Investment Update, November 2011
Investment Update, November 2011 Issued: December 2011
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Equity markets remained volatile in November, as investors continued to be frustrated by a lack of concrete action from European leaders to deal with the continent’s ongoing sovereign debt crisis. US, UK and European equity markets rallied strongly on November 30, following news that central banks worldwide were taking concerted action to boost global liquidity. This final-day rally was not enough, however, to bring returns back to positive territory for the month as a whole. Asian markets did not benefit from this final-day rally, as the announcement came after their market close.
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In Australia, the S&P/ASX 300 Accumulation Index fell 3.4%, driven lower by the Bank and Resource sectors. On commodities markets, oil remained well bid, as concerns grew about rising tensions with Iran.
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Cumulative performance of GESB’s Readymade investment plans GESB Super
Following recent equity market losses, the performances of the diversified Readymade investment plans have generally fallen below cash returns for the year to November 2011.
108 Past 12 Months November 2010 = 100 106 104 104
104
102
102 101
100 99
98
Conservative Plan Balanced Growth Plan Cash Plan
No v1 1
Oc t1 1
Se p1 1
Au g1 1
Ju l 11
Ju n1 1
Ma y1 1
Ap r1 1
Ma r1 1
Fe b1 1
Jan 11
De c1 0
No v1 0
96
Since the beginning of April 2011, equity markets have fallen substantially with developed market international shares and Australian shares both falling over 10% to the end of November. Fears over a stalling global economic recovery, political debate regarding the debt position of the US, and the ongoing European debt crisis have been the major drivers of the poor performance. The Readymade investment plans provide a diversified exposure to a number of underlying asset classes. The various Readymade investment plans perform differently over time, reflecting their different allocations to specific asset classes.
Balanced Conservative Plan Growth Plan
West State Super 108 Past 12 Months November 2010 = 100
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In GESB Super, the Cash plan has delivered the strongest return over the 12 months to November 2011. The declines experienced in the past few months by the more aggressive plans have outweighed their stronger performances in the first half of the year. The Balanced Conservative plan has slightly outperformed the Balanced Growth plan. This is due to its higher allocation to defensive assets, such as bonds, which helped reduce the impact of the equity market falls.
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In West State Super, the Conservative plan has been the best performer over the 12 months to November 2011. The more growth-orientated Balanced and Growth plans have fallen due to equity market weakness in the last six months.
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In the Retirement Income products, the Cash plan was again the best performer, followed by the Conservative plan.
106 105 105
104 102
102
100
100
98
Conservative Plan
Balanced Plan
Growth Plan
No v1 1
Oc t1 1
Se p1 1
Au g1 1
Ju l 11
Ju n1 1
Ma y1 1
Ap r1 1
Ma r1 1
Fe b1 1
Jan 11
De c1 0
No v1 0
96
Cash Plan
Retirement Income 108 Past 12 Months November 2010 = 100 106 105 104
104
102
102 100
100
98
Conservative Plan
Balanced Plan
Growth Plan
No v1 1
Oc t1 1
Se p1 1
Au g1 1
Ju l 11
Ju n1 1
Ma y1 1
Ap r1 1
Ma r1 1
Fe b1 1
Jan 11
De c1 0
No v1 0
96
Cash Plan
Source: GESB Notes: The charts show the cumulative performance of the investment plans (net of fees and taxes for GESB Super and Retirement Income and net of fees for West State Super) and do not take into account any contributions or benefits you paid or received during the period, such that the change in value of each plan does not necessarily correspond to the change in your account value over the same period.
Investment Update, November 2011 November was another volatile month for global sharemarkets, as investors continued to be frustrated by a lack of concrete action from European leaders to deal with the continent’s ongoing sovereign debt crisis. The start of the month saw equity markets lose ground, following an inconclusive G-20 summit in Cannes that produced no permanent solutions to Europe’s debt crisis. Shortly after the meeting, Greek Prime Minister George Papandreou and Italian Prime Minister Silvio Berlusconi resigned, with both men replaced by unelected technocrats who have been given a short-term mandate to press on with additional austerity measures. Italy is now governed by former EU Commissioner Mario Monti, while Greece’s government is now headed by former ECB vice president Lucas Papademos. Spain also saw a change of government, with the People’s Party of Mariano Rajoy ousting the Socialists, who had been in power since 2004. There are still major concerns about whether the Eurozone can survive in its present form, with German Chancellor Angela Merkel and French President Nicolas Sarkozy looking to promote greater fiscal union among the 17 member states of the Euro currency as a way of ensuring that another sovereign debt crisis cannot occur again in the future. Certainly, the leadership changes across Europe failed to calm market nerves – Italian 10-year bond yields broke through the key 7% barrier shortly after Berlusconi’s departure and Spanish yields were still trading above 6% after that country’s election – and global sharemarkets remained volatile over the month. Over the course of the month, there was further encouraging economic news from the US, where manufacturing growth reached its strongest rate since June. The Institute for Supply Management said that its index of factory output rose to 52.7, from 50.8 in October. Any reading above 50 indicates expansion. New car sales were also up by 14% year-on-year, indicating that some measure of consumer confidence is returning to the US economy. New car sales have now shown growth for six consecutive months. On November 30, six central banks (US, UK, ECB, Canada, Japan and Switzerland) announced concerted action to boost global liquidity – primarily by lowering the cost of borrowing US dollars for European banks. This saw the US and European sharemarkets post strong rallies on the final trading day of the month. Indeed, Germany’s DAX index gained nearly 5% on the day. This rally was not enough, however, to bring returns back to positive territory for the month as a whole. For this month the UK is one of the better performing markets, down by 0.2%, while the US’ Dow Jones index also lost 0.8%. In Europe, France’s CAC 40 lost 2.5% and Italy’s MIB fell by 4.3%. Sentiment towards UK equities was affected by a downbeat Autumn Statement from Chancellor George Osborne, which made for gloomy reading when it was announced on November 29. The government has cut growth forecasts for the coming years and increased borrowing forecasts, with the government also admitting that it would not now be able to meet its aim of eliminating the country’s structural budget deficit by the end of the current parliament in 2015. Asian markets fared much worse than their western counterparts in November. However, this was largely due to the fact that the November 30 central bank announcement on boosting global liquidity happened after the market close in Asia. Over the month, Japan’s Nikkei 225 was down by 6.2%, while Hong Kong’s Hang Seng index lost 9.2%. Sentiment towards Japanese equities is also being clouded by an ongoing corporate governance and accounting scandal at major corporation Olympus, whose shares have lost about 60% of
their value between mid-October and end-November. Economic data out of China was also disappointing, with HSBC’s Purchasing Managers Index falling to a 32-month low of 47.7 for November and the central bank also announcing a 0.5% cut in the reserve requirement ratio for the country’s banks in an effort to boost lending activity. Australia’s S&P/ASX 300 Accumulation Index lost 3.4% in November, again suffering from the fact that the market had closed before the November 30 announcement of a significant global boost to market liquidity. Banks and Resources both lost ground over the month, with defensive sectors (such as Telecommunications, Health Care and Utilities) outperforming. The 0.25% cut to interest rates administered by the RBA on November 1 did little to support equity prices, given the still-depressed global economic outlook. On commodities markets, oil remained well bid as Western powers look to impose tighter sanctions on Iran. Already, the US has imposed a ban on Iranian oil imports, with the EU likely to follow suit. However, with Iran being the world’s fourth largest oil producer, cutting off Iranian output would see already tight global supply lines squeezed yet further. Therefore, the risk is that energy prices will continue to rise over the northern hemisphere winter months. The Australian dollar saw some measure of weakness over the first three weeks of the month, initially triggered by the 1 November interest rate cut by the RBA, but then exacerbated by growing fears of a renewed slowdown in global economic growth and a concomitant fall in demand for commodities. However, the currency rallied strongly towards the end of November, to end the month 3.2% weaker against the US dollar, at USD1.0273.
Investment Update, November 2011 Asset class returns Defensive asset classes outperformed growth asset classes as the European debt crisis continued }
Equity markets fell in November as politics in Europe and the US continued to weigh on investor sentiment. Defensive assets were generally positive as investors sought safe havens
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The European sovereign debt crisis claimed two political casualties as Greek Prime Minister George Papandreou and Italian Prime Minister Silvio Berlusconi both resigned
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Late in the month six central banks (US, Canada, England, Japan, ECB and Switzerland) announced coordinated action to lower the cost of US dollar swap funding
World sharemarkets All major global sharemarkets fell over the month, with a sharp rally on the last day of the month distorting results }
The larger developed nations (UK, US and Germany) performed the best in the down month while Asian markets (China, Japan and Hong Kong) performed the worst
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The performance differential was largely a timing issue due to a sharp rally on the last day of the month (the Euro STOXX 50 and the US S&P 500 both gained 4.3% on the day) after the Australian and Asian markets had closed
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The last day rally was caused by the announcement of coordinated liquidity measures by central banks, including the European Central Bank
European debt crisis The coordinated central bank action this month was a symbolic move, but investors hope it is a sign of further cooperation }
Italian 10-year government bond yields broke the 7% mark during November, a level often associated with serious funding issues, and Spanish bonds returned to 6% yields. German “Bunds” also rose slightly towards the end of the month as investors became concerned Germany may be drawn into the crisis
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Portugal, Hungary and Belgium all saw downgrades to their sovereign debt ratings in November by various ratings houses
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The European Central Bank lowered its key interest rate by 0.25% to 1.25% in response to lower economic activity
Financials Financial stocks were hit hard in November as investors saw greater risks in the sector
Source for charts: Bloomberg and Datastream
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The MSCI World Banks index fell 5.6% in November versus the broader MSCI World Price index fall 0f 2.7%
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Fitch released a report in November outlining gross US bank exposure to European countries, which highlighted the impact a European bank default would have on the US
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Falls were widespread across the US (Bank of America -22.4%), UK (Lloyds -23.6%) and Europe (Credit Suisse -14.2%)
Investment Update, November 2011 Australian sharemarket The S&P/ASX 300 Accumulation Index lost 3.4% in November as the largest sectors, Banks and Resources, both fell }
Sector performance was split down classic defensive / cyclical lines over the month
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Defensive sectors Telecommunications, Health Care and Utilities outperformed over the month while cyclical sectors Materials, Energy, Financials and Consumer Discretionary underperformed
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Annual general meetings continued in Australia and gave a mixed picture of trading conditions. Three of the big four banks reported in line with expectations, but commentary highlighted the difficult state of overseas funding markets
Australian economy The RBA delivered a Melbourne Cup interest rate cut of 0.25% to 4.5%, the first reduction in the cash rate for 2½ years }
The Reserve Bank of Australia cut official interest rates by 0.25% to4.5%, and markets are pricing in more cuts over the coming months
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The government’s mid-year budget review showed revenue falling below the projections made in the May Budget speech and a projected deficit of $37bn for the current year, up from a forecast of $22.6bn
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Treasurer Wayne Swan reiterated the goal of a surplus in 2012/13 and to this end announced $6.8bn of spending cuts
Commodities The S&P GSCI commodity index gained 1.4% in November, mainly due to a positive performance by the Energy sector }
The Energy sector rose 3.7% as oil prices were supported by new concerns over Middle Eastern supply of crude, most recently in Iran during November
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The Industrial Metals sector fell 2.7% due to economic concerns around global growth with Nickel the worst performer
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Agriculture was the worst sector losing 7.1% as northern hemisphere grain harvests showed increases in overall supplies and inventories. Rising agricultural prices over 2010 created incentives to bolster supply in2011
Australian dollar The Australian dollar finished the month just over parity with the US dollar after falling below during the month
Source for charts: Bloomberg and Datastream
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The Australian dollar fell steadily over the month with the RBA interest rate cut, weaker metals prices and a lower investor risk appetite all weighed on the currency. A late month rally saw the Australian dollar reach $1.002 by 30 November.
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The Euro fell 3% versus the US dollar as the sovereign debt crisis continued to hamper the combined currency
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The US dollar was stronger on a broad front versus its major trading partners mainly due to reduced risk appetite
Investment Update, November 2011
The information contained in this investment update is of a general nature, and does not constitute legal, taxation or personal financial advice. In providing this information GESB has not taken into account your investment objectives, financial situation or needs. GESB is not licensed to provide financial product advice. If you need specific advice for your personal circumstances, you may wish to consult a suitably qualified adviser to ascertain whether the information contained in this investment update is appropriate for you. You should read this document in conjunction with other relevant disclosure documents GESB has prepared, and the Product Information Booklet of the relevant product.
