Investment update for October 2011

Renewed optimism?

October was the best month for investment markets since February 2011, despite a slow start. Markets experienced one of the largest intra-month rallies on record even though negative headlines dominated the media last quarter and many were predicting a US recession on top of their sustained high unemployment, weak housing and lower consumer confidence. The strong rebound was due to the Euro-zone leaders making a high level proposal to alleviate the region’s debt crisis and the US reporting season starting well. Personal consumption, business investment, and exports all helped US GDP grow at a 2.5% annualised rate during the September quarter, which surprised markets on the upside. All risk assets generally had a good month on the back of renewed positive sentiment while government bonds retreated from the strong gains experienced in the last quarter.

Australian equities finished the month strongly, affected by the same issues as markets around the world. In a period where positive sentiment drove markets, defensive stocks struggled and cyclicals performed best. Energy, Materials,Consumer Discretionary, Financials and Industrials performed strongly while Consumer Staples, Health Care, IT, Telecomms and Utilities didn’t fare so well. Small companies outperformed large caps due to the strong performance of small resources stocks. Unlisted Property posted a positive return for the month with returns largely reflecting income.

Global equities performed strongly on a hedged basis, and with the $A strengthening significantly against the $US, unhedged returns (in $A) were only slightly positive for the month. The regional indices of Asia ex-Japan, Europe, North America and Emerging Markets all posted positive returns on an unhedged basis (in $A). Other than New Zealand, Greece and Portugal, all the MSCI Developed Market Country Indices reached positive figures in local currency terms – Hong Kong, Germany, the US and the UK were the standout performers, while Japan was relatively flat and smaller European nations (Austria, Belgium and Denmark) performing weaker than the larger Euro countries. The global sector performance of prior months was reversed as defensive sectors of Consumer Staples, Health Care, Telecoms and Utilities posted negative returns in an environment where defensive stocks generally underperformed cyclicals. Energy, Materials, Industrials, Consumer Discretionary and Financials fared the best on the back of renewed market optimism.

Given the positive market sentiment, government bond yields softened as investors move into risk assets. Not surprisingly, longer duration government bonds were the standout underperformers over the month. High grade corporate bond investments held onto gains in October in hedged $A terms, while riskier fixed income assets posted strong returns. Both the high-yield and bank loan sectors, which struggled in August and September as the risk-off trade prevailed, rebounded strongly as recessionary concerns subsided during October. Despite the recent softening, the 10 year yields of Australian, Euro area, UK and US government bonds remain low, having declined since 30 June 2011.

Looking ahead

Investment markets wobbled on the news of political uncertainty in Italy and Greece. Investors should expect volatility to continue for the time being as market sentiment proves to be closely aligned to political and policy stability. The subsequent RBA interest rate cut may influence Australian markets in November.

Broad stock market performance – October 2011

Performance (income and capital gain or loss) %
Australian Shares (S&P/ASX 300 Accumulation) 7.2
International Shares (MSCI AC World ex-Aust) hedged 8.4
Global Bonds (Barclays Global Aggregate (Hedged)) 0.3
Cash (UBS Bank Bills) 0.4
Unlisted property 0.5
Appreciation of $A against $US 9.2
Check out AvSuper’s weekly returns and quarterly performance results Please note that past performance is not always a reliable indicator of future performance.

 Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays

We trust you find this information useful in understanding how your AvSuper investment is performing and welcome your feedback on how we can improve the information we provide to you.

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