MARKET UPDATES

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

table 2 – breakdown of Australia and international fixed interest market performance to 31 October2008

table 3 – performance of major Australia share market indices to 31 October2008

table 4 – breakdown of Australian share market performance to 31 October2008*

*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*

bottom 5 performing Australian shares in October 2008*

*Based on the universe S&P/ASX 100 Index.

table 5 – breakdown of international share market performance by country to 31 October2008

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 31 October2008*

*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).

Note: all returns are calculated in local currencies

economic indicators

Cash

The Reserve Bank of Australia (RBA); cut interest rates for the first time since September 2001. The RBA cut rates by 0.25% to 7.0% citing evidence of tight financial conditions and restrained credit growth.
At the most recent meeting in early October, the RBA lowered the cash rate by 1% to 6.0%. The RBA noted dislocation in financial markets as well as a slowdown in economic activity among Australia’s major trading partners. The RBA noted a change to the balance of risks surrounding the outlook, requiring a significantly less restrictive stance of monetary policy.

Australian bonds

The UBSA Composite Bond All Maturities Index returned 1.3% in September. Yields on 10 year bonds fell to 5.40% (down from 5.76% in August).

Risk aversion remained a dominant theme. Interest rate spreads in many areas of the debt market remain high amid limited liquidity and concerns about default risk, a situation that has filtered through to tight credit availability in the real economy. This dislocation has been most pronounced in the short end of the yield curve.

Supply of corporate bonds in the Australian bond market has dried up as credit spreads widened, making it more expensive for corporates to lock in long term funding.

international bonds

International bond markets fell 0.6% in September (Lehman Global Aggregate - hedged, $A). This month saw the global financial crisis continue, with the demise or takeover of some major financial institutions. Most major bond markets saw yields fall as bond markets increasingly priced in a global economic slowdown.

The interbank rates that banks charge each other for loans (LIBOR) hit new highs as banks around the world remain wary of lending to each other. This is despite the world’s central banks pumping billions into the system to try and cushion the fallout. Banks have also been stockpiling cash to make their balance sheets look stronger.

The graph below shows a sharp increase in spreads in September, stemming from the current perceptions about bank creditworthiness, which has led to a drop in market confidence:

Renewed concern about the stability of the banking system drove Treasury bill rates down over the month, with a slight recovery by months end. Yields on US 10 year bonds ended the month at 3.83%; (slightly up from 3.81% in August). Weak US economic data did not help sentiment. The unemployment rate surged to 6.1% in August – the highest level in five years. Retail sales were weaker than expected (down 0.3%). Housing starts fell 6.2%.

Australian listed property securities

The S&P/ASX 300 A-REIT index was down 5.9% in September, outperforming the broader sharemarket by 4.0%. Industrials (-18.46%) significantly underperformed the A-REIT index, reversing Augusts’ positive outperformance by this sector. Commercial (-7.2%) marginally underperformed the index, while Leaders (4.8%) and Retail (4.0%) outperformed.

The top performers were CFS Retail Property Trust (4.2%) and Commonwealth Property Office Fund (3.2%). Outperformance reflected a continued reference for defensive characteristics, as investors took refuge during an unprecedented month of events in global equity markets.

The worst performing trusts for the month were Centro Retail Group (-53.1%), Centro Properties Group (-49.7) and Valad Property Group (-43.3%). Centro Retail suffered on about credit market deterioration. Valad felt the headwinds from an announcement that its major provider of debt HBOS, will merge with Lloyds TSB. Lloyds TSB to date has not been involved with Valad, leaving some investors to worry about its willingness to lend.

international listed property securities

The UBS Global investors Index (hedged, A$) fell 4.8% in September. New Zealand (0.9%) was the top performer. Singapore (-19.2%) Europe (-16.2%) and Hong Kong (-14.6%) were the worst performers (all in $US).
Transaction volumes fell in Hong Kong (down 27% in August), as the Chinese government announced plans to buy shares in struggling mainland banks. This led to a rally in local Financial stocks, and a fall in property stocks as the news made Financials more attractive.

However, Global REITS outperformed global equities in September, and year to date. This can be attributed to the more defensive investment attributes of Real Estate stocks. At a global level, the vast majority of public real estate securities are more conservatively capitalised then their Australian counterparts.

The graph below shows the performance of global REITs over the last 12 months.

Australian shares

The Australian share market fell 9.9% in September (S&P/ASX 300 Accumulation Index). Leading Resource stocks could no longer hold up under the weight of lower commodity prices and the weakening global outlook. Also hit hard were mining services names (Boart, Longyear, Bradken, Downer, Leighton, ORI, Worley Parsons). Companies with high gearing (the suite of Babcock and Brown and Macquarie funds, Allco, Asciano, Centro Retail Group and Centro Property Group, Goodman Fielder, Valad Property Group) fell sharply.

Harvey Norman and Seven were sold off after announcing a worsening domestic profit outlook. In contrast, most outperformers came from ‘safe-haven’ sectors such as Consumer Staples, Telecommunications and Health as risk aversion rose as negative sentiment increased. Relatively lower-risk names within Financials (AMP, QBE, Perpetual) held up better. Ironically, many US-exposed stocks gained back some recent underperformance (Billabong, Brambles, Hardies) due to continued $A falls against the $US. Gold was the lone commodity to rise, in a month that saw widespread commodity price falls. This was positive for gold mining stocks.

international shares

Stockmarkets rose in August, with the MSCI world Ex Australia Index (hedged, $A) up 1.5%. Investor Sentiment was helped by Crude prices retreating another 6% due to a jump in the USDollar and an easing of Russian military activity in Georgia.

In the US, the fall in the oil price, indications from the Federal Reserve that interest rates were set to stay low; and solid retail numbers, all gave a boost to neleagured consumer stocks. This included Home Depot, Lowe’s and JC Penney. Good results from HewlettPackard, Procter & Gamble and Cisco also helped sentiment. However poor data on US housing hampered some stocks. Insurer AIG fell as a result of writedowns from credit default swaps and mortgae derivatives. Results from General Motors and Dell also disappointed investors.

Europe was helped by the stronger US Dollar relative to the Euro, which is good for exporters (as European exports are more competitive); as well as takeover activity across Germany and the UK. Strong results from utilities (France 2.1%, UK 4.2%) also helped performance. However, weak economic data and further selling of mining shares (as metal prices suffered from the rising US Dollar) dilutes the gains. Asian markets (Japan -3.8%, China -14%, HK -6.5%) were weaker as the economic ‘de-coupling’ with the US showed signs of waning.

The graph below shows the performance of international shares over the last 12 months:

global emerging markets

Sharemarkets continued to fall over September as more financial firm failures shook the US financial System. The MSCI world Ex Australia Index (hedged, $A) fell 11.3%.
An extraordinary month saw the US Federal Reserve rescue of Freddie Mac and Fannie Mae, the demise of Lehman Brothers and takeovers of the ailing Merrill Lynch, Wachovia and Washington Mutual by better-capitalised rivals. The Federal Reserve also had to bail out one of the world’s biggest insurers (AIG).

The problems stemmed from more mortgage-related losses, with counterparty risk surging as trust in the balance sheets disappeared. The initial failure of Congress to pass a bailout plan allowing the FED to cleanse banks’ balance sheets sent markets sharply down (the S&P500 dropped 8.8% on 29 September alone). Volatility was high as global markets traded through extreme ranges on a day to day basis throughout the month. Weak US retail sales, housing data and higher jobless claims continued to paint a bleak picture. The worsening economic outlook globally saw mining and other cyclical suffer, while consumer staples, health and (safer) financials fell less.
European markets were dragged further into the US credit crisis (France -10%, Germany -9.2%’ UK -13%). Similar government bailouts in the UK (Bradford & Bingley) and Belgium/Holland (Fortis), and Lloyds TSB rescue of HBOS added to the bad news from the US. Asian stocks (Japan -13.9%) also fell heavily.

investment markets data

table 1 – investment market performance to 30 September 2008

table 2 – breakdown of Australia and international fixed interest market performance to 30 September 2008

table 3 – performance of major Australia share market indices to 30 September 2008

table 4 – breakdown of Australian share market performance to 30 September 2008*

*Based on S&P/ASX 300 Accum Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).

top 5 performing Australian shares in September 2008*

bottom 5 performing Australian shares in September 2008*

*Based on the universe S&P/ASX 100 Index.

table 5 – breakdown of international share market performance by country to 30 September 2008

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 30 September 2008*

*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).

Note: all returns are calculated in local currencies

economic indicators