Market update as at October 2007

Market update

The table below provides details of the movement in average investment returns from various asset classes for the period up to September 30, 2007.

Australian shares rally

The problems of July and early August seemed a distant memory in September as the Australian equity market rallied to new highs. The ASX S&P 200 Index jumped by a substantial 5.6%, to bring annual returns to 32%.

Source: van Eyk

Resource stocks led the market higher as positive sentiment returned to world commodity markets. BHP, up 17%, and Rio Tinto, up 16%, were the largest contributors to the overall market increase. Healthcare stocks also out performed, with CSL and Cochlear being 10% and 17% higher respectively.

Smaller companies also returned to favour with an average 4.6% increase. This rise, however, was insufficient to return values to the peaks reached in July.

The less growth orientated sectors experienced weaker results. Banking stocks, constrained by the possibility that a stronger economy would lift interest rates as well as continued global fallout from the sub-prime crisis, rose by just 1.9% on average. Interest rate fears also impacted on the building construction sector with Boral, CSR and James Hardie Industries all losing significant ground.

Rate cut boosts world markets

The confirmation of a 0.5% reduction in interest rates by the United States (US) central bank led to a rally on global equity markets. Australian investors with hedged currency positions experienced an average 2.8% return over the month. However, once again a significant rise in the value of the Australian dollar sent unhedged returns into negative territory.

Source: van Eyk

Hong Kong was a stand out performer last month with a 13% jump in the Hang Seng Index. This rise appears to have been related to a decision by the Chinese Government to allow Chinese citizens to invest on the Hong Kong exchange. It was also a particularly strong month for other Asian and emerging markets. The MSCI Emerging Markets Index is now up 48% over the past year in local currency terms.

The rallies on the major developed markets were more constrained. In the US the S&P 500 was up 3.6% to be 14% ahead for the year. European markets averaged an increase of just below 3% for the month, whilst Japan shrugged off the news of its Prime Minister's resignation with a 1.3% rise in the Nikkei Index.

Despite the strong positive sentiment on world equity markets, there was still some fall-out evident from the sub-prime loan crisis last month. United Kingdom bank, Northern Rock, experienced a run on savings after it sought emergency finance from the Bank of England. There were also reports of bankruptcies and finanical difficulties being experienced by financial institutions in the US, Europe and Japan.

Interest rates creep slightly higher

Some stability returned to money markets last month. There was little movement in longer-term Government bond yields, whilst the higher risk premiums being charged on corporate lending facilities were largely retained.

In Australia, there was some rise in the 10-year Government bond yield, which finished the month at 6.2% after opening at 5.9%. Yields have returned to the levels prevailing prior to the "flight to quality" of July and August. Longer-term yields still remain below the prevailing cash interest rate of 6.5%, which was unchanged over September.

Similarly, Government bond yields overseas rebounded slightly with the US 10 year bond rising from 4.5% to 4.6%. This increase came despite the fall in official overnight cash interest rates from 5.25% to 4.75%.

Source: Reserve Bank of Australia

Property recovery continues

Australian listed property continued its recovery over September, with the sector recording a 2.3% increase. This followed the 8.4% rebound in August. Average yields available from listed property are currently 5.6%, which remains below the cash interest rate and longer-term bond yield. However, investors remain encouraged by the prospect of capital growth in underlying property assets to supplement returns.

Source: ASX/S&P

Global property returns however, declined last month despite some stabilisation in US listed property prices. The S&P Citigroup REIT Index fell 3.8% over the month in $A terms. However, the rise in the value of the Australian dollar accounted for all of this decrease in value.

* Asset class returns based on the following accumulation indexes: S&P ASX 200, S&P ASX Small Cap Ords, MSCI World index (AUD - Hedged), MSCI World Index (AUD), MSCI Emerging Markets (AUD), ASX 200 Props Trusts, S&P/Citigroup Global REIT, UBS Warburg Composite All Maturities, JP Morgan Broad WGBI (AUD Hedged), UBS Warburg Bank Bill.