Investment market review

20 Nov 2015

By Shadforth Financial Group

Australian shares

The S&P/ASX 300 Accumulation Index experienced a significant quarterly decline of -6.5%.

The energy sector was the worst performer, down 24.1%, as crude oil prices came under renewed
selling pressure. The better performing sectors were industrials, which rose 3.4%, utilities gained
2.4% and consumer staples climbed 1.5%. Capital management initiatives were an important theme during the quarter as Ansell, Computershare, Downer EDI, Dexus and Seven West Media all announced share buybacks. Important ASX top 50 stocks, such as, Commonwealth Bank of Australia, ANZ, and Origin raised equity capital during the quarter.

graph 1

Listed property trusts

The REIT sector generated a positive return of 1.1% for the September quarter.

Falling Australian and international bond yields impacted the sector after the US Federal Reserve kept
interest rates at zero. Over the quarter, the property sector outperformed the broader market by 7.6%.

A major driver of REIT sector outperformance was a steep fall in domestic bond yields during the quarter. The 10 year Australian bond yield fell 41 basis points.

Earning’s results of A-REITs during the recent reporting season were broadly in line with market expectations. The A-REITs exposed to the retail sector reported an improvement in fundamentals
as consumer sentiment improved.

graph 2

International shares

Major international markets finished in negative territory, with the S&P 500 down 6.9%, the European Stoxx 50 losing 9.5% and the Nikkei 225 falling 14.1% (after adjusting for the weaker Australian dollar).

The MSCI World Index, in Australian dollar terms, produced a slight gain of 0.20% in the September quarter.

Heavy market falls in China during the September quarter precipitated large declines in international markets. In the US, the VIX ‘fear index’ spiked to a post-GFC high in August pointing to a high degree of risk aversion by investors. US economic data was generally positive with GDP growth in the second quarter revised up to 3.9% and the unemployment rate falling to 5.1% as a result of stronger jobs growth. The People’s Bank of China cut interest rates by 25 basis points and also reduced Chinese banks’ required reserve ratio (RRR) by 50 basis points.

graph 3

Fixed interest

International bond yields moved lower over the quarter.

The benchmark 10 year Government bond rate in the US and Australia fell by 32 and 41 basis points to close at 2.04% and 2.61% respectively. In Australia, falling yields on short to medium term maturities was driven by growing concerns around China’s economic slowdown, heightened risk aversion in share markets and weaker commodity prices. These bearish signals resulted in stronger demand for the perceived safety of government bonds.

graph 4

Cash

The RBA left the cash rate unchanged during the September quarter at 2.0%.

Economic data was relatively weak with June quarter GDP growth of only 0.2%. Economic growth was dragged lower by weaker than expected net exports and business capital investment, as the resources sector transitioned from the investment phase to the production phase.

graph 5

The long view

This chart displays the highest and lowest 12-month returns of the major asset classes since September 1995.* As you can see, cash provides stability and security, having never generated
a negative return over a 12-month period. The trade-off for this stability and lower risk is that cash will be unlikely to match the higher returns generated by other asset classes.

chart

Source: Morningstar. Indices used are: Cash — AusBond Bank Bill; Fixed Interest — AusBond Composite 0+ year; Australian shares — S&P/ASX 300 Accumulation; International shares — MSCI World AUD Net Return; Listed property trusts — S&P/ASX 300 A-REIT Accumulation. Data as at 30 September 2015.
* Listed property trusts index only available from June 2001.

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