Market Overview
Market Watch July 2010
In brief
Fixed interest markets were up strongly, driven by the good performance of corporate bonds. Low yields on government bonds increased demand for corporate credit.
The banking sector was buoyed by successful bank stress tests in Europe.
Global property and share markets gained significantly as concerns eased around the European debt crisis and confidence grew about future economic growth.
Cash
The Reserve Bank of Australia (RBA) left the cash rate unchanged at 4.5% for the second consecutive month in July. The RBA stated that the ongoing volatility and uncertainty in Europe remained a threat to the sustainability of the global economic recovery.
Following the release of the June quarter inflation statistics, which showed that inflation was lower than expected, the RBA again chose to leave interest rates at 4.5% at its August meeting.
Australian bonds
The UBSA Composite Bond All Maturities index was 0.3% higher in July. Yields on 10-year government bonds rose modestly to 5.21% over the month (up from 5.09% in June).
Consumer price inflation rose 0.6% in the June quarter, better than analyst expectations of a 1.0% rise. On an annual basis, CPI grew to 3.1% from 2.9%, breaching the upper end of RBA’s target range. The key contributors to the inflation figure were the higher prices of petrol, health and rents as well as an increase in the tobacco tax. This was offset by general price weakness which pushed core inflation down to its lowest level in three years, to 2.7%. Core inflation excludes items such as energy and food products with more volatile prices.
International bonds
The Barclays Capital Global Aggregate index (hedged, $A) rose 1.1% in July, with corporate bonds outperforming government bonds.
In the United States, the yield on the 10-year government bond continued to fall, albeit slightly. The yield ended the month at 2.90%, down from 2.93% in June, after briefly touching a low of 2.88%. The yield on the two-year government bond fell to a record low of 0.56%. While investor sentiment showed signs of an improvement in July, falling yields on US government bonds suggest that investors remain concerned about the health of the US economy. The US economy grew more slowly than expected in the June quarter.
Low yields on US government bonds saw demand for US corporate bonds increase in July. Among investment grade bonds, financials outperformed non-financials, supported by a more favourable outlook for the European banking sector following generally favourable results from stress testing of the capital adequacy of banks conducted by the Committee of European Banking Supervisors.
Australian listed property securities
The S&P/ASX 300 A-REIT Accumulation index was up 1.0% in July, underperforming the S&P/ASX 300 by 3.4%. The chart below shows the performance of the domestic listed property and the broader share market over the 12 months to 31 July. It highlights the strong rise of A-REITs (lighter line), from distressed levels post the GFC.
Source: ipac
The fundamentals of listed property have improved and the economic outlook is broadly supportive for the Australian listed property sector. However, some parts of the retail sector have been feeling the pressure from property vacancies. In July, office vacancy rates rose to 10%, the highest level in more than a decade, as new office space counteracted stronger tenant demand.
Diversified ( 2.3%) was the top performing sector for the month, followed by Industrial ( 1.0%). Retail ( 0.1%) was the laggard, followed by Leaders ( 0.7%).
Dexus ( 5.6%) was the best performing trust in July, benefiting from takeover speculation, followed by Stockland ( 1.9%). ING Industrial Fund ( 18.7%) performed very well, following suggestions that management plans to internalise or merge its two largest trusts – ING Industrial Fund and ING Office Fund.
Global listed property
The UBS Global Property Investors' index (hedged, $A) was up 7.7% in July. The US and Canada was the top performing region for the month ( 9.5%) followed by Continental Europe ( 8.9%). The worst performing region was Japan.
While the global REIT market suffered significant falls during the financial crisis, the sector rebounded strongly as access to capital resumed. Global REITs have outperformed the global share market over the last 12 months.
Australian shares
The fundamentals of the Australian economy continued to remain favourable for the domestic sharemarket in July. Following a sharp fall in June, the S&P/ASX 300 Accumulation index bounced back by 4.5% over the month, supported by positive economic news and improved investor sentiment. Risk aversion subsided following a better-than-expected employment report and the International Monetary Fund’s upward revision of Australia’s economic growth forecasts.
The mining sector responded positively to an agreement between the government and major mining companies to replace the controversial Resources Super Profits Tax (RSPT) with the Minerals Resource Rent Tax (MRRT).
Banks performed strongly in July. Defensive sectors generally underperformed. The best performing Australian large-cap stocks during the month included Intoll Group ( 41.3%), Downer EDI ( 38.1%) and Centennial Coal ( 34.7%). The worst performers included Nufarm (-29.1%), Aquarius Platinum (-19.8%) and Australian Worldwide Exploration (-12.1%).
The chart top right highlights the potential for rising earnings to drive up share prices over the medium term. The black dotted line is the level of the market (S&P/ASX 200). The blue line is the Earnings Per Share (EPS) for companies in the ASX 200. When the lines meet, the market has a price to earnings ratio of 15 which is about the long term average or fair value. The chart suggests the market is below fair value.
Source: Legg Mason Global Asset Management
International shares
International equity markets rallied in July, with the MSCI World ex Australia index (hedged, $A) returning 6.0%.
Factors that have kept investors nervous in recent months eased in July, such as risks to China’s economic growth and European sovereign issues. China’s economic growth slowed in the June quarter, reducing the need for further tightening. Successful bank stress test results in Europe, that showed only seven banks out of 91 banks failed, also offered market support. The aim of the stress tests was to measured banks' resilience to shocks.
Amongst the key developed markets, Europe ( 11.7%) was the best performing region, followed by the US ( 7.0%) and Japan (3.6%). Banks performed well in July. Defensive sectors generally underperformed.
The positive investor sentiment was tested in the final few days of the month, following weaker US GDP data. Slower growth in the US reflected a larger trade deficit and a slowdown in consumer spending. Consumer confidence fell, as did durable goods orders, raising concerns that the economic rebound is slowing as the government unwinds stimulus programs.
Confidence is being drawn from corporate earnings. There are signs of an earnings recovery in Europe helped by depreciation of the Euro that has made exports more competitive. In the US, earnings per share estimates increased 8% in the current reporting season compared to prior expectations.
Global emerging markets
The MSCI EM index (unhedged, $A) was up 1.1% in July as concern over European debt levels subsided.
Chinese shares gained on optimism that authorities will relax tightening measures in coming months, following reports that China’s economic growth slowed to 10.3% in the June quarter and industrial production fell more than anticipated. The People’s Bank of China stated that while economic growth is likely to slow further in future months, the possibility of a double dip recession is small as fundamentals remain healthy.
The Russian and Turkish markets were the strongest performers across global emerging markets, while the Moroccan and Indian markets lagged.
Investment Markets Data
Economic indicators
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