Investment market review
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.
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
− 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 $2.49 per − Policy can be eased further in most emerging economies and
unit. Independent Directors unanimously recommended the this is expected to be a key feature in early 2012.
Proposal, subject to an Independent Expert finding the − Another focus for emerging markets in 2012 will be to
Proposal in the best interests of unit holders. monitor activity indicators for signs of slowing growth due to
− The UBS Global property investors' index (local currency) the sovereign debt crisis in Europe and weaker financing
increased 6.0%, with North America the top performing activity.
region (+6.4%) followed by Singapore (+5.9%). The worst
performing regions were Japan (+2.4%) and Continental
Europe (+3.9%). Global fixed interest
− Most major developed global bond markets ended modestly
lower in January, however, yields in peripheral Europe
− Global equity markets posted a solid gain as markets tried to − Despite protracted negotiations on a restructuring of Greek
look beyond the near term issues impacting markets. debt, growing pressure on Portugal and downgrades to the
− The MSCI World Index rose 4.9% in US$ 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
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.
− 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.
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