Key points:
 Global sharemarkets rallied in September on expectation of another round of monetary stimulus by the US Federal Reserve.
 Sharemarkets are being helped by a large number of mergers and acquisitions.
 The global economic outlook remains uncertain but the economic data out in September was broadly better.

Economic overview
September proved to be a positive month in global equity markets, despite the continued uncertainty over the global economic outlook. The biggest cause of this rally in equity markets was expectation of another round of monetary stimulus by the US Federal Reserve (US Fed), aimed at lowering long term interest rates in the US. Other positive impacts on the market in September included stronger Chinese economic data and some other global economic news that surprised on the upside, albeit still indicating a weakening trend.

Remarks by US Fed Chairman Ben Bernanke in late August laid out the willingness and the ability of the Federal Reserve to introduce further monetary stimulus if warranted by the economic outlook. The lack of inflation pressures and rising concerns over the prospect of deflation are causing the Federal Reserve to consider further stimulus.

President Obama also proposed additional fiscal stimulus in September. Political pressure is mounting to balance the need to reduce debt and stimulate the economy. A US$50 billion infrastructure spending package on roads, runways (ie airports) and railways was announced, while a business tax incentive scheme to boost capital expenditure and research & development was also announced, worth approximately US$200 billion. The business sector is one of the few bright spots in the US economy and continues to indicate signs of life.

Employment data in the US surprised on the upside for the first time in several months with 67,000 private jobs added in August. However, the unemployment rate rose to 9.6%. New unemployment claims trended down in September, after rising in August. Retail sales also recorded a slight positive gain, rising 0.4%/month, although consumer confidence surveys continue to show a depressed consumer.

The US housing market continued to stall post the end of the tax credit. Existing homes sales rose +7.6% in August, but this followed a 27% decline in July, while new home sales were flat in August. Housing starts did rise 10.5% over the month to 598,000, however both existing home sales and housing starts were driven by the volatile multi-residential sector. The overall housing market remains at extremely depressed levels with little catalyst for near term improvement.

The Japanese economy continued to make news in September. A leadership challenge for the Prime Ministership occurred, but was regained by Naoto Kan who advocated for fiscal discipline and job creation. The challenger, Ozawa advocated for intervention in the Yen and further stimulus. Following the result, the Bank of Japan intervened in the currency, buying US dollars (USD) and selling Japanese Yen for the first time since 2004. The Yen had appreciated to a 15 year high in the month, hurting exporters and the overall Japanese economy. The Yen subsequently fell from 83.04 to 85.85, before rising again at month end to 83.52 (per US dollar, see chart on next page).

USD vs Japanese Yen

 Source: Bloomberg.

Japanese exports slowed to 14.4%/year in August from 23.5%/year in July and a peak of 45.3%/year in February. This slowdown has been driven by exports to the US, which fell 9% over the month.

In Europe, sovereign debt concerns continued to overshadow economic data releases. Late in the month Moody’s downgraded Spain’s credit rating to Aa1 with a stable outlook. While this was expected, it does highlight the enormous challenge Europe has to reduce government debt and manage economic growth. France recommitted itself to reduce its budget deficit from 7.7% of Gross Domestic Product (GDP) in 2010 to 6% in 2011, while Portugal announced further austerity measures including public sector wage cuts and a lift in its VAT. Financial markets became increasingly concerned over Portugal and Ireland (with the government forced to inject more public money into the banking system), reflecting this in widening bond yield spreads to Germany. Economic data out of Europe was mixed for the two largest economies, Germany and France.

In Australia, domestic economic news continued to show the strength of the Australian economy. Q2 2010 GDP data was released in early September, indicating the Australian economy is gaining momentum quickly. Q2 GDP growth was 1.2%/quarter, higher than market expectations of 0.9%/quarter, taking the annual growth rate to 3.3%. The unemployment rate fell to 5.1% in August, with a further 30,900 jobs added (almost 350,000 have been created over the past 12 months). Despite this, consumer confidence retreated 5% in the month, with consumers remaining frugal amid concerns over possible interest rate rises and political uncertainty (see chart below). Business confidence did rebound, although remains off the highs reached in February 2010.

Consumer confidence


Source: Bloomberg.

A new government was formed in Australia, with the Labor Party reaching a deal with three independents and a member of the Green Party to form a minority government. Question marks remain over the stability and sustainability of the ALP minority Government. Key policy areas for the new Government will be the National Broadband Network, Resources Rent Tax, future tax reform, carbon pricing, infrastructure development and population planning. New data released in September showed population growth slowed from 2.1%/year to December 2009 down to 1.8%/year to March 2010. This slowdown was driven by a fall in net overseas migration. Not surprisingly Western Australia recorded the fastest population growth at 2.3%/year and Tasmania the slowest at 0.9%/year.

The Australian dollar rallied 7.9% in September to 96.56 US cents (see chart on next page). Globally there have been a number of sharp currency movements, leading to intervention by Japan, Brazil and Argentina. In Australia, a strong Australian dollar is usually welcomed by the Reserve Bank of Australia (RBA) for its ability to help control inflation.

Currency movements – Australian dollar


Source: Bloomberg

Australian shares
Australian shares made reasonable progress in September, with the S&P/ASX 200 Accumulation Index climbing 4.6%. The market appeared to be supported by economic data, which confirmed a further decline in Australian unemployment and strong growth in the overall economy.

As expected, the result of the election had no discernible impact on the share market. Now that the Government has been sworn in, investors will be looking for confirmation of key initiatives such as the introduction of the Mineral Resources Rent Tax and the rollout of the National Broadband Network. The details of these initiatives will have an important influence on certain stocks in the Australian sharemarket.

Investors maintained close attention on the sharp movements in foreign exchange markets during the month. The weakness of the US dollar had an indirect influence on certain stocks in the Australian share market. The declining US dollar resulted in a sharp appreciation in the gold price, which supported gold stocks such as Newcrest Mining (+7.0%), while appreciation in other commodity prices was beneficial for other stocks in the Materials sector. Rio Tinto (+9.5%), for example, was a notable outperformer.

Global shares
Global equity markets rallied in September on prospects of further monetary stimulus in the US, mergers and acquisition activity and some better economic data.

The MSCI World Net Index rose 9.1% in USD and 0.5% in AUD terms. A stronger Australian dollar lowered returns for local investors, with the AUD appreciating 8.6% against the USD over September to US 96.71 cents.

US equity markets gained with the Dow rising 7.7%, the S&P 500 up 8.8% and the NASDAQ recorded a sharp 12.0% gain.

European markets also rose, although returns were slightly lower than in the US. France (+6.4%), Germany (+5.1%), and Spain (+3.2%) all rose despite further fiscal austerity measures being announced in the region. The UK FTSE 100 rose 6.2%.

In Asia, equity markets were stronger. In Japan the Nikkei rallied 6.4% over the month with gains predominantly occurring post the Yen intervention. The share prices of some major Japanese exporters were struggling before the intervention, Toyota finished the month up 4.8%, Sony (+9.0%) and Canon (+13.7%) also rose.

Elsewhere, Hong Kong (+8.9%), Singapore (+5.0%), South Korea (+6.8%) and Malaysia (+2.9%) all rose.

On a sector basis, there were a number of outperformers with cyclical sectors performing well. Consumer Discretionary (+11.9%), Industrials (+11.6%), Materials (+11.0%) and Energy (+10.1%) performed well. Utilities (+2.9%) underperformed in a rising market.

Global emerging markets
Emerging markets outperformed the developed global equity market in September on improved risk appetite and continued economic outperformance compared to the developed world.

The MSCI Emerging Markets Index rose 10.9% in USD terms and 2.1% in AUD terms. Sri Lanka (+23.7%) and the Philippines market (+14.1%) performed well. The Sri Lankan market has been one of the best performers over the past 12 months with a large number of stock splits driving investor inflows into the market.

Latin American markets were mixed and dealing with a large number of currency appreciations. Argentina rose 12.3% while Brazil (+6.6%) and Mexico (+5.2%) recorded more modest returns.

In Europe, the Czech Republic was one of the rare markets that fell, down 0.8% over the month. Poland (+7.2%), Russia (+4.2%) and Hungary (+3.0%) all rose.

Fixed interest
The global macroeconomic backdrop remains uncertain and expectations of further monetary stimulus in the US are also adding to uncertainty.

In the US economic momentum remains weak even though the National Bureau of Economic Research (the organisation that decides the timing and length of recessions) announced the recent recession went for 18 months and ended in June 2009. With that news 10 year yields found it hard to continue to fall as demand for risk assets and more bond supply tempered the trend. However the announcement of possible monetary stimulus helped yields rise and 10 year yields closed at month end virtually unchanged at 2.51%.

The UK Gilt market followed the global trend of rising yields to mid month, then fell back to close at 2.95%. The economic performance was mixed with housing prices continuing to fall, unemployment remaining unchanged but the weaker pound helping exports remain strong. However, inflation remains above the 3% target and the temporary factors previously mentioned by the Bank of England remain in place.

The economic performance of Europe remains relatively strong compared to the rest of the developed world. In fact, the European Central Bank has revised its 2010 GDP forecast up to 1.6% from 1.0%, and 2011 forecast to 1.4% from 1.2%, and has maintained their Quant easing measures. This improving sentiment helped Portugal, France, Ireland, Germany, Spain and Italy auction bonds in September. 10year Bund yields closed slightly higher by month end at 2.28%.

In Japan political uncertainty helped yields spike almost 25bps before 10 year bonds finish almost unchanged for the month, at 0.94%.

The Reserve Bank of Australia (RBA) changed tact in September, outlining a case for higher official interest rates with several bullish speeches and releases. Governor Glenn Stevens outlined a two-speed Australian economy with an economic expansion only just beginning with above trend growth in 2011 and with recent inflation declines unlikely to go much further. As a result the Governor outlined that much of the task in managing a “fairly robust upswing” will fall to monetary policy. This sentiment was echoed in the release of the Board minutes from the September meeting with the central case scenario for the economy no longer consistent with average rates.

As a result financial markets are now pricing in possible moves in November and into 2011. While this does reflect a bullish outlook for the Australian economy it is likely to hamper some consumer spending activity and some business activity for those not leveraged to the resources boom.

The economic and monetary policy outlook in Australia is different from the outlook in most other developed economies. The performance of the Australian bond market in absolute terms as well as relative to other international bond markets reflects that difference in outlook. Commonwealth Government bond yields rose in September by 0.29% to 5.01%.

The UBS All Maturities Composite Bond Index returned -0.90% in the month and 7.34% over 12 months.

Listed property
A-REITs underperformed the rising Australian sharemarket in September as investors favoured stocks with greater exposure to economic activity. Several of the larger trusts in the sector are perceived to be defensive exposures, which tend to struggle during period of rising investor risk appetite. The S&P/ASX 200 Property Accumulation Index declined 0.9% in the month.

The performances of sub-sectors of the domestic property market were quite different. The Retail sub-sector fell 2.0%, dragged lower by index heavyweight Westfield Group (-2.0%). The office sector fared somewhat better, although returns were nonetheless in negative territory (-0.6%). By far the best performing sub-sector of the market was Industrials, which added 3.3% as investors favoured stocks with the greatest leverage to economic activity.

Overseas listed property stocks tended to perform extremely well. The Netherlands and France were the best performing markets, while a number of others in Europe recorded gains of between 6% and 9%. Returns from the large markets of the US, Japan and Hong Kong were more modest. As a whole the UBS Global Investors Index, which tracks the performance of global listed property securities, added 4.8%.

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