Financial commentary

December quarter 2012

In the quarter ended December 2012, share markets in Australia and overseas produced positive returns in response to a better economic growth outlook and recovering commodity prices. The performance of share markets was largely responsible for the solid returns we saw on our growth investment options, such as High Growth and Balanced Growth, which have a high weighting to shares.

The Australian share market outperformed most other world markets for the quarter as the outlook for resource company earnings improved. Small companies slightly underperformed larger companies, while Health Care, Telecommunications and Consumer Discretionary were the leading sectors over the quarter. Industrials and Materials sectors performed well, however the Energy sector was the weakest performing sector for the quarter.

Financial news both here and overseas was dominated by discussion about whether the United States would be able to avoid the ‘fiscal cliff’. A last minute plan to increase taxes and cut spending was negotiated and for the time being, this has softened the impact on the US economy. The US Federal Reserve Board also announced a fourth round of ‘Quantitative Easing’ aimed at stimulating the US economy with further cash injections in an effort to lower the US unemployment rate.

Australian Government bond yields increased over the quarter to 3.3% resulting in modest returns for bond investments and for our defensive options with a higher bond weighting, such as our Conservative option. The International Fixed Interest sector achieved better returns for the quarter, helped along by good performance from emerging market debt.

The Reserve Bank of Australia (RBA) cut the Cash rate at its October and December meetings, bringing it down to 3%. The RBA Governor pointed to weak global growth and Europe’s financial problems as reasons to stimulate the local economy. The Australian dollar fluctuated throughout the quarter before ending the quarter slightly down.

Direct property had a moderate return of around 1.6% with returns mostly coming from steady property income. Global listed property had positive returns in line with share markets.

Overall, strong share market performance helped all of the LGS pre-mixed investment options perform very well for the December quarter, however the Conservative option did lag slightly due to its lower exposure to share markets.

6 months to December 2012

The Australian share market enjoyed strong performance in the second half of 2012 due to falling interest rates, supportive economic policy initiatives overseas and a recovery in key commodity prices like iron ore. The local economy remains soft and Europe is still being plagued by debt problems, however the Chinese economy appears to be recovering which is an encouraging sign for Australia.

The Australian share market gained more than 13% over the last six months. Health Care, IT and Telecommunications were the best performing sectors for the six months to December. Following a period of poor performance, the Materials sector rebounded towards the end of the calendar year thanks to improving commodity prices.

Though not as strong as the Australian market, international shares also had a positive return for the half year. The return on international assets has been held back slightly by the small rise in the Australian dollar over the half year.

The strong performance of the Australian Fixed Interest sector is slowing, with yields on ten year Australian Government bonds increasing from 3.0% to 3.3% over the six months to 31 December. This resulted in moderate returns for our defensive investment options such as Conservative which have a higher weighting toward bonds.

The Reserve Bank of Australia (RBA) cut the Cash rate at its October and December meetings, bringing it down to 3%. The RBA Governor pointed to weak global growth and Europe’s financial problems as reasons to stimulate the local economy. The Australian dollar ended the half year slightly up, increasing from US$1.02 to US$ $1.04.

As capital values remained stable, our direct property investments had a steady gain of nearly 3% comprised mostly of property income. Global listed property had strong positive returns similar to the general equities markets.

The December half returns for all LGS investment options was positive and we saw particularly solid returns for our growth investment options thanks to the strong performance of the Australian share market. The Conservative option managed a smaller positive return, but was held back slightly by flat performance in the Fixed Interest sector.