Note: This information is based on market commentary provided by Macquarie Investment Management Ltd (AFSL 237492) and is published in this report with its consent. It is very important to note it relates to investment markets generally. It does not constitute financial advice and is of a general nature only without taking into account a person’s individual circumstances or needs. Past performance is not indicative of future performance. The opinions, estimates and other forward looking statements are subject to various risks and uncertainties.
Cash and Fixed Interest
The beginning of FY12 was characterised by an increase in volatility due to negative market sentiment. Notable events during this period included the downgrade of the US government, fiscal concerns in peripheral Europe and the slowdown in the US economy leading to Operation Twist. Domestically the softer conditions led to rate cuts totalling 125bps. The December quarter continued to display heightened volatility, particularly driven by the sovereign and banking concerns in Europe. With regards to the Greek debt crisis, a plan was delivered at the conclusion of the EU summit that saw banks take a voluntary 50% haircut on Greek bonds and enabled the European Financial Stability Facility (EFSF) to be leveraged up to 4-5 times. This caused risk markets to rally, however, this was short lived as markets became increasingly sceptical of the ability of the plan to be implemented. This was reflected in further widening of Italian and French bond yields which hit new post-Euro highs.
The second half of the financial year began with a more positive tone as markets were driven higher on the back of upcoming European Long Term Refinancing Operations (LTRO) funding and possible restructure of the Greek debt issue. However, this was short lived as the results of Greek elections and fears surrounding Spain’s financial system troubled the market. Reflecting these concerns, the yield on Spanish government bonds rose above 7% for the first time – above the level that previous sovereign bailouts had taken place. Both the Fed and the RBA adopted a more balanced tone as they maintained their wait and see approach in regards to further stimulus and rate cuts. Towards the end of the financial year, however, market sentiment softened and the credit markets erased much of the previous quarter’s gains. Meanwhile, yields in the US, Germany and Australia all fell to record low levels, as investors sought the perceived safety of these markets.
In Australia, the December quarter saw the RBA cut the cash rate two more times bringing the official cash rate to 4.25%. The RBA then cut rates again in May (50bps) and June (25bps) due to Australian CPI printing weaker and further evidence of a slowdown in global growth (especially in Europe and China). The yield on the 10 year government bond fell to 2.87% in June 2012, versus over 4% in April 2012. Contrary to the global trend, however, Australian economic data started to surprise to the upside causing an increase in domestic selling pressure. However, this was tempered by the weakness in the overall global economic data, leading Australian bond yields to being fairly contained in a range in the last few months of the financial year. Looking ahead, the fundamental driver of market sentiment will continue to be the longer term trend of global economic data, which has softened over recent months.
The Australian listed property sector outperformed the broader equity market by 17.8% in FY12, up 11% in absolute terms. This was only its second year of outperformance since FY03. Over the past three years, following the horrible performance of the REITs in the GFC, the REITs have delivered cumulative outperformance of 24.0%.
The outperformance of the REIT sector was concentrated in the second half of the year, with 13.5% of the outperformance coming in the June 2012 quarter. This was partially driven by WDC, which makes up roughly 30% of the sector, as well as GMG and WRT.
Despite global challenges, the debt markets remain open for the REITs with $6.3bn of new debt/refinancing completed in the last year at an average term of 6.0 years and average margin of 230bps. Base debt costs fell sharply through FY12, with the BBSW and five year swap rate falling 143bps and188bps respectively, versus a ~50bps rise in debt margins.
Transaction markets were healthy in FY12, with $11.4bn of assets trading hands (>$30m). Office was the most active, representing 55% of sales, with retail activity picking up in 2012 and providing 26% of sales. The main source of buying came from offshore with $2.3bn of net acquisitions, and domestic unlisted institutional investors (+$1.3bn), whilst the major sellers were REITs with $2.8bn of net sales.
While delivering a solid return over FY12, listed property securities were impacted by macroeconomic 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 continued interest rate cuts through FY13 may provide some respite for property trusts in an uncertain global economy.
The Australian equities market underperformed in FY12, providing an absolute return of -6.71% (S&P/ASX 200 Accumulation Index). Macroeconomic issues continued to play a pivotal role in the direction of the equity markets as investors juggled concerns of a European debt crisis, a slowing Chinese growth story, and the hope that a US recovery will remain on track.
The sovereign debt crisis in the periphery of the Eurozone deepened over FY12. The Greek government agreed to a restructuring of its privately-held debt with holders accepting a combination of new Greek debt and European Financial Stability Fund bonds. Fears of a Greek exit from the European monetary union were heightened by a strong election showing by anti-austerity parties in May, though a June re-election brought a centrist coalition government to power.
Domestically, FY12 has been a year of structural change as local manufacturing and tourism operators suffer a higher AUD, retailers and media companies adapt to an increasingly digital world, and a more prudent consumer both borrows and spends less. The problem with structural change is that no cut in interest rates or taxes can arrest its affect. Despite the Reserve Bank of Australia (RBA) cutting interest rates by 1.25% this FY, and tipped by the futures market to have another 75bps of cuts to come, Australian businesses will have to fight to remain relevant in an increasingly global economy. The AUD fluctuated against the greenback, dipping below the parity mark in the second quarter, before closing at US$1.02.
Sector performance across the ASX200 this financial year highlights a defensive investor bias. Telcos ended the year up +27%, along with utilities +10% and healthcare +8%. The materials sector is off almost 30% this FY, with the fear of a hard landing in China remaining front of mind, ahead of their once in a decade leadership change. The People’s Bank of China (PBOC) cut interest rates for the first time since 2008, unnerving markets as Premier Wen Jiabao predicted economic growth of 7.5% in FY12, the slowest annual pace since 2004. Unsurprisingly BHP (-25.8%) and RIO (-30%) were big detractors of performance on the local bourse.
The MSCI World Ex Australia Index returned -0.5% over 12 months ending 30 June 2012. The continuation of issues in Europe and signs of weakening economic growth in both Developed and Emerging markets ensured a volatile year.
The European sovereign debt crisis continued to roil with a seemingly never ending string of inconclusive summits and bailout packages. A notable slowdown of German PMI manufacturing and service numbers, as well as a fall in Euro Consumer Confidence reiterated widespread market fears that the Euro is headed for choppy waters, which triggered France, Spain, Italy, Greece and Belgium, to impose short selling bans to stabilise the markets. Populist backlash over imposed austerity measures further compounded issues, prompting governmental changes in both Greece and Italy, with former members of the European Central Bank taking charge of the nations’ future. S&P downgraded thirty‑four Italian banks after reducing the nation’s ratings, and Moody, similarly, cut debt ratings on six European countries including Italy and Spain and placed the UK and France on risk alert. UK GDP disappointed expectations, tipping the local economy officially back into recession, the first double dip since 1975. Ongoing discussion by European leaders to find a permanent solution to looming contagion risks finally resulted in additional aid allocated to endangered countries, with the European Union (EU) Summit in late June finally producing a degree of political agreement, buoying markets.
This came as particularly good news for periphery economies such as Spain and Italy, which had seen their debt spreads widen considerably since the start of 2012.
US markets were naturally influenced by the issues across the Atlantic, with additional complications stemming from bureaucratic paralysis, a looming Presidential election and their first ever S&P credit downgrade, to AA+ level. Some positive sentiment ensued towards the end of 2011 with the upward revision of the GDP based on strong consumer spending and deployment of Fed Chairman Ben Bernanke’s Operation Twist, the third in a series of major policy responses by the Fed to stimulate the economy, aimed at lowering the interest rate on longer term bonds.
Economic momentum slowed considerably in China with the data uniformly disappointing, notably with home prices declining in more than half of the biggest cities. While this partly reflects the slowdown intended by Chinese policymakers, the market was nonetheless concerned over the risk of a hard landing.