Cash

In March, the Reserve Bank of Australia (RBA) left the cash rate unchanged at 6.25%. The UBS Australia Bank Bill Index returned 0.5% for the month.

Australian bonds

The UBS Australia Composite Bond Index (All Maturities) fell (-0.3%), as the market priced the likelihood of further interest rate increases on the back of continued strength in the domestic economy. December quarter economic growth, released during the month, showed an increase in economic growth to 2.8% with the non-farm sector growing at 3.3%.

Inflationary pressures remain on the upside with little spare capacity available in the economy.

The RBA Deputy Governor, Malcolm Edey, restated the Bank's tightening bias during the month in a speech to the Australia and Japan Economic Outlook Conference. Edey noted that: the "inflation outlook is higher than ideal"; "inflation [is] more likely to be too high than too low"; and "the factors pushing up underlying inflation last year remain in place".

The next RBA Board meeting will be held on 1 May. They will potentially have to contend with robust consumer and business confidence and the likelihood of the two strongest successive quarters of consumer spending growth since the end of the housing boom in 2003.

International bonds

The Lehman Global Aggregate Index (hedged, A$) returned 0.1% as yields tracked upwards on higher oil prices. Not only has the cost of crude increased but the cost of refining has increased. This is known as the crack spread.

In the United States (US), the Federal Reserve left interest rates unchanged at 5.25%. Consumer prices rose more than expected in February (+0.4%, January: +0.2%) dampening chances that the Federal Reserve would cut rates. Against this backdrop of persistent inflationary data US economic growth is slowing, driven primarily by weakness in the housing sector. Home sales in the US fell by the largest amount in 13 years during the month.

US 3-Year and 10-Year bond yields ended the month at 4.5% (-3bps) and 4.7% (+7bps) respectively.

In Europe, the European Central Bank (ECB) raised interest rates to 3.75%. ECB President, Jean Claude Trichet, signalled that European interest rates remained "accommodative", and that further rate rises were required. European 3-Year and 10-Year bond yields ended the month at 4.0% (+12bps) and 4.1% (+10bps) respectively.

In Japan, the Bank of Japan (BoJ) left interest rates unchanged at 0.5%. Yields remained unchanged as the bond market weighed strong economic growth (+5.5%, annualised), boosted by the weak Yen, against flat consumer price data (+0.0%, previous: +0.1%). Japanese 3-Year and 10-Year bond yields ended the month at 0.9% (-2bps) and 1.7% (+2bps) respectively.

Australian listed property securities

The S&P/ASX 300 Property Accumulation Index fell -4.0%. This poor return was one of the worst since 1979. All listed property sectors underperformed. The worst performing sectors were Retail (-6.4%) and Diversified  (-3.1%).

The poor performance of listed property reflects a change in fundamental composition of the listed property trust sector with more trusts assuming stapled structures, which has made them more equity like. Historically Australian equities and Australian listed property have generally moved together. The return in March was unusual, as the listed property return was negative when Australian equities were positive. The result, reflected valuation concerns.

International listed property securities

The UBS Global Investors Index (hedged, A$ net dividends) fell -0.6%, outperforming Australian listed property (-4.0%). The best performing market was Japan (+6.2%) which was lifted by rising commercial land values. The only negative performers were North America (-2.6%) and Australia (-4.0%), which together account for two-thirds of the benchmark.

Australian shares

The S&P/ASX 300 Accumulation Index returned 3.3% for the month. The best performing sectors were Information Technology (+11.3%), Telecommunications (+9.2%), and Materials (+6.3%). The worst performing sectors were Property Trusts (-4.0%) and Financials (+0.7%).

Merger and Acquisition (M&A) activity remained strong. Alinta (+1.9%) recommended the takeover offer from Babcock & Brown (+7.3%). Bendigo Bank (+27.3%) received a takeover offer from Bank of Queensland (+15.2%). OneSteel (+2.8%) received support from BlueScope Steel (14.8%) for its takeover of the Smorgon Steel Group (+6.8%).

International shares

The MSCI World Ex Australia Index (hedged, A$ net dividends) rose 1.6%, outperforming the unhedged index (-0.8%). 

The US market (S&P 500: +1.0%) was bolstered by continued M&A activity, led by the private equity buyout of Texas utility TXU.

Europe (MSCI Europe: +2.8%) delivered solid performance. The best performing major markets were Germany (DAX: +3.0%) and UK (FTSE 100: +2.2%), while France (CAC: -2.1%) lagged.

The Japanese equity market (TOPIX: -1.8%) struggled despite a weaker Yen supporting exporters.

Global emerging markets

The MSCI EM (in A$ with div reinvested) Index returned 1.4%