The Reserve Bank of Australia (RBA) left the cash rate unchanged at 5.5% during the month.

Australian Bonds

Government bonds (+0.1%) and Semi-Government bonds (+0.1%) both marginally underperformed the composite benchmark. The most value add came from corporate credit with the UBS Credit Index (+0.3%) outperforming the composite benchmark.

Data released during the month was mixed, with retail trade figures (seasonally adjusted) weaker than expected. A wider trade deficit offset positive business lending figures that hit a 15-year high. The strength of business credit highlights that the Australian economy has transitioned from consumer-led economic growth to one fuelled by business investment.

International Bonds

The Lehman Global Aggregate Index was flat for the month. For the year to 31 January 2006, the Lehman Global Aggregate Index returned 5.6%. The yield on all government bonds rallied during the month.

The US Federal Reserve, despite dropping its reference to "accommodation" in the last policy statement, raised rates for the 14th time to 4.5% stating that "some further policy firming may be needed" to keep inflation in check. The market remained concerned that strong gains in US employment and orders for durable goods would force the Federal Reserve to lift rates again in March.

The European Central Bank (ECB) is expected to leave rates unchanged at 2.25%, with some measured increases later in the year, as economic growth whilst "encouraging" is less than uniform. In Japan, positive economic data left the market more optimistic about future tightening despite continued cautious statements from the Bank of Japan. The data included a rise in core CPI prices by 0.1% (month on month) – the first increase since October 2003 – and Japanese consumer confidence hit its highest level since 1991.

Australian Listed Property Securities

The S&P/ASX 300 Property Trust Accumulation Index returned -1.2% for the month compared to the broader Australian equity market return of 3.6%. For the year to 31 January 2006, the index has underperformed the broader equity market by 14.4%. The best performing sectors in January, were Commercial and Industrial Trusts with the worst performing sector Diversified Trusts.

The best performing stocks were Multiplex (+3.8%), ING Office Fund (+3.4%) and Galileo Shopping Trust (+2.2%). The worst performers were CFS Gandel Retail (-4.5%), Thakral Holdings (-4.2%) and Babcock and Brown Japan Trust (-4.0%).

Trusts with carefully selected overseas property exposure faired better as Australian listed property is suffering from negative sentiment and stretched valuations. The risk/return profile of the sector is becoming more equity-like, with many listed property managers growing earnings through more risky activities such as property development and construction, rather than focusing on rental income. This has led to a 'blue sky' factor being priced into trust valuations that may be unrealistic, an example is Macquarie Goodman that trades on a price-to-earnings multiple of 40-times.

The S&P/ASX 300 Accumulation index rose 3.6% in January. For the year to 31 January 2006, the benchmark index is up 25.0%. The best performing sectors were Energy (+10.1%), Materials (+9.4%) and Financials ex. Property Trusts (+3.8%). The worst performing sectors were Healthcare (-1.6%) and Consumer Discretionary (-1.6%).

The market rallied despite mixed economic data. The manufacturing index rose in December, for the first time in three months, yet retail sales and employment declined. The trade deficit widened to an eight month high.

Corporate activity remained robust. Macquarie Bank purchased Smarte Carte ($270 million), Queensland Gas made a takeover bid for Sydney Gas ($66 million), Singapore Telecommunications purchased Virgin Mobile ($30 million), Computershare bought SLS Group ($24 million) and Babcock & Brown Wind Partners agreed to purchase Eifel Wind Farm ($9.2 million).

Whilst the market does not appear expensive on price-to-earnings multiples the key risk moving forward is that the earnings estimates underlying these multiples may prove too optimistic. Such concerns were heightened during the month with profit downgrades from Excel Coal, Healthscope, Pacific Brands, Macarthur Coal and Telecom New Zealand.

The MSCI World Ex Australia (net div in $A unhedged) returned 1.2% for the month with the hedged benchmark returning 3.3%. The Australian dollar rallied against the US Dollar (+3.1%), Japanese Yen (+2.3%) and the Euro (+0.2%). The best performing markets in January were France (CAC: +4.9%), Germany (DAX: +4.9%) and Japan (Nikkei 225: +3.3%).

The MSCI World (ex Australia) Small Capitalisation index (+6.4%) significantly outperformed the large capitalisation benchmark (+1.2%).

In the US, the S&P500 (+2.6%) performed strongly. During the month the Dow closed above the psychological level of 11,000 for the first time since 2001, on the back of positive economic data and robust corporate activity. Weighing on returns were poor profit results from DuPont, Wells Fargo, US Bancorp, Citigroup, Bank of America, Johnson & Johnson.

In Japan, the Nikkei 225 (+3.3%) continued its strong performance. However, the market remains concerned about the level of both corporate governance and the ability of the Tokyo Stock Exchange (TSE) to cope with the high level of trading. These concerns found voice mid-month with Livedoor, a Japanese internet company, being put under investigation for securities fraud. The TSE also closed early on two separate days due to high trading volumes.

Europe continued its impressive performance as consumer confidence hit a three-year high. German unemployment had its biggest decline in 15 years. Whilst economic growth in European economies remains lower than peers, European manufactures have demonstrated significant leverage to emerging markets with the manufacturing index accelerating at the fastest pace in 16 months.

Global Emerging Markets

The MSCI Emerging Markets Index (in $A dividends reinvested) returned 7.8% in January, outperforming the MSCI World Ex Australia (net div in $A unhedged) Index by more than 6.0%.