Cash

In January 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 (All Maturities) Index returned 0.5%. The 3-Year and 10-Year bond yields ended the month at 6.1% (+10bps) and 5.9% (+4bps) respectively.

Interest rate pressures moderated during the month as inflation eased. The Consumer Price Index, after rising strongly in the September quarter, fell by 0.1% in the fourth quarter. The market had forecast a 0.2% rise. Employment data released during the month (+44.6k, consensus: +15.0k) showed that the economy was still strong. The unemployment rate remains at a 30-year low (+4.6%) with the participation rate (64.9%) just shy of its record high (September 2006: 65.0%).

International bonds

The Lehman Global Aggregate Index (hedged, A$) was flat, underperforming the Australian fixed interest market. Yields rallied strongly in all major markets as stronger than expected economic growth weighed on fixed interest returns.

The United States Federal Reserve left interest rates unchanged at 5.25%. The US economy grew at a stronger than expected 3.5% (annualised) in the fourth quarter, quietening fears that the housing market was leading the economy into recession.

Yields rose throughout the month on stronger than expected employment and manufacturing data. The Federal Reserve, while noting that inflation remained a "predominant concern", appeared bullish on the outlook for domestic and global economic growth. The US 3-Year and 10-Year bond yields ended the month at 4.8% (+10bps) and 4.8% (+11bps) respectively.

In Europe, the European Central Bank left interest rates unchanged at 3.5%. The outlook for the European economy remains robust with business and consumer confidence rising to a six-year high during the month, and unemployment falling to its lowest level in five years (7.6%). During the month the UK unexpectedly raised interest rates to 5.25% after the economy grew faster than expected in the fourth quarter. European 3-Year and 10-Year bond yields ended the month at 3.9% (+11bps) and 4.1% (+14bps) respectively.

In Japan, the Bank of Japan (BoJ) left interest rates unchanged at 0.25%. The market had expected the BoJ to raise interest rates in January, however modest economic growth and weak inflationary data in the fourth quarter appeared to exert pressure on the BoJ to keep interest rates unchanged. Japanese 3-Year and 10-Year bond yields ended the month at 0.8% (-5bps) and 1.7% (+2bps) respectively.

Australian listed property securities

The S&P/ASX 300 Property Accumulation Index delivered another strong return (+2.4%) in January. Australian listed property has outperformed the Australian equities market over 1 month (+0.5%), 3 months (+7.5%), 6 months (+7.3%),  1 year (+16.4%), 5 years (+4.7%) and 10 years (+2.6%).

The best performing sectors were Retail (+4.5%) and Managers & Developers (+3.7%). The worst performing sectors were Industrial (-1.6%) and Diversified (+1.2%). The best performing trusts were Tishman Spyer Office (+17.3%), Valad Property (+13.6%) and Multiplex (+11.5%). The sector was lifted as Multiplex announced that it had received a takeover approach from Brookfield Asset Management. This boosted prices across the asset class as participants speculated about further private equity activity.

International listed property securities

The UBS Global Investors Index net div in A$ hedged returned +5.5%, outperforming Australian listed property (+2.4%).

The best performing markets were Japan +14.4%, Hong Kong +11.2% and North America (+8.6%). All regions recorded positive performance with the exception of the UK (-6.4%). The UK property market fell after the Bank of England unexpectedly raised interest rates. The UK market underperformed after an exceptionally strong 2006 (+46.0%).

Australian shares

The S&P/ASX 300 Accumulation Index returned 1.9% for the month. The best performing sectors were Utilities (+8.1%) and IT (+7.1%). The worst performing sector was Energy (-1.1%) as the oil price fell on warmer weather in the Northern Hemisphere. Industrials, buoyed by M&A activity, continued to outperform Resources.

Alinta (+18.6%) was the subject of a controversial takeover offer from management and Macquarie Bank. AGL (+7.0%) proposed a merger with Origin Energy (+9.7%). Primary Healthcare (+3.4%) made a takeover offer for Symbion Health (+8.9%). Veda Advantage (+33.8%), formerly Baycorp Advantage, received a takeover offer from Pacific Equity Partners and Merrill Lynch Global Private Equity.

Value (+1.9%) and Growth (+1.8%) performed in line over the month. Value stocks (on an annualised basis) have outperformed growth over the last three years.

The lack of distinction between value and growth over the last four years reflects the environment of low volatility. The market has been a rising tide, with investors not distinguishing between value and growth companies.

International shares

The MSCI World Ex Australia Index (net div in A$ hedged) returned 2.0%, underperforming the unhedged index (+3.0%).

US (S&P 500: +1.4%) delivered a strong return as corporate profits advanced. The standout performer was JP Morgan (profit: +48%) which has benefited from the US$3.6 trillion of M&A activity worldwide in 2006. The market benefited as economic growth surprised on the upside. During the month the market witnessed an up-tick in volatility on fears that moderating consumer demand and increased competition would hurt future corporate earnings.

Europe (MSCI Europe: +2.1%) delivered solid performance. Spain (IBEX: +3.4%) and Germany (DAX: +2.9%) did best while the UK (FTSE: -0.3%) lagged.

The Japanese equity market (TOPIX: +2.4%) reached levels last witnessed in 1999, as strong corporate profits and a weak Yen lifted the share market.

Global emerging markets

The MSCI EM (in A$ with div reinvested) Index returned 0.7%.