PSSap Fund Performance for July 2008

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 the month of July 2008  

* All Earning Rates are after fees and tax

Table 2: Historical Fund Earning Rates* (%)

* All Earning Rates are after fees and tax

Commentary

The month of July saw a further deterioration in global economic activity. In the US, although the housing sector and private consumption remains weak, the economy has not slowed to the extent evident in the early part of this decade in the aftermath of the dot-com bubble. This has been due to the manufacturing and export sectors holding up well as a result of the decline in the US dollar which has improved US competitiveness. A number of commentators suggest that the US economy will weaken further in the second half of 2008 as the impact of the government’s temporary fiscal stimulus package begins to wane.

Economic activity in the UK and Europe has weakened significantly in recent months. In the UK, retail sales fell by 3.9% in June, the largest monthly decline on record, thereby reinforcing a major decline in consumer confidence. In Europe, industrial production plunged by 1.9% in May, the largest decline in 16 years, as business conditions and confidence have plummeted.

In Australia, many commentators suggest that the cycle of higher official short-term interest rates is over and will be followed by a reduction in rates in the coming year. This expectation has been fuelled by a major decline in consumer and business confidence, which has been borne out by lower retail sales and weak housing figures. Although the level of employment remains robust, it is viewed as a lagging indicator of economic activity. Inflation rose to 4.5% in the June quarter from 4.2% in the March quarter. Going forward, the recent decline in the oil price and weakness in domestic demand are expected to reduce the level of inflation back towards the Reserve Bank’s target range of 2% to 3%.

Amidst this economic backdrop, equity markets fell further in July. Significant falls in the first half of the month were followed by some recapturing of lost performance which coincided with a sharp decline in the oil price. For the month as a whole, global equities fell by 1.7% in hedged terms. Amongst the major markets, the largest declines were recorded by the UK (down almost 4%), US (down 1%) and France (down 1%). Some markets did manage to advance, principally India (up 6%), Hong Kong (up 3%), China (up 1%) and Germany (up 1%). A modest decline in the value of the Australian dollar meant that the return from global equities in unhedged terms fell by only 0.3%.

The Australian equity market experienced another sharply negative month in July, recording a decline of 4.7%. Falls were concentrated in Resource shares, which dropped by 11.7%. In terms of sectors, Energy fell by 13.8%, while Materials retreated by 10.6%. Declines in other sectors were of a lesser magnitude, led by Property Trusts (down 4.9%), Information Technology (down 4.3%) and Consumer Discretionary (down 3.7%). The more defensive sectors achieved strong gains, with Telecoms up 5.9%, Utilities up 4.2% and Industrials up 3.9%. Small stocks again underperformed their large counterparts, maintaining the trend evident over the last year.

In July, a sharp decline in the oil price and a further deterioration in economic activity reduced earlier fears that inflationary pressures may prevent future declines in official short term interest rates in the major economies. This created an environment in which most bond markets advanced strongly, led by Australia which rose by 1.8% and outpaced the gains from global bond markets which advanced by 1.6%. These rises were well in excess of the 0.7% return from cash.  Reflecting the gains in bond markets, 10-year government bond yields fell by 0.3% in the UK and Europe, 0.2% in Australia and New Zealand, and by a little less than 0.1% in Japan and the US. Credit spreads widened a little during the month in response to deteriorating economic conditions.

Commodity prices declined significantly in July, more than offsetting the gains achieved in June. The most notable movement was recorded by Oil, which fell by 14% from a mid-month high of US$145 per barrel to US$125 per barrel by the end of the month. For the month as a whole, Oil declined by 11%. Other commodity prices also retreated in July, led by Nickel (down 14%), Copper (down 6%) and Aluminium (down 5%). Gold held up relatively well, falling by only 1%. 

The Australian dollar fell modestly in July, due to lower commodity prices and an increasing expectation that Australia’s interest rate differential with other major nations will narrow in the period ahead. Declines were recorded against all of the major currencies, with the largest fall being against the US dollar (down 1.7%). Movements against other currencies were less significant, with falls of 1.2% against the Pound, 0.8% against the Euro and 0.2% against the Yen. 

Alison Tarditi
Chief Investment Officer
8 August 2008