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Asset class review for 2009/2010

What happened in each asset class?

International shares
International shares rose 5.2% over the 2009/2010 financial year in Australian dollar terms (as measured by the MSCI World ex Australia Index (net return)). The rebound continued until the end of March 2010, when international sharemarkets were spooked by the flow-on effects of a volcano eruption in Iceland, the US SEC lawsuit against Goldman Sachs and then the Eurozone debt crisis. The government debt concerns in European countries peaked in early May as the International Monetary Fund (IMF) and the European Union coordinated a €110 billion rescue package for Greece to prevent a default and the crisis spreading through the rest of the European bloc.

Concerns about Spain’s financial health and the strength of the Euro continue to weigh on investor sentiment around the world. Positively for international sharemarkets, there were some signs of economic recovery in the United States as the reporting season in early 2010 showed improvements in some cyclical stocks, for example retailers, media advertisers and copier and printer suppliers. Emerging markets outperformed developed markets despite the underperformance of Chinese markets over the last six months. Overall, conditions remain difficult, however high quality large stocks which have scale, strong brand, pricing power and elevated cash levels, remain in a relatively better position to deliver returns for investors.

        

Australian shares
Australian shares, as measured by the S&P/ASX 300 Accumulation Index, rose 13.1% over the 2009/2010 financial year. Industrial shares, as measured by the S&P/ASX 300 Industrial Accumulation Index, rose 14.5% over the same period. The Australian sharemarket continued its recovery, which started in March 2009. Improving global economic conditions and the restructuring of corporate balance sheets were key drivers of the solid sharemarket gains seen up to mid-October.

Then fallout from the global financial crisis started to surface in Europe, where concerns about government debt began to affect investor sentiment. Finally, Australian resource companies weakened over the last quarter. This was due to uncertainty surrounding the proposed resources super profits tax and potentially slower growth in China, which also triggered falls in both commodity prices and the Australian dollar. Industrial stocks outperformed resource stocks over the financial year. At a sector level, property trusts (20.3%), financials (17.2%), and information technology (16.9%) were the best performers, with only modest gains in health care (2.5%) and telecommunications (1.4%). Energy (-3.4%) was the only negative performing sector.
 
Listed property
Australian real estate investment trusts (A-REITs) delivered strong returns, with the S&P/ASX 300 A-REIT Accumulation Index returning 20.3% over the 2009/2010 financial year. A-REITs rallied off a low base after a turbulent 2008/2009 financial year. Key to the sector’s strong recovery was the restoration of balance sheets and the movement to more sustainable payouts to investors. The unfreezing of direct property markets also helped trusts manage their gearing. The lower levels of gearing helped them withstand the recent European debt crisis. These positive drivers more than overshadowed rising interest rates, which are traditionally a negative for A-REITs.		   Fixed income
Fixed income investments returned 7.9% over the 2009/2010 financial year, as measured by the UBS Australian Composite Bond Index. This was driven primarily by increased strength in the corporate and banking sectors and improved confidence in the banking system. The supply of credit was constrained for much of the year despite strong growth in the issuing of bonds. This resulted in a significant repricing of credit as investors returned to the market in search of yield. However, towards year end, government debt concerns in European countries triggered some volatility.

Mortgages
Improved conditions both locally and overseas saw the RBA shift its stance on monetary policy. After a series of significant interest rate cuts that saw short-term rates at historically low levels during 2008/2009 financial year, the RBA embarked on a series of rate hikes. With higher short-term rates as well as wider margins, going forward investors will benefit from improved yields. Mortgages as an asset class may strengthen after September 2010 if the Federal Government phases out its guarantee on financial institution deposits.		         Cash
Cash continued to provide protection from general market volatility but delivered lower yields over the 2009/2010 financial year. At the start of the financial year, the RBA target cash rate was at a historic low of 3.0% and since then it has been raised six times to 4.5%. As a result, cash returns were 3.9% according to the UBSW Bank Bill Index over the period. With growth returning to trend levels, it’s expected the RBA will continue to raise the target cash rate until it reaches more normal levels.
 

 

This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 and Perpetual Superannuation Limited ABN 84 008 416 831, AFSL 225246, RSE L0003315 contains information contributed by third parties. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs.

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