Month ending October 2011

Renewed optimism driven by hopes for a resolution to the Euro-zone debt crisis and a positive start to the US reporting season

October was the best month for markets since February. After a slow start to markets in early October, markets experienced one of the largest intra-month rallies on record. This result was hard to fathom in the context of last quarter where doom-and-gloom headlines dominated newspapers, where many commentators were predicting a US recession on the back of sustained high unemployment, weak housing, and lower consumer confidence. The strong rebound in markets was driven by two factors. Firstly, a high level proposal was agreed to by Euro-zone leaders to alleviate the Euro-zone debt crisis. The proposal is light on detail, but essentially involves banks writing down Greek debt by 50% in return for the ECB pledging €1 trillion to the European Financial Stability Fund to help stabilize European financial institutions. Secondly, the US reporting season got off to a good start. Personal consumption, business investment, and exports all helped US GDP grow at a 2.5% annualized rate during the September quarter, which surprised markets on the upside. All risk assets generally had a good month on the back of renewed positive sentiment while government bonds retreated from the strong gains experienced in the last quarter.

Global equities performed strongly on a hedged basis (+8.4%), and with the $A strengthening significantly against the $US, unhedged returns (in $A) were only slightly positive for the month (+0.9%). The regional indices of Asia ex-Japan, North America, Europe and Emerging Markets all posted negative returns in $A on an unhedged basis. Apart from Greece, New Zealand, and Portugal, all other countries in the MSCI Developed Market Country Indices reached positive territory for the month in local currency terms. The US, UK, Germany and Hong Kong were the standout performers, Japan was relatively flat, while the smaller European nations of Austria, Belgium, Denmark were comparatively weaker relative to the larger Euro countries. The sector performance of prior months was reversed as defensive sectors of Consumer Staples, Health Care, Telecoms and Utilities posted negative returns in an environment where defensive stocks generally underperformed cyclicals. Energy, Materials, Industrials, Consumer Discretionary and Financials fared the best on the back of renewed market optimism.

Australian equities finished the month strongly (+7.2%). The themes driving the Australian market were largely consistent with the main themes globally. In a period where positive sentiment drove markets, defensive stocks struggled and cyclicals performed best. Energy, Materials, Industrials, Consumer Discretionary, and Financials performed strongly while Consumer Staples, Health Care, IT, Telecomms and Utilities fared worse. Small companies outperformed large caps due to the strong performance of small resources stocks. Listed Property Trusts had a difficult month, underperforming the broader Australian stock market in an environment not suited to their perceived defensive characteristics. Unlisted Property posted a positive return for the month with returns largely reflecting income.

Given the positive market sentiment, government bond yields softened as investors move into risk assets. Not surprisingly, longer duration government bonds were the standout underperformers over the month. High grade corporate bond investments held onto gains in October in hedged $A terms, while riskier fixed income assets posted strong returns. Both the high-yield and bank loan sectors, which struggled in August and September as the risk-off trade prevailed, rebounded strongly as recessionary concerns subsided during October. Despite the recent softening, the 10 year yields of Australian, Euro area, UK and US government bonds remain low, having declined since 30 June 2011 by 0.7%-1.1%.

Subsequent to month end, the RBA announced a 0.25% rate cut. Investment markets wobbled on the news of political uncertainty in Italy and Greece. Investors should expect volatility to continue for the time being as market sentiment proves to be closely aligned to political and policy stability.

Market Performance – October 2011	Performance (income and capital gain or loss) %
	Month	3 months
Australian Shares (S&P/ASX 300 Accumulation)	7.2	-1.5
International Shares (MSCI World ex-Australia) unhedged	0.9	-2.9
International Shares (MSCI World ex-Australia) hedged	8.4	-5.0
Unlisted Property (Mercer Unlisted Property Funds Index (Pre Tax)	0.5	2.0
Listed Property Trusts (S&P/ASX 300 Property Trusts Accumulation)	3.8	1.9
Australian Bonds (UBS Composite Index)	-0.6	2.3
Global Bonds (Barclays Global Aggregate (Hedged))	0.3	3.1
Cash (UBS Bank Bills)	0.4	1.2
Appreciation of $A against $US	9.2	-3.4

(Catholic Super wishes to thank JANA Investment Advisors for this monthly Market Commentary)