The last quarter of 2009 produced a mixed bag of positive and negative economic data.

In Australia we saw the unemployment rate consistently surprise with jobs being added in September, October and November, contrary to investors that expected net job losses. Retail sales also showed signs of improvement in October after contracting in September indicating consumers are still spending, and news of a 4.2% increase in house prices for the third quarter improved investor sentiment. Commodity prices continued to increase as China leads global growth with their insatiable demand for raw materials.

In the US, the unemployment rate continued to rise, reaching 10.2% in October with 111,000 jobs shed for the month. November, however, produced the first positive job rate in two years when 4,000 jobs were added. December job numbers disappointed, though, with the shedding of 85,000 jobs. As at the end of 2009 the jobless rate in the US remained at 10% but this masked the fact that almost 700,000 jobseekers left the workforce in December. If you add back the 700,000 who left the workforce, then the unemployment rate would rise to 10.4%.

The most positive news for the quarter was the strong manufacturing numbers as businesses that had ran down their inventories started to rebuild stock as government stimulus continued to support growth.

The market commentary below is provided to give an indication of the various factors affecting the investment performance of individual asset classes. It is based only on the gross performance of the relevant market index and no allowance is made for taxes or fees as they apply in your superannuation investment. It is provided merely as an indication of relative performance between asset classes and should not be used as a measure for judging the performance of your investment strategy.

Australian Equities

The fourth quarter return for the benchmark S&P/ASX200 was 3.39%. This followed a third quarter return of 21.5% which was the best 3-month return since the index began in May 1992. The fourth quarter started off weak with October finishing down 2.08%, partly due to some consolidation after the 21.5% third quarter return and some disappointing economic news out of the US. The market rally of the previous two quarters has seen the equity market move from cheap to what we consider to be on the upper band of fair value. Investors are expecting a strong 2010 in terms of corporate profits but much of that has been priced into the market and that leaves greater risk to the downside.

International Equities

International Equities finished the quarter strong with the MSCI World Index hedged returning 4.89%. Early in the fourth quarter domestic and global third quarter corporate earnings were released and most companies reported better than expected profits. Most of this was achieved through cost cutting as opposed to increased revenues. However, in $A terms the MSCI World Index returned just over 2% as the Australian dollar continued to rally due to commodity price increases, RBA raising rates and the US keeping rates at a record low level for the foreseeable future.

Listed Property

The Australian Listed Property finished the quarter down with the S&P/ASX200 LPT Accumulation index returning -5.01%. This follows two quarters of stellar performance, 15.17% in quarter two and 30.45% in quarter three. Australian Listed Property was one of the worst hit sectors falling 75% from its peak in February 2007 to its bottom in March 2009. The initial rally in LPTs was spurred by a global rally in equity markets that began in March 2009 due to the monetary and fiscal stimulus measures enacted by central banks. As the rally gathered pace LPTs were able to raise additional capital, refinance existing debt and strengthen their balance sheets to avoid insolvency. The result was that quarter three ended up delivering the best quarterly return since the index series began.

Cash and Fixed Income

The Reserve Bank of Australia raised interest rates again by 0.25% in December which takes the interest rate to 3.75%, a record three consecutive months of interest rate rises. The rate rises were widely anticipated by market participants as the RBA gave indications of removing the emergency rate setting that brought the interest down to a historic low of 3% on the back of positive economic news domestically and importantly from China. Short term money markets rallied with the UBS Bank Bill Rate up 0.88% for the quarter. Bond markets also reacted to the rate rise with yields rising and bond prices falling in October, only to have yields fall back in November and bond prices rise as soft economic numbers lowered expectations of rapid interest rate hikes by the RBA. However, by December strong retail sales and better than expected unemployment numbers saw yields rise again and the UBS Sovereign index finished the quarter up 1.03%.

6 months to 31 December 2009

The second half of 2009 could have left many investors wondering what all the fuss was about over the previous two years with record breaking short-term returns and a general improvement in investor confidence.

However, these unprecedented returns were a reaction to the severity of the market decline between late 2007 and early 2009 and the rally only served to return stock markets to more 'normal' levels. Some commentators argue that the rally was unsubstantiated and based on false optimism rather than solid economic data.

For instance, unemployment remained high in developed nations giving a strong indication that full recovery is still a long way off. US unemployment peaked at 10.1% in October whilst Australia peaked at 5.8%. This is a key statistic as economic growth is constrained while so many individuals are out of work and others are fearful of losing their jobs.

Interest rates remained at emergency levels throughout developed nations in order to encourage investment and therefore economic activity. Only Australia bucked the trend during the six months with three consecutive rate rises in October, November and December. Never before has there been three consecutive interest rate rises in Australia and this action was received favourably by investors who took it as a sign that the economy had recovered to a level that no longer required emergency action.

The US, however, was unable to follow suit largely due to the significantly higher unemployment rate and the high number of home owners whose mortgage is bigger than the value of their home. Interest rates in the US have been at 0.25% for the past twelve months in a bid to stimulate economic activity. This does appear to be working, but it is expected that rates will stay at this level for an extended period until the recovery is secure.

The following market commentary is provided to give an indication of the various factors affecting the investment performance of individual asset classes. It is based only on the gross performance of the relevant market index and no allowance is made for taxes or fees as they apply in your superannuation investment. It is provided merely as an indication of relative performance between asset classes and should not be used as a measure for judging the performance of your investment strategy.

Australian Equities

The Australian stock market rose by 25.6%* in the second half of 2009 as the market recorded five positive months out of six.

Record low interest rates and continuing government stimulus encouraged investors to return to the stock market.

The positive earnings announcements from companies were an encouragement to investors throughout this period. The earnings season was watched very closely for clues on how major financial institutions have weathered the post-credit crisis environment. On the whole, investors were not disappointed with most company profit announcements exceeding expectations, supporting a feeling of renewed optimism in the market.

* as measured by the S&P/ASX 200 Accumulation Index.

International Equities

International stock markets rose by 20.4%* over the six months on a hedged basis. Like the domestic stock market, investors have been enticed back into the equity markets following the sharp declines of last year as the credit crisis left many companies looking too cheap to pass up. We are now seeing stocks being priced in a range that is considered to be more normal, but this will require company fundamental data to justify the stock prices. Earnings announcements were generally positive, which helped stocks to rally, but this will need to be sustained into 2010 in order for global stock markets to continue upwards.

* as measured by the MSCI World ex-Australia Accumulation Index (Hedged).

Listed property trusts

Australian listed property trusts gained 23.9%* over the period, but this particular asset class suffered most during the credit crisis with investors losing over half of their money in the twelve months ending 28 February 2009, putting into perspective what a 24% return over 6 months really means. Property trusts have been helped by increasing property prices and greater occupancy rates, but availability to credit is still hard to come by meaning that refinancing debt for these trusts is a costly process and will continue to eat into the bottom line.

Globally, listed property trusts have fared even better with a return of 39.6%** over the six months. Like Australian listed property trusts, this asset class suffered badly during the credit crisis and they are subject to the same problems with refinancing debt.

* as measured by the S&P/ASX 200 Prop Trust Accumulation Index.
** as measured by the UBS Global (ex Australia) Property Investors Net Index $A hedged.

Fixed Interest and Cash

Due to the rally in equity markets and the move towards more risky assets, fixed interest investments were less favoured by investors, reflected in their relatively modest returns.

Australian bonds returned 2.8%* for the six months, which was a far cry from the double digit returns received for the previous financial year. Meanwhile, global bonds returned 5.1%** for the same period.

Australian cash investments produced record low returns during this six month period. Cash returned 1.7%^ for the period as the cash rate had been reduced to emergency levels in order to stimulate the economy.

*as measured by the UBS Australia Composite Bond Index.
**as measured by the Barclays Capital based Aggregate Index - $A hedged.
^as measured by the UBS Australian Bank Bill.