stack - watch out!

Economic News

US second quarter GDP was disappointing, with growth at 1% annualised, driven largely by a slump in spending on consumer durables. Business investment, however, remained supportive. The US Federal Reserve responded to the increased downside risks in the economy and financial markets by promising to keep the Fed funds rate at close to zero for almost two years. US non-farm employment was unchanged in August and the unemployment rate was steady at 9.1%.

The steady unemployment rate and higher ISM data (manufacturing index) suggest that conditions could be stabilising, after supply chain shocks and bad weather hit US activity in the second quarter. European markets have been intensely focused on the rapidly evolving sovereign debt crisis. Coincidentally, European economic data remains very weak. After a solid start to the year, growth weakened sharply in the second quarter of 2011, with Euro area GDP expanding only 0.2% quarter-on-quarter. A slowdown in external demand has been one factor causing momentum to weaken, but consumer spending was also markedly weaker.

Indicators of economic activity in China continue to soften at a gradual pace, reflected in lower manufacturing purchasing managers’ index, business conditions and credit availability data. Australian GDP growth for the June quarter was stronger than expected, increasing 1.2% over the quarter, or 1.4% year-on-year. Subsequent data reinforced a picture of a two-speed economy, including a higher unemployment rate and soft business confidence, no doubt influenced by global macro fears. The RBA Board left the official cash rate target steady at 4.75% at its September meeting. 

The above information has been sourced from Macquarie Equities Limited. 

Market Commentary  

Since early August we have seen steep falls in markets and some subsequent stabilisation, as a range of concerns led to negative sentiment becoming further entrenched.

Australian Shares

The S&P/ASX300 Accumulation Index fell 1.9% in August, with resources (-5.0%) leading the broader market down as the uncertain global economic outlook saw investors turn to defensives. Large caps (down 1.9%) outperformed small caps (down 2.7%), while small industrials (down 2.2%) outperformed small resources (down 3.4%). Financials (down 0.1%) held up relatively well against the broader market and the performance of REITs (up 2.9%) was pared back by Banks (down 0.1%), diversified financials (down 2.7%) and insurance (down 2.3%). The Australian market has continued its negative and volatile performance into mid-September, with the S&P/ASX 200 Index down around 4%. 

International Shares

International equities also fell in August, with the MSCI World Index down 4.9% in Australian dollar unhedged terms. The Australian dollar fell 2.4% on a trade-weighted basis, leading to a worse performance for the hedged index, which was down 6.8%. The hedged index fell around 13% over the course of the first 5 trading days in August, driven by concerns about the European debt crisis becoming more serious for Greece, Spain and Italy, in particular, in addition to softer US economic data that suggested a double-dip recession might be developing. The delay in approving the US debt ceiling extension and the US sovereign rating downgrade in early August also drove negative sentiment. Late August saw some recovery as markets began to anticipate a fresh round of stimulus packages. Emerging markets also fell 6.8% in August. 

Property

Australian REITs performed relatively well, up 3.1% in August, driven by both strong results from the larger names and investors seeking relative safe havens in the form of REIT yields. A-REITs have fallen 4% so far in September. Global REITs (the FTSE/EPRA NAREIT Global Index), on the other hand, posted a negative 6.7% return in August as investors reduced exposure to markets that had run up strongly over the previous 12 months. Unlisted, high quality direct Australian property returned 0.4% for the month of August. 

Fixed Interest

Bond markets have rallied to post-GFC highs since April 2011, with the Australian 10-year Commonwealth Government bond yield around 4.1%. The same factors driving lower and more volatile returns in equities and commodities markets have driven bonds higher. These include concerns about the European debt situation leading to serious implications such as default, banking sector stress or a break up of the Euro, in addition to fears of recession in the US, and over-tightening and inflation in the emerging world. Bond indices have performed strongly as a result, up 2% over August and up 1% for the first half of September. 

Cash and Currency

Australian 90 day bank bills rallied strongly in August, moving to 4.81% from 5.01% at the end of July. The main drivers of this performance were ongoing global macro fears and the pricing-in of an aggressive RBA cash rate cut, following the August RBA Board meeting. Most of the movement in yields occurred in the first week of August, in line with the equity market sell off, and bills have traded in a 4.78% to 4.88% range since that time, reflecting a tempering of rate cut expectations. The Australian yield curve (the spread between 10 year bonds and 90 day bank bills) has moved to an even more inverted position as at 15 September 2011, at negative 72 basis points. The Australian dollar hit a six month low of $US1.02 in early August due to risk aversion, weak domestic economic data, the Bank of Japan moving to sell Yen and buy US Dollars and rate cut expectations. As these factors largely dissipated over the second half of August, the Australian dollar appreciated to over $US1.07, subsequently depreciating again to around $US1.02 due to ongoing risk aversion.

The above information has been sourced from Macquarie Equities Limited. 

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.