Investment update for May 2014
Weather hits the US and Europe struggles
Mergers and acquisition activity and strong corporate earnings supported risk assets in a month of weak developed market economic data. Defensive assets also produced strong returns. Quarterly economic growth in the US was negative for the first time in three years. As this was attributed to weather earlier in the year, the growth outlook remains broadly unchanged. Very strong first quarter growth in Japan was affected by consumers bringing forward purchases to beat a sales tax increase. Below target growth and inflation in Europe led the market to anticipate ECB announcements of additional monetary easing at its June meeting. In June, the ECB did announce a stimulus package, cutting the Eurozone policy interest rate to 0.15%, the deposit rate to -0.1%, and also a lending program to encourage new bank lending across the Eurozone.
The MSCI EM Index recovery continued with a 3.5% gain in May. Following elections and other significant political events across the emerging markets, investors showed a clear preference for stability. Indian equities continued to rally, with the Sensex Index reaching a new high as the first central bank meeting since the election opened up the possibility of interest rate cuts. In China, the official Producer Manager Index showed a broad improvement in production, new orders and export orders, though a drop in imports shows domestic demand remains fragile. The impact of the more stable economy has been seen most clearly in the offshore H-share market, not in domestic A shares. The latter have the potential to rally given their relatively low valuations.
The S&P/ASX300 Accumulation Index (0.6%) underperformed hedged overseas equities as falling iron ore prices impacted the Materials sector. Energy stocks were the best performers in the Australian market. Property Trusts underperformed the broader market and unlisted Australian property. Small cap stocks underperformed large caps. The RBA maintained interest rates at 2.5% and believes current monetary policy will foster sustainable growth in demand and on-target inflation. The most likely course is a period of stability in interest rates.
The Australian Dollar (AUD) strengthened against most major developed market currencies. and continues to be one of the strongest performing currencies. Relatively high interest rates and low volatility in currency markets has increased the attractiveness of the carry trade. The Euro was the weakest performing major currency following ECB President, Mario Draghi, stating that a strong Euro in an environment of low inflation and low growth was concerning.
Broad stock market performance – May 2014
|Performance (income and capital gain or loss) %|
|Australian Shares (S&P/ASX 300 Accumulation)||0.6||2.6|
|International Shares (MSCI AC World ex-Aust) hedged||1.6||-0.7|
|Unlisted property (Mercer Unlisted Property Funds Index (Pre-tax))*||0.5||2.0|
|Global Bonds (Barclays Global Aggregate (Hedged))||1.2||2.4|
|Cash (UBS Bank Bills)||0.2||0.7|
|Check out AvSuper’s weekly returns and quarterly performance results Please note that past performance is not always a reliable indicator of future performance.|
*Estimate as at 10 June 2014 Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
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