View from the Hill - February 2012

View from the Hill

Hillross investment market performance at a glance.

Australian shares

The calendar year 2012 commenced on a very positive note with share markets rallying across the globe. European debt concerns subsided over the month, whilst there were ongoing signs of positive economic growth in the United States. The local S&P ASX 200 Index jumped 5.1% over January, thereby erasing around half of the previous calendar year’s losses. None-the-less, Australian equities are still 6.2% below the level recorded one year ago.

In line with the improved sentiment around the global growth outlook, commodity prices were bid higher and this had a positive impact on Australian resource stocks. Resource stocks were the main driver of growth on the Australian market over January, rising by 11%.

The more defensive sectors of the market posted less impressive increases, with healthcare (down 1%), consumer staples (up 1%) and telecommunications (flat) all underperforming. Finance stocks did post a reasonable increase of 3%, as signs of increased stability in the European banking system encouraged some buying of bank stocks locally.

It was a positive month for smaller companies, which benefited from a strong contribution from the small resource sector. The Small Ordinaries Index jumped 7.8% over the month, but remains 13.5% down on an annual basis.

International shares

Positive sentiment prevailed across all major equity markets over January. Average returns on global markets were similar to those recorded in Australia, with the MSCI World Index producing a 4.5% gain for Australian investors with hedged currency exposures. However, a large jump in the value of the Australian dollar over the month eroded much of the positive return for investors with unhedged currency exposures, with the unhedged MSCI World Index rising by just 1.2%.

The higher $A over January can be attributed to the improved outlook for global growth and commodity prices. Against the $US, the $A rose from US 101.6 cents at the end of December to US 106.4 cents in January.

With some of the initiatives being put in place to improve liquidity and stability in the European financial system appearing to be successful (in the short term at least), there was a strong rally on some continental European markets. The German market was a highlight, rising by 10% over the month.

Further evidence of declining unemployment in the United States extended the gains on its share market. January’s 5% jump in the U.S. follows a rise of 11% over the December quarter.

Emerging markets also performed well over January, boosted by some easing in the fears of a “hard landing’ in the Chinese economy. The Chinese market finished the month some 11% higher, whilst commodity exporting economies such as Brazil (up 8%) were also strong.

Interest rates

Despite the bullish mood on equity markets, there was little reaction on bond markets over January. Typically, an improvement in the growth outlook would result in rising longer term interest rates as investors take higher inflationary expectations into account. However, over January, the United States 5-year Government bond yield fell from 0.8% to 0.7%. A statement by the United States Federal Reserve Bank, suggesting that interest rates would be kept "exceptionally low" until at least late 2014, was no doubt responsible for much of this fall in longer term yields.

Further to the declines in U.S. longer term interest rates, there were also some welcome falls in Government bonds yields in Europe. This was indicative of improved liquidity and perhaps a sign of increased confidence that debt positions will ultimately be managed. The Italian 10-year Government bond yield, for example, fell by approximately 1%, to finish the month just below 6%.

In Australia, there was little movement in interest rates across the yield curve over the month. The 5- year Government bond yield was unchanged at 3.3%. The lack of any Reserve Bank Board meeting over the month of January also meant that short term cash interest rates remained at 4.25%.

The combination of the December quarter Consumer Price Index data and the December employment data has increased the likelihood of further reductions in cash interest rates. At 2.6%, underlying inflation is now close to the middle of the Reserve Bank target range; whilst the lack of any employment growth over the past 12 months suggest there is little inflationary pressure coming in the form of wages growth.

Property

It was also a positive month for listed property over January. Locally, the S&P ASX 200 A-REIT Index rose by 5.4%, with returns now positive on an annual basis. The positive annual result from this sector has come despite a 14% decline in the largest listed property trust, Westfield Group. Several non-retail (nonshopping centre) trusts have performed well over recent months, as underlying commercial property values appear to have recovered. Falling interest rates over recent months have increased the relative attractiveness of rental being generated by this sector.

Listed property trusts on global markets also posted a strong result, rising by 5.9% over the month.

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