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PSSap fund performance for January 2009

Welcome to the monthly update on your Fund's investment performance.

ARIA’s primary responsibility is the management and investment of the PSSap Funds in the equitable and best interests of all members. ARIA approaches this task by setting an investment objective to maximise the real returns earned on investments subject to a tolerable level of short-term volatility.

Table 1:  PSSap option earning rates for periods ending January 2009  

* All Earning Rates are after fees and tax

Table 2: Historical fund earning rates (%)

* All Earning Rates are after fees and tax

Commentary

The global economic environment deteriorated further in January, with significant reductions in economic growth forecasts, major contractions in global trade levels and a further easing of inflationary pressures. In the US, real GDP declined at an annualised rate of 3.8% in the fourth quarter of 2008, dragged down by a contraction in private consumption. The US housing sector remains in the doldrums, as evidenced by both housing starts and new home sales falling to record low levels. At the same time, 2.6 million US jobs were lost in 2008, the largest decline since 1945, and annual inflation fell to just 0.1% in December.

Elsewhere, the picture looks equally grim. In Japan, the government significantly lowered its economic growth forecast for 2009 and announced an AUD 25 billion government backed loan scheme in an effort to stimulate the flow of credit. In China, economic growth in the December quarter fell to an annual rate of 6.8%, which is only marginally above the lowest recorded growth rate (since records began in 1989) of 6%. In the UK, fourth quarter real GDP fell by 1.5% after a 0.6% decline in the third quarter. At the same time, Royal Bank of Scotland announced the UK’s largest ever corporate loss of 28 billion pounds. In Europe, official economic growth forecasts for 2009 were lowered to -1.9%, while unemployment jumped to 8% in December. In Australia, the economy received a temporary boost in December from the government’s pensioner and family tax stimulus package. However, perhaps a truer underlying picture of the state of the economy can be gleaned from the housing sector, where building approvals are 35% below their levels of a year ago, and job advertisements, which suggest a significant employment slowdown is looming.     

Amid a deteriorating global economic backdrop and ongoing reductions in both realised and forecast corporate profits, it was no surprise to see global equity markets retreat further in January. The largest declines were recorded by Japan (down 10%), Germany (down 10%), the US (down 9%) and Hong Kong and France (both down 8%). China stood out from other markets, achieving a gain of 9%. In aggregate, global equities fell by 7% in hedged terms. However, another significant decline in the value of the Australian Dollar in January meant that the return from global equities for Australian investors in unhedged terms was marginally positive (+0.2%).

The Australian equity market modestly outperformed its global counterparts in January, despite a large number of companies raising equity which helped to suppress their share price. The S&P/ASX 300 Index declined by just under 5%, with Resource shares (down 1.7%) significantly outperforming Industrial shares (down 6.0%). There was little performance dispersion between small and large capitalisation stocks. GICS sector performance dispersion was again a prominent feature of the market in January. Healthcare (up 6%) was the standout sector, benefiting from proposed health care reforms announced by the new US administration. Telecoms (flat) and Utilities and Materials (both down 1%) also fared well in a relative sense, and easily outperformed Industrials (down 11%), Property Trusts (down 10%) and Financials and Consumer Discretionary (both down 10%).

In January, short-term interest rates were reduced further in the UK (down 0.5% to 1.5%), Europe (down 0.5% to 2.0%) and New Zealand (down 1.5% to 3.5%). These declines were accompanied by an ongoing reduction in both recorded and forecast inflation. Despite this, government bond yields rose markedly in a number of countries, reflecting both a partial reversal from the very low levels reached towards the end of last year and expectations of a huge increase in supply to fund various government stimulus packages. Ten year government bond yields rose by 0.7% in the UK, 0.6% in the US, 0.3% in Germany and 0.1% in Australia. As a result, the return from global government bonds declined by 1.4%. Despite the deteriorating economic backdrop, credit spreads narrowed in January. This enabled the return from a composite basket of global fixed interest securities to decline by only 0.6%. A smaller rise in Australian bond yields meant that the value of a composite basket of Australian fixed interest securities increased by 1.4%. This comfortably exceeded the 0.4% return from cash.

Commodity prices experienced mixed fortunes in January, with strong rises in lead (up 12%), silver (up 11%), sugar (up 10%) and gold (up 5%), offset by declines in natural gas (down 20%), aluminium (down 12%), zinc (down 9%) and crude oil (down 5%). Commodity prices suffered very large declines in the last year due to the major reduction in global economic growth expectations. Falls of between 40% - 60% were common amongst a majority of commodities.

The Australian Dollar fell significantly against a number of currencies in January. The decline against the Yen (down 10%) and US Dollar (down 9%) reflected the perceived safe haven status of those currencies, while the movement against the Pound (down 9%) reflected renewed support for the UK currency after earlier large declines. Smaller declines were recorded against the Swiss Franc (down 2%) and Euro (down 1%). 

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Alison Tarditi
Chief Investment Officer
6 February 2009