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Market Update - March 2012

The long-awaited Greek default became official during the month. Greece completed a “voluntary” restructure and amended Greek law to write “collective action clauses” into their debt. Effectively, these would enable Greece to enforce any majority decision on all investors whether they voluntarily agree to the restructuring or not.

 

After netting off trades, just EUR3bn was left exposed to CDS, and there were none of the disorderly consequences that had been feared. No banks collapsed or defaulted on their CDS payments. Fears that CDS would be worthless as a hedging instrument (having twice seen a vote against declaration of a credit event) were likewise unfounded – third time around, ISDA confirmed that the hedges would pay off.

 

The money lost on Greek bonds was lost two years ago – the important point was that no new financial events followed. With some comfort on that point, financial markets had another strong month. Australian shares followed a strong offshore lead for global shares in local currency. However, A-REITs gave back some of their recent gains, losing -0.6%.

 

 

 

 

The market started to gain some comfort with the China slowdown theme – official forecasts being pulled back from +8% to +7½%. That will hurt some sectors, notably property and this saw Hong Kong’s Hang Seng index (-5.2%) and the Shanghai Composite (-6.8%) down! However, this did not translate to broad-based falls, with Spain the only other recording standout losses.

 

Unhedged shares got another strong boost as the $A weakened on lowered interest rate expectations, which would reduce the $A’s attractiveness as a high yield currency. The RBA opened the door a crack to further rate cuts.

 

The trade balance worsened $2bn in the month of March – falling below levels last seen during the Queensland floods. No jobs have been created for a year with jobless numbers up 5% in that time, despite a ½% lower participation rate. Little wonder then that Australian bonds rallied, returning almost triple the cash rate (+0.9%) in a month where offshore bonds generally lagged (earning just +0.2% hedged).

 

Locally, investors will be looking to see whether the RBA falls into line with market forecasts and moves back into easing mode. The Quarter one CPI will be crucial to their deliberations. The corporate sector faces headwinds from increased taxation and the possibility that they will be asked to share the cost of higher superannuation contributions. Globally, just how China adapts to what may be structurally slower growth (the era of 10% p.a. growth may be past), and the impact of this on commodities is an ongoing theme. Has Europe bought itself a few years with LTRO, or a few months? The trading of Italian and Spanish bonds will be key, as the Spanish lurch closer to joining the bailout queues.

 

 

Market Indices
Australian Shares	S&P/ASX 300 Accumulation Index
International Shares Hedged	MSCI World (ex Australia) in local currency
International Shares Unhedged	MSCI World (ex Australia) in $A
Listed Property	S&P/ASX 300 A-REIT Accumulation Index
Direct property	Mercer/IPD Australian Pooled Property Fund Index
Australian Fixed Interest	UBSA Composite Bond All Maturities Index
International bonds	Barclays Capital Global Aggregate Index (Hedged to $A)
Cash	UBSA Bank Bill Accumulation Index

In compiling this market review, CPG Research and Advisory (“CPG”) has relied on data and information provided by third parties. Although reasonable care has been taken to produce this review, CPG will not accept any liability for any loss, direct or indirect, resulting from reliance on information in this review. Past investment performance does not necessarily reflect future investment performance.