Financial commentary

December quarter 2011

In the December quarter, share markets in Australia and overseas managed to rise after strong gains in the month of October. The debt problems faced by Europe still remain, however outside of Europe the economic outlook is improving.

Overall, the Australian share market rose by 2%. However, the resources sector was held back by weakening commodities prices, particularly metals and retail sector returns were disappointing with several companies, including Billabong, issuing warnings that profits would be weak.

International shares had a similar return for the period, after taking into account a small rise in the Australian dollar ($A). While several European countries are struggling to maintain enough investor confidence to contain their interest rates, there was some relief when authorities agreed to increase liquidity support for their banking sectors.

Bond markets continued their impressive year-long rally, with ten year Australian Government bond yields falling from 4.2% at the start of the quarter to 3.8%. This resulted in good gains for defensive strategies with a high bond weighting. Inflation linked bonds had the best return, which was over 3% for the quarter.

The Australian economy was supported in the December quarter by two cuts to the Cash rate totalling 0.5%, which now stands at 4.25%. The Reserve Bank of Australia has become more relaxed about local inflation due to the softening in the economy. The Australian dollar also increased from US$0.97 to US$1.02.

Direct property had a steady gain of nearly 2%, due mostly to property income as capital values have been stable. Global listed property had strong positive returns as there were no offsetting currency losses from this fully-hedged strategy.

Overall, the December quarter returns for all our investment options were positive, thanks to the strong equities gains in October and steady returns from the Fixed Interest sector throughout the quarter.

Six months ending 31 December 2011

Australian and overseas share markets suffered negative returns in the half-year ended 31 December due to sharp falls in the September quarter. This was caused by concerns over global economic growth and the ongoing debt problems in Europe.

The Australian share market fell by nearly 10%, with resources as the weakest sector due to falling commodity prices and the softening economic outlook. Late in the period the retail sector also suffered. The telecommunications sector had the best return for the six months to December.

International share markets also had a negative return for the period, although not as bad as Australia. International asset returns were boosted by the fall in the Australian dollar over the six months. Several European countries are still struggling to maintain enough investor confidence to contain their interest rates.

Bond markets continued their impressive year-long rally, with ten year Australian Government bond yields falling from 5.2% at the end of June to 3.8% by the end of December. This resulted in good gains for defensive strategies with a high bond weighting. Inflation linked bonds had the best return, which was over 11% for the period.

The Australian economy was supported by two cuts to the Cash rate totalling 0.5%, which now stands at 4.25%. The Reserve Bank of Australia has become more relaxed about local inflation due to the softening in the economy. The Australian dollar fell from US$1.07 to US$1.02 over the half year.

Direct property had a steady gain of nearly 4%, comprising mostly property income as capital values have been stable. Global listed property had negative returns similar to the general equities markets.

Overall, our half-year returns for the growth and balanced type investment options were negative due to the weak equities performance in the September quarter. The Conservative investment option managed a positive return due to the strong Fixed Interest sector performance.