Cash

The UBS Composite Bond index returned 0.2% in October.

October was a mixed month of data with weak trade balance, building approvals and labour force statistics. Offsetting these was the positive NAB Surveys, which showed rising business confidence and improving business conditions.

Inflation is now tracking towards the upper end of the Reserve Bank’s range of 2-3%. Figures released during the month showed that wholesale prices rose more quickly in the September quarter than at any time in the past four years. However the economy is not seeing a linear rise in inflationary pressure with the TD-Securities Melbourne Institute ‘Inflation Gauge’ falling in the month of October.

Glenn Stevens, the Deputy Governor of Reserve Bank, noted in a recent address that a rate rise remained more likely than rate cut in the near term. Stevens commented that "the issue before us in the next year or two is whether the world and Australian economy can adapt to higher energy and resource prices without a significant bout of inflation".

Despite this short term inflationary pressure, 3 Year Commonwealth Government Bonds ended the month yielding 5.35%. This indicates that despite anticipated short term upward pressure on rates, the market expects a longer term easing of monetary policy. 

The Lehman Global Aggregate Index (hedged) returned –0.5% for the month. All sectors were negative over the month. International bond yields continue to rise as the market prices in higher inflation expectations, resulting in higher yields but lower relative capital values of such bonds.

European and Japanese 10 year bonds ended the month yielding 3.40% and 1.55%, increasing from 3.19% and 1.51% at the start of the month.

President George W Bush nominated Ben Bernanke to succeed Chairman Alan Greenspan at the Federal Reserve when his term ends on 31st of January 2006. Bernanke is a former Federal Reserve Governor and current Chairman of Bush’s Council of Economic Advisers. Equity markets rallied on the announcement yet bond markets sold off, sending Treasury yields to their highest level since March. 10 Year US Treasuries started the month yielding 4.22% and closed the month at 4.55%.

Bernanke in a 2002 speech entitled "Deflation: Making Sure 'It' Doesn't Happen Here", implied that he was in favour of what the market has termed the ‘Greenspan put’. The ‘Greenspan put’ is the (informal) policy whereby the Federal Reserve will always act as the buyer of last resort and use monetary policy as a tool not merely to control inflation but also to mitigate potential ‘shocks’. The ‘put’ was most famously used to avert the impact of the Asian financial crisis where Greenspan lowered rates three times. The willingness to utilise a ‘put’, caused further concerns to bond markets in a rising inflationary environment, that the new Chairman may be more supportive of growth over inflation.

Australian Listed Property Trusts (-1.9%) outperformed the broader equity market in October. The best performing sectors were Retail (-1.0%) and Diversified (-1.4%) with the worst performing sectors being Office (-5.2%) and Industrial (-3.8%).

The best performing stock was Multiplex (+8.5%). The stock had fallen 17.66% for the year to October. Analysts remain mixed about the company’s prospects with Macquarie Equities downgrading the stock to "under-perform" and Citigroup upgrading the stock to "buy".

Macquarie Office Trust (-6.02%) declined on announcing a $1.6 billion joint-partnership with US based property developer Maguire Properties. The deal transforms Macquarie Office Trust into Australia’s largest office investor with a portfolio of $4.8 billion.

The S&P/ASX 300 Accumulation Index declined 3.8% in October. Despite this fall the Australian sharemarket finished the month with its largest one-day gain in two and a half-years. Of the 300 stocks in the benchmark, only 72 recorded a positive return over the month.

Resources which had returned 10.8% in September was the worst performing sector in October declining 11.3%. Yet is still up 45.5% for the year to October. The price of oil finished the month down 8.16%, as Hurricane Katrina, Rita and Wilma failed to have any sustained effect on production or refinery capacity in the Gulf of Mexico. OPEC stated that it expects oil to stabilise at $US45-55 per barrel early next year. This outlook adversely affected oil exploration companies with offshore operations, most notably Tap Oil (-17.34%), Hardman Resources (-16.87%) and Oil Search (-14.72%). Mining companies also declined, but the falls were less uniform than pure oil exploration companies, with BHP (-4.78%) and Rio Tinto (-6.74%) performing better than their non-diversified counterparts. The exception was Zinifex (+7.5%) which benefited from rising zinc prices, reaching their highest level in eight years during the month.

Within Industrials the best performing sectors were Information Technology and Telecommunications. Within Information Technology the best performing stock was Vision Systems (+15.6%) which designs and manufactures video security and air quality monitors. The stock rose on higher than expected first quarter sales. Telstra (+3.43%) rallied after declining 13.03% last month, despite management and some analysts suggesting hard times ahead as the company transitions its copper wire network and operates under a new regulatory environment.

All developed international markets declined in October with the exception of the Japanese Nikkei and the Swiss Market Index. Similar to Australia the worst performing sectors were Energy (-9.2%) and Utilities (-4.5%). As a result markets (-5.7%) with higher weightings to these sectors (such as Canada) under-performed the MSCI World Index (ex Australia, Hedged) -1.7%.

Japan (+0.2%) performed well as the Bank of Japan’s Governor Fukui commented that the upward revision of inflation from 0.1% to 0.5% would mean that the monetary policy would be normalised "at some point". Thus spelling an end to the deflation which has plagued the economy since the mid-1990s.

The US S&P500 (-1.8%) marginally under-performed the MSCI World Index despite strong third quarter GDP growth figures released during the month (3.8%p.a. versus 3.6%p.a. analyst expectations). Employment figures in the US were also better than expected with non-farm payrolls declining less than expected. Despite strong underlying macro-economic growth, company earnings were more subdued than market expectations, with mean estimates of 17.6% earnings growth exceeding actual reported earnings growth of 15.8% in the October (with two-thirds of S&P 500 companies having reported by 31 October).

Europe (-2.7%) also under-performed, with the worst markets being France (-3.6%) and Italy (-5.7%). Despite these falls Europe remains the best performing region this year, with the S&P Europe 350 stock index up 19.3% versus 6.8% rise in the US S&P 500. M&A activity increased during the month with Spain’s Telefonica bidding EUR18.5 billion for British mobile operator O2 and the takeover offer for UK glassmaker Pilkington from Japan’s Nippon Sheet Glass.

The MSCI Emerging Markets Free Index declined (4.5%) in October, returning 33.8% for the year. The best performing region, as with last month, was Latin America, which has returned 21.28% for the year to October. In Mexico (-2.2%) strong GDP growth and consumer spending contributed to the return. Argentina, whose sharemarket has gained 60.63% in the year to October, was the main detractor to performance in this region falling 11.4%.

The weakest performing region was Eastern Europe (-8.4%) weighted down by poor returns in Russia, Poland and Hungry. Russian growth is expected to slow this year from 7% to 5.5%. The sharemarket’s heavy weighting to energy adversely affected Russia as the price of crude declined over the month.

Emerging Asia declined (-6.4%) with the largest detractor being China (-9.9%), as the government forecast a slowing growth rate for the economy. Chinese stocks are now trading on multiples of 10.4 times forward earnings, a significant discount to developed markets. During the month China Construction Bank listed on the Hong Kong exchange. The issue was 42 times oversubscribed, with investors appearing unconcerned about the high level of non-performing loans and lack of transparency. China Construction Bank, was the largest float this year, with a market capitalisation of $66 billion, making it larger than American Express.