Australia - review of the markets

- Editor

• The Reserve Bank of Australia became the first nation in the developed world to raise benchmark interest rates recognising that an expansionary policy setting was no longer necessary.
• The Australian dollar jumped to the highest level in 13 months after bank Governor Glenn Stevens lifted the benchmark interest rate to 3.25 percent.
• Australian retail sales, approvals to build private homes and bank mortgage lending jumped and the countries jobless rate fell for the first time in five months.

Australian shares

The Australian equity market (S&P/ASX200 Accumulation Index) also added to previous months’ increases, gaining 6.2% over September on the back of further positive earnings news and strengthening economic data. This was the market’s seventh consecutive monthly rise, and it took the rally from its closing low at 6 March 2009 to a gain of 50%.

The standout sector for the month was consumer discretionary (+10.6%) followed by financials (+9.9%) and REITs (+9.8%). The laggard was the telecommunications sector (+0.3%).

The main economic news supporting the market was retail sales bettering market expectations for August (+0.9% vs 0.5%), taking the annual rate of growth to 5.8% year-on-year. Dwelling prices were also positive, rising 1.9% for the month of August and 6.6% on a one-year basis. Other recently announced data, including building approvals and private credit growth, were flat in August.

Australian listed property

The Australian property sector saw its seventh consecutive monthly rise in September, with the index up 9.8%, outperforming the broader equity market (ASX 200) by 3.6%. The sector has now rebounded a staggering 75% from its March 2009 lows. However, despite the rebound, the sector is still down a very disappointing -23.7% for the 12 months to the end of September, underperforming the broader equity market by 32%. This was largely due to significant new equity issuance of hugely dilutive levels to pay down debt.
The continued rally in the sector is due to the re-emergence of risk appetite following the recapitalisation of the sector and the improved economic outlook. Over AUD$18 billion of new equity has been issued to investors, and as a result the fear of fire sales by property vehicles has retreated, taking pressure off asset values. Most of the large listed vehicles are now gearing closer to 20%, rather than the usual 30-40%, and investors have started to anticipate that mergers and acquisition activity is likely to pick up. One of the first out of the blocks during September was Lend Lease, which entered into a scheme of arrangement to acquire all the shares it did not own in Lend Lease Primelife, a separately listed retirement village operator.

The best performing listed property vehicles during September were Centro Property Group with 88.2%, followed by Centro Retail Property Trust with 48.0% and Valad with 29.7%, all of which benefited from improved sentiment and greater risk tolerance. Other strong performers were Charter Hall with 18.9%, Mirvac with 14.9% and sector-heavyweight Westfield with 9.8%. No listed property vehicles recorded negative returns during September and Macquarie Countrywide and Bunnings Warehouse Property Trust were the worst performers with 1.6% and 1.8%, respectively.