May 2010 investment commentary
Financial markets were mixed in May with Australian equities falling significantly, international equities rising modestly (for unhedged investors) and fixed interest markets producing positive returns. Volatility increased in the majority of markets during the month. Investors appear to have become resigned to the fact that sovereign debt default issues in Europe will be a constraint on the region’s economic recovery and take time to resolve. Moves by the Chinese authorities to restrain economic activity and property lending in particular have also tempered expectations for continuing strong economic growth and commodity prices. While interest rates around the world remain mostly at historically low levels and there are signs of recovery in company profits and economic activity indicators in some regions, increasing financial market volatility indicates the risks to a sustained recovery remain high.
Equity markets
The Australian equity market performed poorly in May falling by more than 7%, having recovered from double digit losses mid way through the month. Sovereign debt problems in Europe, Chinese government initiatives to curb excessive growth in parts of its economy, uncertainty over the Henry Tax Review and a softening of the Australian dollar were all seen as a negative for the Australian equity market. Domestic economic indicators were mixed with strong building approvals and business confidence data being tempered by a slight softening in retail sales and consumer confidence.
International equity markets were generally lower during May, although returns varied across regions. The US market was lower despite stronger economic growth and positive first quarter earnings results. European markets were mostly negative, with concerns about the Greek, Portuguese and Spanish sovereign debt bailout dragging down the markets of Germany and France. The UK market was also lower with the new Tory government indicating the economy was in worse shape than initially thought. Asian and Latin American markets were slightly higher with renewed investor interest in the increasing pace of recovery of emerging markets economies. International equity returns for unhedged Australian investors were boosted by the weak Australian dollar.
Fixed interest markets
The Australian fixed interest market produced positive returns during the month as investors sought out the relative safety of government bonds. Volatility in the sector increased as investors weighted the possibility of inflation increasing beyond current consensus expectations, against the timing of further rises in domestic interest rates by the Reserve Bank of Australia (RBA). The RBA raised interest rates by another 0.25% to 4.50% during May. International fixed interest markets also performed strongly during the month as investor risk aversion resulted in assets with defensive qualities being highly sought after.
April 2010 investment commentary
March 2010 investment commentary
February 2010 investment commentary
January 2010 investment commentary
December 2009 investment commentary
