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					Market watch

Investment market review
January 2012


Economic overview                                                        2013, growth of 3.9% is anticipated (previously 4.5%). Most
                                                                         of the downgrade was due to Europe, where a mild
−   The new calendar year started with a rally in risk assets.           recession is now forecast for 2012. Inflation forecasts were
−   The month was characterised by improvements in US                    also lowered.
    economic data, improved sovereign bond auctions in Europe        −   In the US, economic data continued to improve, although
    and new forecasts by the Federal Reserve, which suggested            market expectations are quickly catching up to the improved
    interest rates will remain at 0% until late 2014.                    outlook. Q4 GDP was recorded at 2.8%, up from 1.8% in Q3
−   This optimism was well supported by evidence that the                on a seasonally adjusted annualised rate.
    measures undertaken by the European Central Bank in              −   However the composition of growth was less supportive,
    December – i.e. the 3-year Longer-Term-Refinancing-                  with growth driven by a large contribution from inventory
    Operation – appear to have made significant progress in              accumulation, while business investment fell.
    improving bank funding in Europe and stabilising sovereign
    bond yields in Spain and Italy.                                  −   The US labour market continued to improve with the
                                                                         unemployment rate falling to 8.5% at end of December.
−   However implementation risks continue. The Greek bond                200k jobs were created during the month. There is likely to
    ‘haircut’ through the Private Sector Involvement (PSI) deal is       have been some seasonality in this data, however due to
    yet to be finalised and there are growing concerns that              increased Christmas retail and courier employment.
    Portugal will require a second bailout. Expectations are for
    the PSI deal to result in a Net Present Value loss for private   −   In China, annual GDP growth slowed to 8.9%/yr from 9.1%.
    Greek bondholders of more than 70% (i.e. they will get               Net exports detracted from growth due to the global
    repaid less than 30 cents in the dollar).                            slowdown and as the China economy transitions into a
                                                                         consumption based economy.
−   Late in January, the 16th EU emergency summit concluded.
    There were further moves towards a fiscal compact, which         −   Inflation pressures continued to ease, with inflation falling to
    was signed by 25 out of 27 EU countries (UK and Czech                4.1%/yr from 4.2%/yr. The PMI Manufacturing index held up,
    Republic did not sign the agreement).                                rising to 50.5, from 50.3.

−   It was also announced that the two bailout funds, the            −   Data analysis has been complicated this month. Chinese New
    European Financial Stability Facility (EFSF) and the European        Year fell in January this year, compared to February last year.
    Stability Mechanism (ESM) would be combined and have a               This saw a strong jump in retail sales, which were up
    joint capacity of € 750bn from 1 July 2012.                          18.1%/yr in December, from 17.3%/yr in November.

−   In other EU news, Standard and Poor’s downgraded nine EU         −   In Australia Q4 CPI data was released. This showed that
    countries, with both France and Austria downgraded from              inflation was unchanged in Q4 11, which reduced the annual
    AAA to AA+. The EFSF subsequently was also downgraded to             pace of inflation to 3.1% from 3.5%. However, the measures
    AA+.                                                                 of underlying inflation rose by an average of 0.55%/qtr,
                                                                         which was above market expectations, albeit lower than the
−   Economic data in Europe was mixed, with labour market                pace recorded in Q1 and Q2 2011.This took the annual rate
    weakness continuing. Unemployment rates at the end of                of underlying inflation up to 2.60% from a revised 2.55%
    December 2011 were Germany 6.7%, Ireland 14.5%, Spain                (was 2.45%). This remains within the RBA’s 2% to 3% target
    22.9%, France 9.9% and Italy 8.9%.                                   band.
−   EU inflation pressures continued to moderate, with annual        −   In other economic data, employment fell by 29,300,
    inflation recorded at 2.7%, down from a peak of 3.0%.                although the unemployment rate fell to 5.2% from 5.3% as
−   Survey measures of European manufacturing and services               the participation rate declined sharply.
    activity showed stabilisation. The PMI Manufacturing index       −   This was driven by lower part-time employment than normal
    rose to 48.7 from 46.9, while PMI Services rose to 50.5 from         during December, particularly for women aged 15 to 24.
    48.8. The German economy was largely responsible for the             Subdued levels of discretionary expenditure are now leading
    improvements.                                                        to weaker employment levels in the retail sector.
−   In the UK, Q4 GDP contracted 0.2%, taking the annual rate        −   The Australian dollar rose sharply against other major
    of growth to 0.8%. The unemployment rate rose to 8.4%                currencies in December. This continued to be driven by
    due to fiscal austerity and a weak financial sector.                 inflows into Commonwealth Government Securities (CGS)
−   The International Monetary Fund (IMF) downgraded global              given the yield attractiveness and safety of CGS. The A$ rose
    economic growth forecasts for 2012 and 2013. For 2012                4.1% against the USD, 2.7% against the pound, 3.2% against
    growth of 3.3% is now expected (previously 4.0%) and for             the euro and 3.2% against the yen.


                                                                                                                                            1
First State Investments


Australian shares                                                       economy is slowing. Q4 GDP data was released, which
                                                                        showed growth slowed to 3.4%/yr, from 4.7% in Q4 2010.
−   The Australian share market enjoyed a strong start to the
    new year, with the S&P/ASX 200 Accumulation Index rising        −   Elsewhere returns were positive with Hong Kong (+10.6%),
    5.1% in January.                                                    Singapore (+9.8%), Thailand (+5.7%) and Taiwan (+6.3%) all
                                                                        rising.
−   Most of the issues which impacted the market during 2011 –
    including concerns about the global economic outlook,           −   In terms of sector performance, the Materials sector
    sovereign debt issues in Europe and subdued consumer                outperformed after a poor December. It rose 11.0%, driven
    confidence – remained in place, but the market was                  by sharp increases in commodity prices.
    nevertheless able to post a solid gain.                         −   Tin (+26.8%), zinc (+14.2%), nickel (+11.5%), gold (+11.1%)
−   Stocks in cyclical areas of the market – such as Materials –        copper (+9.5%) and lead (+8.8%) all rose in January.
    tended to be among the best performers as risk appetite         −   In terms of other sector performances, Financials (+8.6%),
    increased. A number of mining companies published                   Consumer Discretionary (+7.4%) and Industrials (+7.2%) all
    quarterly production reports in January.                            rose with the rally in risk assets.
−   Releases from the major diversified players, including BHP      −   Defensive sectors underperformed; with Consumer Staples (-
    Billiton and Rio Tinto, showed continued strong iron ore            1.1%), Telcos (-2.4%) and Utilities (-1.6%) all down.
    production. A cyclone passed through the major mining
    areas of Western Australia during the month, although this
    did not appear to have had a major impact on production.        Global emerging markets
−   There was a limited amount of commentary from companies         −   Emerging markets outperformed the broader global equity
    in other areas of the market, as most were in ‘blackout’            market, gaining 11.2% in US$ and 7.8% in A$ terms.
    ahead of earnings releases in February.
                                                                    −   There was a significant divergence of returns within the
−   The majority of Australian listed companies will update the         sector with Brazil (+11.1%), Hungary (+11.3%) and Turkey
    market with their earnings for the period ending 31                 (+11.0%) all performing well. Sri Lanka fell 6.3%.
    December 2011 over the next few weeks.
                                                                    −   Emerging markets continued to ease monetary policy in
                                                                        January as inflation pressures ease and the growth outlook
Listed property                                                         deteriorates.

−   The S&P/ASX 200 Property Accumulation index rose 5.4%,          −   Brazil, Thailand and the Philippines all cut rates, while the
    outperforming the broader Australian share market.                  Reserve Bank of India cut the cash reserve requirement ratio
                                                                        to assist the banking sector and promote lending into the
−   In terms of stock specific news, Charter Hall Office                real economy.
    announced that it had entered into an agreement with a
    consortium to acquire the Australian portfolio for $2.49 per    −   Policy can be eased further in most emerging economies and
    unit. Independent Directors unanimously recommended the             this is expected to be a key feature in early 2012.
    Proposal, subject to an Independent Expert finding the          −   Another focus for emerging markets in 2012 will be to
    Proposal in the best interests of unit holders.                     monitor activity indicators for signs of slowing growth due to
−   The UBS Global property investors' index (local currency)           the sovereign debt crisis in Europe and weaker financing
    increased 6.0%, with North America the top performing               activity.
    region (+6.4%) followed by Singapore (+5.9%). The worst
    performing regions were Japan (+2.4%) and Continental
    Europe (+3.9%).                                                 Global fixed interest
                                                                    −   Most major developed global bond markets ended modestly
                                                                        lower in January, however, yields in peripheral Europe
Global shares
                                                                        decreased sharply.
−   Global equity markets posted a solid gain as markets tried to   −   Despite protracted negotiations on a restructuring of Greek
    look beyond the near term issues impacting markets.                 debt, growing pressure on Portugal and downgrades to the
−   The MSCI World Index rose 4.9% in US$ terms and 1.5% in A$          debt ratings of nine Eurozone nations, market sentiment
    terms, although this masked considerable divergence                 towards the larger Eurozone peripheral bond markets
    between markets and industry sectors.                               improved.

−   The Dow Jones Industrial Average rose 3.4%, while the S&P       −   Market participants reacted positively to the large-scale
    500 Index was up 4.4%. The NASDAQ rose a sharp 8.0%,                liquidity injection announced by the European Central Bank
    assisted by Apple, which added 12.7% after a strong                 (ECB) in late December, which meaningfully reduced the
    earnings result.                                                    near-term default risk of troubled banks.

−   European markets were generally positive; Spain was the         −   The Longer-Term-Refinancing-Operation has also reduced
    exception, falling 0.7%. Sentiment improved towards                 the pressure on European banks to sell bonds in the
    European banks, with the Stoxx 50 Index rising 6.2%.                peripheral countries.
    Elsewhere the German DAX rose 9.5%, the French CAC was          −   Together with several successful peripheral governments’
    up 4.4% and the Italian market rose 4.9%.                           bond auctions, this propelled 10-year yields in Italy and Spain
−   In the UK, the FTSE 100 rose 2.0%.                                  significantly lower.

−   In Asia, markets recorded mostly positive returns, apart from   −   Elsewhere, US Treasuries were fairly resilient in the face of
                                                                        stronger risk appetite. 10-year US Treasury yields decreased
−   The Korean market rose 7.1% despite concerns continuing             by 8 bps to 1.80% at January-end, driven down late in the
    about the geopolitical risks surrounding the leadership             month by the US Federal Reserve’s projection that it expects
    transition in North Korea, as well as signs the South Korean


                                                                                                                                          2
First State Investments

    to keep interest rates at exceptionally low levels to the end        −    There was no RBA Board meeting during January. However,
    of 2014.                                                                  the easing in headline inflation, combined with global events,
−   This followed the first release of the Federal Reserve’s own              a fairly clear peaking of the terms of trade and benign
    forecast of the Fed Funds rate (conditional on economic                   domestic data (particularly employment and consumption)
    conditions). Officials also released an explicit long-term                could see the RBA lower official cash rates at its 7 February
    target for inflation, which is 2% on the PCE price index.                 2012 meeting.

−   The ECB left its main refinancing rate at 1.0% at its first
    policy meeting of 2012. The decision was unanimous and                Global credit
    widely expected by most market participants.
                                                                         −    Global credit markets tightened in January. Market sentiment
−   German 10-year bunds decreased by 4 bps to 1.79% at                       improved due to the stabilisation in Eurozone financial
    January-end.                                                              conditions, the continued release of better-than-expected
−   During January, the Italian government auctioned € 23                     US economic data and confirmation that the Chinese
    billion worth of treasury bills and € 16.7 worth of bonds. The            economy remains on course for a soft rather than hard
    success of these auctions helped fuel a rally in Italian bonds            landing.
    during the month; 10-year BTPS yields decreased by 110 bps           −    The iTraxx Europe SovX WE Index tightened by 19 bps to 338
    to 5.93% at January-end. Similarly, the Spanish government                bps at January month-end from 357 bps at December-end.
    auctioned € 16.6 billion worth of bonds and € 7.4 worth of                Credit spreads in Europe tightened at the start of 2012
    treasury bills during the month. The Spanish 10-year bond                 despite the credit downgrade of EU sovereigns by S&P.
    yield fell by 40 bps to 4.94%.
                                                                         −    Credit spreads on European financials (Markit iTraxx European
−   However, over January 10-year Portuguese bond yields rose                 Senior Financials Index) tightened by 59 bps to 220 bps at
    from 13.36% to 16.40%.                                                    January month-end from 279 bps at December-end.
−   Across the Channel, the Monetary Policy Committee (MPC)              −    US credit markets tightened in January with the Lucitoss
    again voted unanimously to leave the Bank of England (BoE)                Index of investment grade credit spreads contracting by 8
    rate unchanged at 0.5% and retained its £275 billion asset                bps to 191 at January month-end.
    purchase programme.
                                                                         −    New debt issuance in the USD Investment Grade market
−   The UK 10-year gilt yield decreased by 1 bp to 1.97% at                   increased sharply from US$34.8 billion in December to
    month-end.                                                                US$101.8 billion in January. Citigroup, Goldman Sachs and
                                                                              Bank of America priced sizable transactions during the
                                                                              month on the back of their earnings releases.
Domestic fixed interest
                                                                         −    Australian credit markets tightened in January with the Markit
−   The Australian bond market was mixed in January. 10-year                  iTraxx Index decreasing by 23 bps to 158 bps at January-end
    CGS yields posted a modest 5 bps increase to 3.72% at                     from 181 bps at December-end. The tightening in domestic
    January-end from a record low of 3.67% at the end of                      credit spreads was driven primarily by an improvement in
    December 2011.                                                            global financial market conditions at the start of 2012.




Disclaimer
The information contained within this document is generic in nature and does not contain or constitute investment advice. It has
been prepared for general information purposes only. The information has been obtained from sources that First State
Investments (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or
implied, is made as to the fairness, accuracy, completeness or correctness of the information. Neither FSI, nor any of its
associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any
use of this document.
The views expressed herein are the views of the writer at the time of issue and may change over time. No person should rely on
the content and/or act on the basis of any matter contained in this document without obtaining specific professional advice.
The information in this document may not be reproduced in whole or in part or circulated without the prior consent of First State
Investments. This document shall only be used and/or received in accordance with the applicable laws in the relevant jurisdiction.
In Hong Kong, this document is issued by First State Investments (Hong Kong) Limited and has not been reviewed by the Securities
& Futures Commission in Hong Kong. In Singapore, this document is issued by First State Investments (Singapore) whose company
registration number is 196900420D.


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