Market Update – January 2014

Market Commentary

A continued normalisation of US economic conditions led the US Federal Reserve (the Fed) to further reduce the quantity of monthly bond purchases by $10B to $65B. As was the case in December, the reduction was spread evenly between sovereign bonds and mortgage-backed securities. The Fed’s announcement led to a broad decline in investor sentiment and had ramifications for global markets. Risk assets fell in the US, however, this was also partly due to mixed company earnings announcements, while in Europe fears of deflation are blurring the longer term growth outlook for the 18 country bloc. European Central Bank President, Mario Draghi, reiterated the Bank’s commitment to take further action to fight deflation, though markets are not currently pricing prolonged easing. Manufacturing data from China came in below expectations and this led investors to revise growth expectations. A combination of reduced monetary stimulus from the Fed and a repricing of Chinese economic growth had a negative impact on emerging markets.

The investment returns of the major markets for one and three months to 31 January 2014 are summarised below.




 

Market Performance – January 2014

Performance
%

Month

3 months

Australian Shares (S&P/ASX 300 Accumulation)

-3.0

-3.5

International Shares (MSCI World ex-Australia) unhedged

-1.2

9.2

International Shares (MSCI World ex-Australia) hedged

-3.1

1.8

Unlisted Property (Mercer Unlisted Property Funds Index (Pre Tax)

0.5

2.2

Listed Property Trusts (S&P/ASX 300 Property Trusts Accumulation)

0.4

-3.6

Australian Bonds (UBS Composite Index)

1.1

1.5

Global Bonds (Barclays Global Aggregate (Hedged))

1.7

1.4

Cash (UBS Bank Bills)

0.2

0.7

Appreciation of $A against $US

-2.5

-7.9

*Estimate as at 10/02/2014

The MSCI World ex-Australia Index (hedged to $A) fell 3.1% over the month but the decline of the Australian Dollar against most major currencies softened the impact of the market fall to -1.2% (in $A) on an unhedged basis. Emerging markets underperformed developed markets as index heavyweights China, South Korea and Russia produced negative absolute returns. The equity markets of many of the countries experiencing balance of payments related troubles (namely Brazil, India, South Africa and Turkey) were sold-off further as reduced monetary stimulus measures led to increased capital outflows from countries most reliant on foreign funding. From a global sector perspective Energy and Consumer Staples were the weakest performing sectors, while the defensive sectors of Health Care and Utilities were the only two to produce positive absolute returns.

The S&P/ASX300 Accumulation Index (-3.0%) performed broadly in line with hedged global equities as investor sentiment was driven by the same macro themes. Small cap stocks outperformed large caps, with relative performance mostly driven by small Resources. The S&P/ASX 300 Property Trusts Index outperformed the broader Australian equity index and performed broadly in line with unlisted property.

Most 10 year developed market government bond yields moved sharply lower over the month, resulting in positive absolute returns for bond indices. Investment Grade credit spreads were broadly flat and performance was in line with government bonds. The Reserve Bank of Australia did not meet in January and the Australian Cash Rate remains at 2.5%. The Australian Dollar depreciated (-2.5% against the $US).