Cash

The Reserve Bank of Australia (RBA) left the cash rate unchanged at 5.5% during the month.

Australian Bonds

The UBSA Composite Bond Index (All Maturities) returned 0.9% for the month of December. For the year to 31 December the index has returned 5.8%.

The outlook for interest rates remains stable despite inflation tracking at the higher end of the RBA’s target range of 2-3%. Governor Ian Macfarlane noted mid-month that "virtually all of the rise in oil prices has been reflected in statistics on inflation, and the results have been surprisingly small". The global rise in interest rates, particularly in the US, represents in the RBA’s view a return to normality, based on "the realisation that the world could not have safely continued with the sort of interest rates that prevailed in 2002 and 2003".

International Bonds

The benchmark Lehman Global Aggregate Index (hedged, A$) returned 1.0% for the month marginal outperforming the UBSA Composite Bond Index (All Maturities). For the year to 31 December the benchmark has returned 6.6%.

During the month the US Federal Reserve raised rates for the 13th time in a row. US 10-year Treasury bond yields fell 8 basis points (bps) to 4.3% as the Federal Reserve signaled an end to its "accommodative" policy stance. The market sees some remaining upside but believes the Federal Reserve is approaching ‘neutral’. US fixed interest markets will watch with anticipation, as there is a changing of guard at the Federal Reserve with Chairman Greenspan stepping down on 31 January 2006 making way for Ben Bernanke.

In Japan the Yen fell to a 32 month low intra-month as Japan’s finance minister Sadakazu Tanigaki and Bank of Japan (BoJ) Toshihiko Fukui indicated that they were unconcerned about the Yen’s 15% decline this year. The BoJ indicated that the Bank is close to ending its deflation fighting policy, which has held interest rates at near zero for the past four-and-a-half years, as consumer prices begin to show "solid" gains, saying that "it is clear to everyone that the end is close". Japanese 10 year Government bonds rose slightly to 1.5%.

The yield on 10 Year European bonds fell sharply to 3.3% despite the European Central Bank (ECB) rising interest rates for the first time since 2000.

Australian Listed Property Securities

The S&P/ASX 300 Property Trust Index returned 5.3% for the month, the benchmark is up 12.7% for the year to 31 December. Despite outperforming for the month, over the year the sector has under-performed the broader Australian equity market as concerns over both valuations and high leverage.

The best-performing sectors were Industrial Trusts (+6.8%) and Retail (+4.2%) with the worst performing sector being Commercial (+0.1%).

During the month Macquarie Goodman (+3.5%), Australia’s largest industrial real estate trust, purchased United Kingdom based Arlingtion Securities for $US350 million, transforming Macquarie Goodman into the world’s second-largest commercial property manager with $A14.7 billion under management. The move will help Macquarie Goodman expand into the UK and European market with the onset of REIT legislation.

One of the worst performing stocks was Multiplex (-4.6%) which forecast that the loss from Wembley Stadium construction project would be larger than earlier forecast and will cut group earnings by two-thirds this financial year.

The S&P/ASX 300 Accumulation Index returned 3.1% for the month, the benchmark is up 22.5% for the year to 31 December 2005.

The rise in the bourse reflects the buoyant economic environment. This was underscored by economic data released during the month which saw the unemployment rate falling to 5.1% and exports rising to the second highest level on record narrowing the trade deficit more than expected. The sharemarket was also boosted by a flurry of IPO activity.

The best performing sectors were Energy (+6.3%) and Materials (+6.1%) as resources continued to be the engine of growth. The best performing large capitalisation companies were all energy and material companies - Zinifex (+28.6%), Oxiana (+25.2%) and Alumina (+16.7%). The worst performing sectors were Information Technology
(-0.2%) and Consumer Staples (+0.2%).

Infrastructure companies continued to find value in overseas assets with Macquarie Infrastructure Group purchasing a stake in French toll rode Paris-Rhin-Rhone ($8.4 billion), Macquarie Media buying a stake in Taiwan Broadband Communication ($890 million), Babcock & Brown’s purchased Enersis II ($US590) a Portuguese wind energy and hydro-electricity company, and Babcock & Brown’s offer to buy UK based PD Ports ($US456 million).

Reserve Bank Governor Ian MacFarlane noted in a speech mid month the prevailing short termism of investors’ behaviour. He noted that this is exacerbated by companies' short term reporting schedules and the changes to the accounting standards is likely to worsen the short term volatility of company results and it will be interesting how investors' behaviour changes in response.

 International Shares

The MSCI World Ex Australia (net div in $A unhedged) returned 3.1% in December with the hedged benchmark returning 2.3%.The Australian dollar fell against the UK Pound (-0.3%), the Japanese Yen (-2.5%) and the US Dollar (-0.2%) and recorded only modest gains against the Euro (+0.4%).

The best performing markets were Japan (Nikkei 225: +8.3%), and Germany (DAX: +4.1%). The US sharemarket (S&P 500: -0.1%) after a very positive November recorded a negative return. For the year to December the best performing markets were Japan (Nikkei 225: +40.2%) and Germany (DAX: +27.1%).

The United States equity markets failed to ignite despite positive economic data. The US economy added 215,000 jobs in November, bouncing back from two months of weak employment data, and stronger consumer confidence numbers, the largest two-month increase in more than two years.

In Europe the strongest performing markets were Germany (DAX: +4.1%), Italy (MIB30: +3.8%) and the UK (FTSE: +3.6%). Spurring equity markets on was the announcement by the ECB that the Euro-region would grow at the fastest pace in two years (+0.6% December quarter) as companies and consumers increased spending. Reflecting this shift fundamentals, German business confidence rose to a five year high in December.

As in the United States M&A activity remained strong, with Vodafone, winning an auction to purchase Turkey’s second largest mobile phone company Telsim Teleekomunikasyon ($US 4.5 billion) and France Telecom offered to buy Belgium’s Telindus ($US680 million).

Japan (Nikkei 225: +8.3%) continued to deliver impressive returns. The markets shrugged off news that the economy grew at the slowest pace in a year (1% annualised) in the third quarter, as companies cut inventories and the government reduced spending, and instead focused on bullish BoJ comments. The government seemed unperturbed by lower recorded growth in the third quarter and approved plans to cut spending to the lowest level in eight years. Their willingness to cut this government spending indicates their faith in the recovery.

China also revealed mid-month that its economy was 17% larger than originally forecast, the findings vault China three places ahead on the list of the world’s largest economies to No.4 ahead of the UK.

Global Emerging Markets

The MSCI Emerging Markets in ($A dividends reinvested) returned 6.9% for the month, for the year to 31 December the sector has returned 43.2%, significantly outperforming the broader developed market indices. The benchmark has rallied as many emerging markets continue to show solid growth and sustainable development.