Financial commentary

September Quarter 2011

The September quarter was one of the toughest in three years for share markets, as Euro concerns, US economic weakness and a Chinese slowdown weighed on investors’ minds.

Warnings early in the quarter of a possible US credit rating downgrade came to pass in August, with the US re-rated to AA+. The reason for the downgrade: concern over the US’s ability to continue servicing its debt obligations. Markets reacted meekly to the news with much of it already priced in, but it did little to ease investor concerns.

The US is trying to stimulate growth by keeping interest rates at near zero. But more is needed as consumers are neither spending nor investing, instead choosing to save and pay down debts.

In Europe, the concern over Greece’s ability to service its debt obligations spread to other countries. Greece is relatively inconsequential in a global economic perspective, but if Italy and Spain, in particular, were to default on their debt the consequences would be far greater. Negotiations continue in an attempt to tackle these issues. However, at the time of writing no agreement has been reached, and with every day that goes by, investors are becoming increasingly concerned over the eventual outcome.

Australia was not spared the market decline. An overall slowdown in global growth led investors to question Australia’s commodity-influenced share market. Australia’s direct links to Europe are limited, but China is showing signs of slower growth, which is likely to lead to a reduction in demand for raw materials and a consequent reduction in domestic economic growth.

Australian Equities

The Australian share market benchmark, the S&P/ASX200 Accumulation Index, returned -11.6% for the quarter, the worst three-month return since December 2008. Investors were extremely nervous about the European crisis spreading to peripheral countries and continued slow growth in the US. Further, the Australian market suffered additional sell-offs as speculation grew that there would be a decline in demand from China.

International Equities

In Australian terms, international shares performed poorly. The benchmark for global shares, the MSCI World ex-Australia Index returned -8.0% – and this takes into account a falling Australian dollar which assists global share returns.

Listed Property

Australian listed property followed the broader equity market with the S&P/ASX200 A-REIT Accumulation Index down -8.0%. Globally, the returns were worse as the standard global listed property benchmark (the FTSE EPRA/NAREIT Developed Total Return Index) returned -15.5% on a currency hedged basis.

Cash and Fixed Interest

Interest rates in Australia remained at 4.75% during the quarter as the Reserve Bank of Australia deemed the current rate to be consistent with that for achieving its target rate of inflation.

Short term money markets produced average returns with the UBS Bank Bill Index finishing up 1.2% for the quarter. Meanwhile, investors continued to pile into the perceived ‘risk-free asset’ of government bonds with returns of 5.2% in both Australia and globally.

This commentary provides an indication of the various factors affecting investment market performance. It is based on the gross performance of the relevant market index and no allowance is made for taxes or fees as they apply to your superannuation investment. It should not be used as a measure for judging the performance of your superannuation investment option(s).