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Colonial First State Market View July 2013

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Market and economic overview 

Australia

  • The Reserve Bank of Australia (RBA) left its cash rate unchanged at 2.75% in July as widely expected.
  •  Governor Stevens noted that the recently released June quarter inflation data was low enough to leave  the RBA with further scope to ease policy to support demand.
  •  Employment increased by 10,300 in June. The unemployment rate rose from 5.6% to 5.7% over the month, a near four-year high.Retail sales increased by 0.1% in May, its first positive outcome in three months.

US

  •  US economic data continued to improve. June quarter GDP growth was better-than expected at 1.7% annualized.
  •  The June US employment report was also better-than-expected. The unemployment rate remained steady at 7.6% as the participation rate rose by one-tenth to 63.5%.
  • The University of Michigan consumer confidence index rose to 85.1 in July from 84.1 in June. This was the highest reading since July 2007.
  •  The US housing recovery continued. The S&P/Case Schiller house price index rose by 1.1% in May to 12.2%. New home sales reached their highest level since May 2008, rising by 8.3% per month to an annualized pace of 497,000 in June. However, falling pending (-0.4%) and existing (-1.2%) home sales in June provided some concerning evidence that rising mortgage rates are beginning to restrain the housing market.

Europe

  • The European Central Bank (ECB) kept its benchmark interest rate at 0.5% in July.

Japan

  •  Japanese Prime Minister Shinzo Abe’s ruling coalition won a clear majority in the Japanese upper house elections. The win is expected to ease the passage of important proposed legislative structural reforms, with a proposed hike in the goods and services tax (GST) from 5% to 8% already high on the agenda.
  •  Japan recorded its first positive national Consumer Price Index print since May 2012 at 0.2% in June bringing the annual figure to 0.4%. This upside surprise suggested that the Bank of Japan’s monetary policy stimulus measures are beginning to boost inflation.
  • The country’s unemployment rate fell to a five-year low of 3.9% in June, as companies began hiring due to the recovery.

China

  •  June quarter GDP rose by 7.5% per year, in line with market expectations. Chinese Premier Li Keqiang reassured market participants that growth would not fall below 7% this year – though he remained confident of achieving the government’s 7.5% stated target.

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AUD and commodities

The Australian dollar (AUD) depreciated by 1.9% against the US dollar (USD)  in July ending the month at $USO.8963. This was the fourth consecutive month that the AUD  had lost ground against the ‘green back’, falling below $USO.90 for the first time since August 2010.

The AUD plunged by 1.6% after RBA Governor Stevens told market participants that further monetary policy easing is likely in his speech on 30 July 2013.

Commodity prices continued to recover, led by Oil (+8.8%) which recorded its largest monthly gain since August 2012, supported by improving European economic data which pointed to rising demand and the closure of most oil terminals in Libya. Gold (+7.3%) reversed its recent losing streak amid evidence of falling scrap supply. Iron ore (+11.5%) prices were pushed to a peak of $US132.10 per metric ton on Chinese re-stocking.

Australian shares

The Australian share market commenced the new financial year strongly, posting its best July monthly performance since 2009.

Some more clarity around a possible start to the ‘tapering’ of the US bond purchase program helped support the Australian bond market in July, which was a factor in helping the Banking (+6.1%) sector on the month.

REITs (-0.8%) and other defensive sectors such as consumer staples (+1.1%), telecommunications (+4.6%) and utilities (+2.7%) lagged performance-wise in July.

Property

Australian listed property securities (the S&P/ASX200 A-REIT Accumulation Index) dipped by 0.8% in July, under performing the broader Australian equity market.

A-REIT valuations have become more attractive in the wake of recent market volatility. A-REIT balance sheets, already healthy, were bolstered by a series of capital raising’s in early May. The low interest rate environment in Australia is expected to persist, which is likely to remain supportive of share prices in the medium term.

Listed property markets offshore rose during July. Overall, the UBS Global Property Investors index (local currency) increased by 0.8%. The UK (+8.1%) was the strongest-performing region, followed by Continental Europe (+3.4%).

Global shares

In the US, the S&P500 Index climbed by 4.9% in July, propelled higher by the health care (+7.1%) and banking (+5.3%) sectors, which be benefited from better than expected June quarter earnings results. The materials (+5.5%) sector also responded to a calming of Chinese economic concerns.

Defensive sectors under performed during the month, with telecommunications (-0.7%), consumer staples (+3.9%) and utilities (+4.2%) the laggards.

Despite lingering concerns over negative credit growth, high unemployment, stagnating economic growth in the Euro-periphery and the unlikely prospect of political reform, tail risks have receded in the Euro zone.

In Japan, the Nikkei 225 and Topix Indices fell by 0.1% and 0.2%, respectively. The market surged by almost 9% in the lead-up to the upper house election on 21 July, only to see these gains wiped-out after the result confirmed that Prime Minister Abe regained full control of the parliament, which was widely expected. The “post-election blues” weighed on the energy, telecommunications and industrial sectors.

Indonesia (-4.3%) was the poorest regional performer as concerns increased that the weakening Rupiah and slowing growth would erode earnings and returns.

Global emerging markets

Recent heightened volatility in emerging market (EM) assets subsided in July.

The MSCI Emerging Markets EMEA Index increased by 2.4% in USD terms (+4.2% in AUD terms) over the month.

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At a sector level, consumer discretionary (+7.9%) and energy (+6.2%) were the two best  performing sectors in July.

Brazilian (+1.6%) shares remained under pressure due to rising political risks. Popular support for the Dilma government has plummeted amid a failure to deliver political reforms amid rising social unrest.

The stabilization in US Treasury bond yields meant that EM bond yields were more subdued last month.

Overall, the 10-year US Treasury yields finished the month 9 bps higher at 2.58%, while 10-year UK Gilt and 10-year German Bond  yields declined over the month (by 8 bps and 6 bps, respectively).

Important information
This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom advisers are authorized representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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