CashThe RBA left the cash rate unchanged at 5.5% during the month. At the time of writing (3 May 2006) the RBA announced that it had lifted its benchmark rate to 5.75%. In its statement, the RBA board noted that "inflationary risks had increased sufficiently to warrant an increase in the cash rate". An excerpt of the statement is provided below: "Domestic and international trends have added to inflationary pressures in an economy that has been operating for some time with rather limited spare capacity and low unemployment. Wages growth, though not accelerating further recently, is higher than it was a year ago, and businesses are continuing to report that suitable labour is scarce. Raw materials costs continued to increase strongly in the March quarter, reflecting the general strength in global commodity prices. Consumer price inflation has picked up to around 3 per cent in recent quarters. While this partly reflected rising fuel costs, underlying consumer price inflation also increased in the March quarter, to around 2¾ per cent, a rate it had not been expected to reach until the second half of the year. Australian BondsThe UBSA Composite Bond Index (All Maturities) returned -0.6%, significantly underperforming the UBSA Bank Bill Index (+0.4%), as yields rose across all maturities in anticipation of the rate rise. Positive economic data helped push yields higher. The trade deficit narrowed sharply to $A595 million from $A2.5 billion in March, the lowest level since July 2002. Australian unemployment fell to a 29 year low, of 5.0%. The 3-Year and 10-Year bond yields ended the month at 5.6% (+30bps) and 5.7% (+29bps) respectively. The strength of the Australian economy combined with higher input costs surprised the market with yields rising in April at their fastest pace in three years. International BondsThe Lehman Global Aggregate Index (hedged, A$) returned -0.2%, as bond yields advanced on positive global economic news and the threat of rising inflation. The US economy continued to support equities and weigh down bonds. Rising consumer confidence was fuelled by US home sales, which rose to a four year high. US 3 Year and 10 Year bond yields ended the month at 4.8% (+20bp) and 4.9% (+30bp) respectively. In Europe, Business and Consumer confidence rose to 15 year highs. European Central Bank (ECB) President Trichet noted that interest rates are "very low" and inflation risks remain "on the upside" as energy prices continued to increase. Fellow ECB board member, Guy Quaden, noted that interest rates would likely rise gradually. European 3 Year and 10 Year bond yields ended the month at 4.8% (+20bp) and 4.9% (+30bp) respectively. In Japan, bond yields were pushed higher as Japan's broadest index of future economic activity showed the economy may achieve its longest expansion since WWII later this year. The index was at 80% in February, a number above 50% signals the economy will grow in the next three to six months. Japanese 3 Year and 10 Year bond yields ended the month at 4.8% (+20bp) and 4.9% (+30bp) respectively. Australian Listed Property SecuritiesThe S&P/ASX 300 Property Accumulation Index (-0.2%) underperformed the broader Australian equity market in April, as investors continued to show a preference for cyclical stocks. Trusts also suffered as yields rallied, increasing the costs of borrowing for the sector and making yield orientated equity investments less compelling. The best performing sectors were Industrial (+1.7%) and Diversified (+1.0%) trusts. The worst performing sectors were Commercial (-1.6%) and Retail (-1.3%) trusts. Non-index property trusts (+1.8%) continued to outperform index peers. The best performing stock was Macquarie Goodman (+3.4%) as investors continued to price the stock on the growth potential of its European and Asian businesses. Investors continue to display a preference for trusts with exposure to offshore markets that provide an opportunity for growth. International Listed Property SecuritiesThe UBS Global Investors (hedged) Index (-2.6%) registered its first negative month since October 2005 as rising bond yields hurt the sector. The best performing market was Hong Kong (+3.6%) which remains the only global property market trading at a discount to net-tangible assets. The worst performing markets were the US (-3.6%), UK (-3.1%) and Continental Europe (-3.0%). Australian SharesThe S&P/ASX 300 Accumulation Index (+2.6%) performed strongly as Resources drove the market. The best performing sectors were Telecommunications (+4.6%), Materials (+4.1%) and Financial (ex Property, +3.4%). The worst performing sectors were Property Trusts (-0.2%) and Industrials (-0.2%). The best performing stocks were Material stocks - Oxiana (+27.2%) and Lihir Gold (+18.7%) - which continued their strong performance on the back of record gold prices. The worst performing stocks were PaperlinX (-11.1%) and CSR (-9.2%). Merger and Acquisition activity continued at a fast pace during the month. Toll offered a revised bid for Patrick ($5.8 billion), which was accepted by Patrick's board. Babcock & Brown tendered offers for both Eirecom ($2.9 billion) the Irish telecom, and Northwest ($2.2 billion) a gas utility in the US. Investors' continue to display a high appetite for risk, and a willingness to bid up cyclical stocks. International SharesThe unhedged MSCI World Ex Australia Index (net div) significantly underperformed (-3.3%) the hedged return (+1.0%) as the Australian dollar rose against the US dollar (+6.0%), UK pound (+4.5%), Euro (+3.9%) and the Japanese Yen (+3.2%). US (S&P 500: +1.2%) stocks performed strongly as the Federal Reserve indicated that it was nearing the end of its accommodative stance. Economic growth continued to underpin the performance of markets. This was highlighted with forward earnings-per-share growth estimates rising to 13.1% in April from 9.8% in March. US consumers continue to be the engine of economic growth as household credit drives consumer discretionary spending. Europe (MSCI Europe: -0.3%) registered weaker performance as inflation and monetary policy concerns weighed on markets. The best performing markets were the UK (FTSE: +1.0%) and Germany (DAX: +0.7%). European corporate activity remains strong with French defence giant Thales purchasing Alcatel's Satellite Operations mid-month, and BAE announcing the intended sale of its Airbus Holdings to EADS ending a 37 year partnership. Japan (Nikkei 225: -0.9%) delivered more moderate performance than in recent months. Economic growth continues to filter through to the sharemarket, yet there are emerging concerns over valuations. Equities are increasingly becoming priced for perfection. The question remains whether this is realistic and a 'goldilocks' scenario of strong global growth and low inflation or whether asset prices are being driven up across the board because of abundant liquidity and low interest rates. Global Emerging MarketsThe MSCI EM in $A (with div reinvested) returned 0.7%. The best performing regions were Eastern Europe and BRIC (Brazil, Russia, India and China).
17th-May-2006 |