Commodity price volatility and investor unease regarding the impact of higher inflation and interest rates on global economic growth drove global equity markets lower during the month. The MSCI World ex Australia Index (unhedged) fell 2.6% during the month. The MSCI World ex Australia Index (hedged into $A) fell 4.3% during the month and underperformed its unhedged counterpart due to the Australian dollar falling against the US dollar and Japanese Yen. Australian equities as measured by the S&P/ASX 300 fell by 4.7% during the month, taking the lead from global markets.
The main domestic news in May was the release of the Federal Government’s Budget for 2006-07, which was mostly positive for the economy. The Budget reduces the top marginal tax rate, facilitates increased savings through superannuation reforms and maintains a reasonable surplus. In other news the Reserve Bank of Australia increased interest rates by 0.25% to 5.75%, citing stronger global economic and credit growth, rising commodity prices and domestic spending as increasing inflationary risk. The RBA seems to be indicating no bias to increase interest rates in the near future. Within the domestic share market, the worst performing sector was Utilities (down 9.0%), which was affected by the RBA’s decision to raise interest rates. Healthcare (down 8.7%) also posted a weak performance due to poor performance from stocks such as CSL, Mayne Pharma and Cochlear. The best performing sectors were Property (down 1.5%) and Consumer Staples (down 2.1%).
In the US, the Federal Reserve raised interest rates from 4.75% to 5.00%, and has suggested a further tightening bias. Economic indicators point to the US economy moderating as increases in the business conditions index and retail sales were offset by falls in consumer confidence and a weaker housing market. |
In Europe, the news was more positive as business conditions reached a five year high and unemployment fell to its lowest level since 2002, 8.1%. The European Central Bank also raised interest rates from 3.0% to 3.25% during the month. Economic indicators from Japan were also positive, with bank lending rising and consumer confidence at its highest level since 1990. The Bank of Japan has also indicated that it is in no rush to increase interest rates. The Chinese economy has continued to grow strongly.
Australian bond yields increased in May following the RBA’s decision to increase interest rates in Australia and the US Federal Reserve’s decision to raise interest rates in the US. This placed pressure on domestic fixed interest returns, which posted a 0.4% return as measured by the UBSA Composite Bond Index. The large sell-off of equities in the developed and emerging markets over the month saw large money flows into the government bond market. Despite this, yield pressures from activities by monetary authorities around the world dampened returns, with the Lehman Global Aggregate Index (Hedged) returning 0.4%.
The Australian listed property sector weakened in May, with the S&P/ASX 300 Property Accumulation Index falling 1.5%. In unlisted property, the office sector continued to recover, with strengthening demand particularly in the commodity-based states. Retail assets also continued to perform well, while demand for industrial premises weakened during the month.
Please note that this economic commentary does not constitute advice. |
