Market Watch November 2008
November 17th, 2008In brief
The Reserve Bank of Australia cut the cash rate by an unexpected 1.0% to 6.0% in October, and cut rates further to 5.25% at its meeting in early November.
In Australian shares, the government guarantee on bank deposits accelerated the selling of riskier assets, with less cyclical defensive companies outperforming.
Poor economic data and concern about company earnings caused further falls in international share markets.
Cash
The RBA cut the cash rate by an unexpected 1.0% to 6.0% in October. Consensus had been for a 0.5% cut. The RBA noted that ‘conditions in international financial markets took a significant turn for the worse in September’.
At its most recent meeting on 4 November, the RBA reduced the cash rate by a further 0.75% to 5.25%, pointing to continued dislocation in credit markets and signs that China’s economy is slowing. These conditions have contributed to further falls in world commodity prices.
Australian bonds
The UBSA Composite Bond All Maturities Index rose 2.0% in October, largely in response to an aggressive rate cut by the RBA, which drove a 0.57% fall in three year yields. Credit outperformed government bonds by 0.3%.
Persistently high funding costs spelt trouble for corporate debt markets, where issuance has fallen dramatically. However, there is some reason to be confident about an improvement in general funding conditions.
The funding premium attached to short term interest rates has shed more than 1% since spiking to a record high in early October. This premium is tied to an estimated 60% of corporate lending..
international bonds
International bond markets fell 0.86% in October (Lehman Global Aggregate - hedged, $A). Widening corporate credit spreads had the largest impact on the negative performance of the index return. Falling interest rates around the world have seen a steepening in the short end of the yield curve.
In Treasuries, US two year bonds gained as a decline in US stocks – the steepest in two decades – drove investors into the relative safety of short term securities. European and UK two year bonds also contributed to performance of the index.
The London interbank offered rate (LIBOR) for three month loans fell for a third straight week, to 3.03%. In addition, the difference between what banks and the US government pay for the loans (the TED spread) narrowed to 2.59% by the end of the month (down from 4.64% in mid October). These movements indicate that banks are more willing to lend to each other after governments worldwide injected capital into the financial system during October.
Australian listed property securities
The S&P/ASX 300 A-REIT index fell 25.4% in October. The Industrial Sector (-64.8%) significantly underperformed the Listed property index for the second month. Office (-29.1%) also underperformed. Although negative, Leaders (-22.5%) and Retail (-5.4%) outperformed the index.
Top performers over the month were Westfield Group (-1.4%) Centro Retail Group (-4.3%) and Commonwealth Property Office Fund (-8.3%) reflecting continued preference for their defensive characteristics through this period of sustained volatility in equity markets.
The worst performing trusts for the month were ING Industrial Trust (-78.4%), and Macquarie Countrywide Trust (-75.3%). ING Industrial Trust suffered from an increased cost of debt following the extreme depreciation in the Australian dollar. Macquarie Countrywide Trust also suffered from adverse currency movements, refinancing risk and the continued selling of some of its assets.
international listed property securities
The UBS Global investors Index (hedged, A$) fell 31.7% for the month, with Japan (-10.8%) and New Zealand (-20.7%) the better performers. Japan’s performance was helped by Kenedix Realty (Office sector), which finished the month up 44.8% (in local currency). The US and Canada (-32.0%) were the worst performers.
US REITs posted another sharp downturn against the broader market, with the Industrial sector taking the largest hit. Regional Malls and Shopping Centres also underperformed, whilst Health Care and Self Storage were the strongest performers.
Several European property companies reported third quarter results, which were mixed but broadly in line with (or just below) market expectations. Icade, Prologis Europe and Norwegian Property all produced results that fell short, hurt by higher interest costs.
China moved to bolster its property sector with a package of measures during the month, including lower interest rates, lower transaction fees and reduced down payments. These measures sough to boost the construction industry. This time last year China faced an asset bubble in the property market and many of these measures represent an unwinding of policies introduced in 2006 and 2007 to cool the market.
Australian shares
The Australian share market fell sharply in October. The S&P/ASX 300 Accumulation Index was down 12.9%, as investors became more risk averse.
The government guarantee on bank deposits (reflecting those overseas) accelerated the selling of riskier assets. This led to increased withdrawals from other investments which were not guaranteed (such as mortgage funds) resulting in the freezing of redemptions by these funds. This ‘flight to quality’ and safe-havens (real or perceived) drove share market performance. Whilst most stocks fell, less cyclical defensive companies (banks, health, consumer staples, telecommunications, utilities) outperformed. Mining majors BHP and RIO significantly outperformed second tier miners and mining services companies.
Gas stocks skyrocketed after British Gas’ bid for Queensland Gas and AGL Energy’s PNG asset sale, while some overseas focused companies benefited from the weaker Australian dollar (Billabong, Brambles). However, other cyclical names such as non-bank financials also suffered. A surprise 1% interest rate cut plus an extension of the short-selling ban did little to stem the selling.
international shares
Poor economic data and concern about company earnings caused further market falls over October. The MSCI world Ex Australia Index fell 19.0%. The month was characterised by significant volatility, as shown in the graph below. The Volatility Index –VIX rose to unprecedented levels.
Tentative signs of a thawing in liquidity was evident by a reduced TED spread. The US treasury purchase of commercial paper and more activity by regulators (a global interest cut and plans to purchase equity in financial institutions) eased fears to some degree.
However sentiment remained gloomy as investors focused their concerns on the impact of a slowing economy and tight credit markets on company earnings. Weak numbers in manufacturing, new orders, retail sales and employment data confirmed the recessionary outlook. News at the company level was also discouraging. Alcoa commenced the third quarter reporting season with a poor result and was joined by Citigroup, Merrill Lynch and a raft of consumer names. Caterpillar, Ebay, Ford, Logitech and Sun Microsystems issued disappointing outlook statements. In contrast Johnson & Johnson, J.P. Morgan and McDonalds exceeded expectations and oil fuelled ExxonMobil announced a world record corporate profit.
Share markets in Europe suffers a similar fate (France -13.5%, Germany -14.5%, UK -10.7%) except for oil stocks (despite a 32% fall in the oil price) and Volkswagen which briefly became the largest stock in the world after jumping 70% due to a counter play on hedge funds. Asian markets (Japan -23.8%) went into meltdown with fears for the health of the Japanese banks and the impact of the worsening global economy.economy.
global emerging markets
Emerging markets had a difficult month in October, with the MSCI EM index (in $A, div reinvested) down 13.2%. Several markets including, China, India, Indonesia, Taiwan, Russia and Brazil, lost approximately one fifth of their value amid expectations that their economies would not be immune to the sharper-than-expected global economic slowdown.
Russian stocks fell 24% (in local currency), hurt by oil’s sharp slide and the global market volatility. The country’s two main bourses closed for several days after some investors had trouble meeting margin calls. In stressful periods the ‘emerging’ nature of developing
Markets can come to the fore. The Russian government said it would inject US$150billion in emergency liquidity and ease funding pressured to help corporations meet their foreign debt obligations.
Oil giants Gazprom (Russia), Petrobas (Brazil) and Lukoil (Russia) suffered as oil fell from record highs. Vale do Rio Doce (Brazil) also found the environment difficult as the outlook for iron ore prices dimmed. Steel giants, such as Posco is South Korea and China Steel in Taiwan, also dropped amid concerns that tougher global markets and slowing economies might put government infrastructure spending on hold.
investment markets data
table 1 – investment market performance to 31 October2008
| asset class |
index |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
Australian Cash Sector |
UBSA Banks Bill Index |
0.7 |
2.0 |
4.0 |
7.8 |
7.2 |
6.8 |
6.3 |
|
Australian Fixed Interest Sector |
UBSA Composite Bond Index |
2.0 |
5.6 |
7.9 |
10.6 |
7.1 |
6.2 |
6.2 |
|
International Fixed Interest Sector |
Lehman Global Aggregate (Hedged) |
-0.8 |
0.0 |
0.8 |
5.1 |
5.3 |
5.3 |
6.3 |
|
Australian Property Sector |
S&P / ASX 300 Property Trust Accum Index |
-25.4 |
-22.8 |
-40.7 |
-56.4 |
-28.1 |
-12.6 |
-0.7 |
|
International Property Sector |
UBS Global Investors Index ($A Hedged) |
-31.7 |
-33.1 |
-40.5 |
-47.2 |
-26.6 |
n/a |
n/a |
|
Australian Share Sector |
S&P / ASX 300 Accum Index |
-12.9 |
-18.4 |
-26.9 |
-38.3 |
-10.3 |
0.6 |
8.5 |
|
International Share (Unhedged) Sector |
MSCI World Ex Australia ($A Unhedged) |
-2.9 |
0.9 |
-7.8 |
-17.7 |
-9.4 |
-1.3 |
3.1 |
|
International Share (Hedged) Sector |
MSCI World Ex Australia ($A Hedged) |
-19.0 |
-27.1 |
-32.5 |
-39.2 |
-16.0 |
-5.3 |
2.8 |
|
International Smaller Companies |
S & P / Citigroup World <US$1.5bn Cap (AUD Unhedged Net Div) |
-8.8 |
-6.6 |
-12.3 |
-27.0 |
-14.9 |
n/a |
n/a |
|
Global Emerging Markets |
MSCI EM in $A (div reinvested) |
-13.2 |
-21.4 |
-30.5 |
-38.7 |
-7.3 |
3.9 |
11.1 |
table 2 – breakdown of Australia and international fixed interest market performance to 31 October2008
|
asset class |
index |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
Australian Fixed Interest |
UBSA Corporate / Credit |
2.3 |
3.7 |
5.9 |
7.4 |
5.6 |
5.3 |
5.7 |
|
International Fixed Interest |
Lehman Global Aggregate (Hedged) |
-4.5 0.8 -1.5 |
-8.1 2.9 0.5 |
-8.0 4.2 0.8 |
-5.8 9.1 6.0 |
-0.8 7.3 5.9 |
1.3 6.7 5.9 |
3.9 7.2 6.5 |
table 3 – performance of major Australia share market indices to 31 October2008
|
index |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
S&P / ASX 20 Leaders Accum Index |
-7.1 |
-11.1 |
-19.7 |
-31.2 |
-4.2 |
5.0 |
10.3 |
|
S&P / ASX 50 Leaders Accum Index |
-10.2 |
-15.1 |
-23.8 |
-35.2 |
-8.3 |
1.9 |
9.1 |
|
S&P / ASX 100 Accum Index |
-11.6 |
-16.5 |
-24.9 |
-36.5 |
-9.2 |
1.3 |
9.0 |
|
S&P / ASX 200 Accum Index |
-12.6 |
-18.0 |
-26.5 |
-37.8 |
-10.0 |
0.7 |
8.7 |
|
S&P / ASX 300 Accum Index |
-12.9 |
-18.4 |
-26.9 |
-38.3 |
-10.3 |
0.6 |
8.5 |
table 4 – breakdown of Australian share market performance to 31 October2008*
|
sector name |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
Consumer Discretionary |
-18.6 |
-16.1 |
-32.2 |
-51.3 |
-25.9 |
-12.6 |
-4.8 |
|
Consumer Staples |
-5.8 |
-4.4 |
-13.9 |
-21.8 |
2.5 |
8.0 |
13.1 |
|
Energy |
-19.3 |
-23.6 |
-19.9 |
-15.0 |
10.0 |
13.6 |
27.2 |
|
Financials |
-11.0 |
-8.6 |
-22.6 |
-42.5 |
-16.5 |
-3.8 |
5.5 |
|
Financials Ex Property Trusts |
-7.5 |
-5.3 |
-17.7 |
-38.7 |
-13.5 |
-1.6 |
7.1 |
|
Health Care |
-2.8 |
7.7 |
-7.1 |
-8.2 |
11.2 |
14.5 |
19.5 |
|
Industrials |
-19.0 |
-22.9 |
-30.2 |
-49.1 |
-17.9 |
-6.2 |
4.3 |
|
Information Technology |
-10.1 |
-14.3 |
-14.6 |
-24.4 |
-6.5 |
1.9 |
9.5 |
|
Materials |
-17.9 |
-36.5 |
-41.8 |
-43.4 |
-7.2 |
5.1 |
13.6 |
|
Property Trusts |
-25.4 |
-22.8 |
-40.7 |
-56.4 |
-28.1 |
-12.6 |
-0.7 |
|
Telecommunications |
-2.5 |
-8.0 |
-9.4 |
-11.2 |
7.1 |
4.3 |
4.1 |
|
Utilities |
-4.4 |
-16.9 |
-22.0 |
-30.5 |
-12.1 |
-0.4 |
10.5 |
*Based on S&P/ASX 300 Accum Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).
top 5 performing Australian shares in October 2008*
|
share |
return % |
|
Queensland Gas Company Limited |
41.98 |
|
Goodman Fielder Limited |
19.06 |
|
Bendigo and Adelaide Bank Limited |
13.62 |
|
Amcor Limited |
7.41 |
|
Tatts Group Limited |
5.04 |
bottom 5 performing Australian shares in October 2008*
|
share |
return % |
|
Riversdale Mining Limited |
-63.47 |
|
Valad Property Group |
-71.53 |
|
Macquarie Countrywide Trust |
-75.26 |
|
Mount Gibson Iron Limited |
-75.30 |
|
ING Industrial Fund |
-78.39 |
*Based on the universe S&P/ASX 100 Index.
table 5 – breakdown of international share market performance by country to 31 October2008
|
index |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
United States: S&P 500 |
-16.9 |
-23.6 |
-30.1 |
-37.5 |
-16.2 |
-7.1 |
-1.6 |
|
Germany: DAX |
-14.5 |
-23.0 |
-28.2 |
-37.8 |
-10.8 |
0.4 |
6.4 |
|
United Kingdom: FTSE 100 |
-10.7 |
-19.1 |
-28.1 |
-34.9 |
-15.5 |
-6.3 |
0.4 |
|
France: CAC |
-13.5 |
-20.6 |
-30.2 |
-40.4 |
-19.3 |
-7.7 |
0.7 |
|
Japan: Nikkei |
-23.8 |
-35.9 |
-38.1 |
-48.8 |
-27.7 |
-14.3 |
-4.1 |
|
Hong Kong: Hang Seng |
-22.5 |
-38.5 |
-45.8 |
-55.4 |
-12.7 |
-1.0 |
2.8 |
Note: all returns are calculated in local currencies
table 6 – breakdown of international shares market performance by sector to 31 October2008*
|
sector name |
1mth % |
3mths % |
6mths % |
1 yr % pa |
2 yrs % pa |
3yrs % pa |
5 yrs % pa |
|
Consumer Discretionary |
-16.7 |
-22.0 |
-30.8 |
-43.7 |
-22.8 |
-11.0 |
-4.3 |
|
Consumer Staples |
-10.2 |
-9.4 |
-15.6 |
-19.5 |
-4.1 |
1.3 |
4.2 |
|
Energy |
-13.5 |
-25.3 |
-32.1 |
-29.5 |
-6.3 |
-0.8 |
11.1 |
|
Financials |
-22.5 |
-28.5 |
-40.4 |
-51.7 |
-30.9 |
-16.9 |
-6.7 |
|
Health Care |
-9.3 |
-13.3 |
-10.7 |
-21.8 |
-10.7 |
-4.3 |
0.6 |
|
Industrials |
-20.5 |
-32.1 |
-38.3 |
-46.4 |
-19.1 |
-8.4 |
-0.1 |
|
Information Technology |
-18.7 |
-29.5 |
-33.3 |
-44.1 |
-17.0 |
-8.3 |
-4.5 |
|
Materials |
-22.0 |
-41.4 |
-45.2 |
-46.5 |
-15.3 |
-2.7 |
4.3 |
|
Telecommunications |
-9.1 |
-16.6 |
-25.6 |
-38.3 |
-13.5 |
-5.4 |
-0.6 |
|
Utilities |
-10.2 |
-19.9 |
-23.7 |
-29.3 |
-8.5 |
0.8 |
8.4 |
*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).
Note: all returns are calculated in local currencies











