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  1. Market Summary: July

    Global equity markets rallied in July with positive sentiment arising from what was perceived as a successful summit of European leaders in late June. Comments from European Central Bank (ECB) President Draghi were also taken as a sign that the ECB was preparing to act in order to bring bond yields down in Italy and Spain. Earnings season in the US saw companies slightly ahead of expectations, generating a similar level of earnings to the same period 12 months ago. Economic data continued to be mixed leading to expectations that the US Federal Reserve will provide additional unconventional stimulus later this year.

    In local currency terms, the MSCI All-Country World Index gained 1.4%. The advance was limited to 0.3% for unhedged NZ-based investors, with the NZ dollar gaining 1.1% against the MSCI-weighted basket of currencies.

    The Australian ASX 200 index gained 4.3%, despite the underperformance of the metals and mining sector. Banks had a strong month, with their relatively high dividend yield proving to be attractive in the current low yield environment. NZ stocks matched their Australian counterparts, with the NZX50 also moving 4.3% higher.
    Global listed property had another strong month, with the UBS Global Investors ex Au/NZ Index advancing 3.1%. The NZ Listed Property Index was up 2.4% compared to a 5.6% gain in the Australian listed property sector.

    US Treasury yields moved lower over the month with the UST 10-year yield below 1.5% at month end. With yields on European sovereign bonds also moving lower, the JP Morgan Global Government Bond Index rose 1.2%. NZ bonds lagged global bonds, with the NZ Government Stock Index up 0.1%.

    “whatever it takes…”

    Volatility remained one of the constant themes of capital markets over July with the euro zone sovereign debt crisis never far from investors’ minds. Spain was the focal point with a number of regional governments requesting aid from the central government. Spanish Government 10-year yields touched 7.5%, while the yield on the same bonds of the larger ‘core’ European nations reached record lows. Shorter-term bond yields moved below zero in a number of countries, meaning investors were prepared to pay governments they are lending money to!

    At the end of July, ECB President Draghai announced, “Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro.  And believe me, it will be enough”.

    This led to a sharp rally in equity markets and a decline in Spanish and Italian bond yields on the expectation the ECB was about to expand its balance sheet to assist specific European countries as they make painful, long term structural adjustments.  As is often the case with Europe, there is a limited amount of detail around the future plans of the ECB. Various policy makers from several northern countries expressed concern with the path the ECB is going down.

    Global growth concerns remain

    Economic data for the US and China did little to alleviate fears that these two powerhouses of global growth are slowing. In the US, the Institute for Supply Management’s Manufacturing survey for June fell below 50 for the first time since mid-2009, and other regional manufacturing surveys were weak.

    Non-farm payrolls rose a less-than-expected 80,000 in June, meaning the unemployment rate remained above 8%. The bright spot for the US was that some of the housing data gave cause for optimism in this key sector. New house starts, in particular, were strong and the Case-Shiller home price index continued to edge higher.
    The People’s Bank of China responded to recent weak data, with cuts to commercial banks’ interest rate less than a month after the previous cut. China’s official PMI (Purchasing Managers Index) remained just above 50 and China’s GDP growth for the second quarter came in at 7.6% year on year. This is close to the rate of growth that Chinese policy makers set out in their five-year plan as they attempt to move the drivers of economic growth from public and private expenditure on infrastructure projects and real estate to more sustainable consumer demand led growth.

    Corporates managing the low growth environment well…

    Earnings season for the second quarter kicked off in July led by US companies who for the most part posted figures ahead of expectations. It is important to note that analysts had already downgraded their forecasts in the months prior to results being released. Analysts now only expect S&P500 companies to report FY2012 earnings around US$103 per share, having been as high as $114 a year ago.

    Companies have continued to manage their businesses very conservatively with careful balance sheet management. This has resulted in profit margins remaining at historically elevated levels and has kept shareholder earnings high.

    Many analysts remain optimistic that corporate America is one of the few sectors of the economy with sufficient capacity to maintain aggregate growth rates. However, few CEOs have the confidence to commit to long-term future investments. The prospect of a fiscal overhang in the US, ongoing instability in Europe, and significant uncertainty over taxes, regulation and commodity prices mean this uncertain environment is likely to remain for some time.
  2. Global equity markets took a turn for the worse in May when support for anti-austerity political parties in Greece again jeopardised the nation’s membership in the euro zone. Generally disappointing economic dataflow in developed markets added to investor woes, particularly in Europe but also in the US. There was also further evidence that China’s economic slowdown may be more pronounced than many economists were forecasting, putting pressure on related stock and commodity prices. 
    In local currency terms, the MSCI All-Country World Index lost -6.8%. The decline was limited to -0.9% for unhedged NZ-based investors, with the NZ dollar dropping -5.9% against the MSCI-weighted basket of currencies. 
    The Australian ASX 200 index shed -6.6%, consistent with the decline in global markets and reflecting the region’s exposure to the resource sector. NZ stocks proved their defensive worth, with the NZX50 declining just -1.9%. 
    Global listed property was less affected by macroeconomic concerns but still declined -3.9%. The NZ Listed Property Index lost -1.8% compared to a -1.3% decline in the Australian listed property sector. 
    The adverse macro-economic environment was positive for bond markets with US Treasury yields plumbing the lowest levels since the Great Depression. The JP Morgan Global Government Bond Index rose 1.5%, with an index yield below 1.8%. The NZ Government Stock Index rallied 2.7%, with sovereign investors attracted to the positive real yields still on offer and relative safety of NZ Government bonds.
    Euro zone on the rocks…
    Macroeconomic concerns plagued equity markets as political wrangling in the euro zone continued to hit investor confidence. 
    Greek elections held in May failed to deliver an election majority to any party or, subsequently, form a viable coalition. This raised concerns about a potential Greek exit from the euro zone. A fresh election is to be held on 17 June and fortunately, recent opinion polls place the pro-bailout centre right New-Democratic party ahead of the radical leftist party Syriza.


As an Authorised Financial Adviser in Christchurch Lyn Bell has passed the requirements of the Financial Markets Authority and is legally qualified to provide financial services to her clients throughout New Zealand.  

Lyn’s registration can be viewed at www.fspr.govt.nz. Lyn can also be found at the Financial Markets Authority website.

A disclosure statement is available free on request



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While every care has been taken to supply accurate information, errors and omissions may occur. Accordingly, Lyn Bell & Associates accepts no responsibility for any loss caused as a result of any person relying on the information supplied.