Cash and fixed interest
Cash and Fixed Interest
Macroeconomic factors were the primary driver of investor sentiment in FY2011. Significant monetary and fiscal policy stimulus from central banks and governments drove a rally in risk markets in the first half of the year which saw the US 10 year treasury bond sell off as yields moved from 2.95% to 3.30%. The implementation of a second round of quantitative easing (QE2) in the US and signs of improvement in global economic data readings in the September quarter led to increased optimism regarding global economic growth prospects. The rally was however, tempered by increasing levels of unease over the fiscal positions of a number of peripheral European sovereign governments, particularly Greece, Portugal and Ireland, all of which have been the recipients of joint International Monetary Fund (IMF)/European Union (EU) bail-outs and support schemes. These events saw the yields on these bonds spike, with Greek 10 year debt yielding 12.47%, and Irish 10 year debt yielding 9.08% in December 2010.
The second half of FY2011 was marked by significantly elevated volatility in markets and a general weakening in the global economic outlook, particularly in the June quarter. Bond prices came under pressure early in the March quarter off the back of strong economic data and increasingly hawkish rhetoric from the European Central Bank (ECB). However, into the June quarter investor sentiment was challenged by intensifying concerns over peripheral European sovereign fiscal positions, with the market pricing in a Greek default at one point. In addition, a general softening in economic data led many analysts to revise their expectations downwards for second quarter growth. Markets were particularly troubled by concerns regarding the sustainability of the economic recovery in the US, with US 10 year treasury bond yields falling to 2.86% in June.
Australian bond markets were largely driven by global developments over the year. Domestic data has generally been positive throughout the second half of the year, however, against the back drop of a general deterioration of global conditions, the Reserve Bank of Australia (RBA) has left the cash rate on hold at 4.75% since November 2010 due to general uncertainty for the domestic outlook.
Australian listed property securities provided a solid result over the 2011 financial year with the S&P/ASX 200 A-REIT Accumulation Index registering a positive return of 5.8%. Gains of 3.8% in both the September 10 and March 11 quarters were partially offset by smaller declines in the December 10 and June 11 quarters. Overall, the sector provided what investors have traditionally expected of it – a consistent, yield-driven return.
The prior financial year (to June 2010) was a period of growth for many listed property companies. Following the volatility of the GFC, debt became more freely available and at more competitive margins, while property values started to recover. Given most companies had recently re-capitalised, balance sheets were typically in good shape and investor confidence was returning. This saw the 2011 financial year as a relatively busy one for transactions and acquisitions.
The best performers over FY2011 were resultantly those involved in some form of corporate activity. Goodman Group, co-ordinating a collection of Sovereign wealth and pension funds, confirmed to the market in July their interest in taking over the management rights of the ING Industrial Fund (IIF). By October, a conditional bid was launched and once completed in March, IIF had increased by 43% for the year.
While delivering a solid return over FY2011, listed property securities were impacted by macro concerns. Along with much of the market, issues including ongoing uncertainty over the American economy, European sovereign creditworthiness and China’s continued expansion all dampened business and consumer sentiment. With property sectors – retail, office, industrial and residential – all reliant to some degree on a confident consumer and an expanding business sector, demand softened somewhat over the year. The prospect of interest rate cuts through FY2012 may provide some respite for property trusts in an uncertain global economy.
The 2010/11 Market Review information is based on reports provided by Macquarie investment Management Limited ABN 66 002 867 003 AFSL 237492. We haven’t verified its accuracy so we can’t guarantee that it is correct, and accept no liability for inaccuracies, errors or omissions. It is very important to note this information is general market commentary only and past performance is not indicative of future performance.