Market update

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

Share prices decline despite post election rally

After 3 months of strong recovery, the Australian share market returned to negative territory in November with a 2.8% decline. The fall would have been larger if it were not for a solid bounce late in the month when the clear cut election result and improving overseas sentiment buoyed markets. The Australian market has now returned 23.7% over the past year.

Source: van Eyk

Ongoing ripples of concern stemming from the United States (US) sub prime lending market, and the US economy generally, continue to create periods of concern for equity markets around the globe, including Australia. This is being felt most heavily in the finance sector, particularly amongst investment banks. Babcock and Brown and Allco Finance both experienced double digit declines over the course of last month.

In contrast, the resources sector was given a significant boost by BHP Billiton’s acquisition proposal for fellow mining giant Rio Tinto. Although the offer was rejected by Rio, news of the offer sent Rio’s share price skywards by 30%. This activity also increased the takeover premium built into some smaller mining companies.

The takeover activity in the resource sector masked the affect of some significant declines in base metal prices over the month. Nickel, Copper, Zinc and lead all declined in price by more than 10%. These weaker prices were one factor behind a larger than normal number of earnings downgrades announced. Smaller companies were hit harder by this generally softer profit outlook, with the smaller company price index dropping by 4.8% over the month.

International returns boosted by weaker $A

All major global share markets weakened last month. However, with the Australian dollar dropping from US 92.6 cents to US 88.3 cents, Australian investors with unhedged currency exposures saw the value of their international investments rise by an average of 0.6%. Those with hedged currency positions experienced an average decline of 4.5%.

Source: van Eyk

The combination of weaker earnings prospects and ongoing sub-prime concerns, generated negative sentiment over November on US equity markets. The announcement of a record loss by General Motors added to the generally pessimistic market mood. In a volatile month, the US S&P 500 Index finished 4.4% lower, with only the hope of a December interest rate cut helping to avoid a more significant decline.

Falls in prices were even heavier in Japan where the banking sector was particulalrly weak. Japanese exporters were also impacted by a stronger Yen. The Nikkei Index dropped to a 12 month low in November, after falling 6.3% during the month.

European markets, although negative, fared a little better. Being somewhat more removed from the effects of a weaknening US economy, the German DAX Index was 1.9% lower, whilst the London FTSE was down 4.3%.

Unlike recent previous months of global weakness, emerging markets followed the general trend, with the MSCI Emerging Markets Index falling 2.6% ($A unhedged). One of the key contributors to this decline was the Chinese market, which is increasing being viewed as “overheated” given the incredible run up in prices of recent years.

Bond yields fall despite higher cash rates

The Reserve Bank confirmed in early November that it would be acting in money markets to bring about a 0.25% rise in the wholesale overnight cash interest rate to 6.75%. This was the 3rd rise in interest rates this year and follows 3 similar increases in 2006. The latest increase was in response to additional evidence that the underlying rate of inflation had continued to increase.

However, despite the rise in short term cash interest rates, longer-term Government bond yields fell last month. The 10-year Government bond is now yielding 6.0%, after opening the month at 6.2%.

Source: Reserve Bank of Australia

The fall in longer term Government bond interest rates appeared to be related to a “flight to quality” effect. Investors, concerned about credit quality, sought refuge in secure Government backed investments. This additional buying support for bonds casued bond prices to rise and yields to fall, creating positive returns for bond holders during the month.

In the US the fall in yields was more significant as the weakening economy provided added impetus to the downward movement in rates. The US 10 year bond yield fell 0.5% over November, to stand at 4.0%.

Listed property sold down again

In a volatile month, the Australian listed property sector experienced a 6.4% price fall, reducing the annual price growth in this sector to just 5%.

With the sector being heavily geared and with several companies having significant US exposures, listed property is tending to be sold down on nervousness associated with the sub-prime loan crisis in the US.

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Source: ASX / S&P

There was also weakness on global listed property markets again last month, with US investments weighing heavily on returns. The S&P Citigroup Global Property Index dropped 4.4% to bring the annual decline to 16.1%.