2012 started on a positive note, with strong rallies in both global and local equity markets

In global markets, both the US S&P500 and the EuroStoxx 50 were up 4.4% over the month. While some might partly attribute this to the ‘January effect’, descriptive of the tendency for markets to rise at the beginning of a new year, some solid economic data and (yet another) sign of a resolution to Eurozone issues played a large part in the market upswings.

The ECB’s 3-year LTRO, completed late in 2011, which will essentially give banks access to over 1 trillion dollars of funding, has been a significant contributing factor. Out of the US came some more positive economic data as the ISM manufacturing survey maintained strength and the labour market data improved, while we also saw early indications that China was far from faltering as many had feared, with strong PMI numbers and exports showing no signs of slowing.

However domestic economic data was less robust. Fourth quarter CPI was flat, as was the unemployment rate at 5.2% – saved from a fall only by a concurrent drop in the participation rate. A more cautious household sector continued to dog the retail sector, with the most recent retail sales data confirming the sector’s fourth straight flat month.

Meanwhile the continued strength of the AUD (up 3.8% against the USD and 2.1% against the Euro), although welcome news for the ever-increasing numbers of Aussies holidaying overseas, contributed to a 3.8% decline in the terms of trade in the final quarter of 2011 as higher import prices took their toll.

Notwithstanding these sombre data releases, the ASX300 Accumulation Index rallied 5.13% – the second best month since September 2009. Renewed risk appetite contributed to strong performance in the higher beta sectors of the market; with Materials gaining 10.3%, Energy 8.3% and Industrials 6.3%.

With no RBA meeting in January the cash rate was unchanged, however domestic data such as this supports our view that the RBA is likely to ease monetary policy at least twice in the first half of the 2012.

The Australian bond market was caught between reacting to the weak domestic economic data positive developments in the European crisis and, with bond yields rising initially but rallying back towards the end of the month off the back of less risk averse market sentiment.

With the start of reporting season coming up, company specific newsflow was muted. One of the more notable updates over the month was a reduced profit guidance from QBE, a clear example of the structural issues we believe characterise the global insurance industry and which will result in further erosion of margins.

The February half year reporting season will be a key focus for the team. Given the persistently sluggish state of the non-resource sectors of the economy, we’re not anticipating much in the way of optimism from companies exposed to these sectors.

Fund manager commentary

Read BTIM’s complete fund manager commentary for January 2012