3nd quarter 2009

As spring blooms in the southern hemisphere, a sense of optimism dawns in investment markets around the world. The so-called ‘green shoots’ of economic recovery are gaining momentum as unprecedented fiscal and monetary policy measures employed by central banks take effect.

The epicentre of the global financial crisis, the United States, is showing signs of expansion, after four consecutive quarters of negative growth. Positive data released in September 2009 further supported this view, with industrial production, domestic demand, and international trade recording improvement. The Achilles heel of the US economy, the housing market, is also showing signs of stabilisation. Despite all the good news, there will be no ‘quick fix’, with most expecting a gradual economic recovery.

Like the US, the European economy continues to show signs of gradual improvement. Consumer confidence is up, in spite of the looming dark shadow that is rising unemployment. After experiencing five consecutive quarters of negative returns, one of the main drivers of growth, foreign demand, is set to rise, with exports expected to increase by 2% over the September 2009 quarter.

The Australian economy continues to be a stand-out performer among its global peers. Labour market figures surprised many in September, with the unemployment rate falling to 5.7% as the economy added 40,600 jobs.¹ The housing sector continues to improve, with strong demand underpinning housing prices. With business confidence at its highest level in six years, and consumer confidence up nearly 40% from its March 2009 low, Australia seems set to emerge from the global economic storm relatively unscathed.

International shares

Global sharemarkets continued their upward trend over the September 2009 quarter, recording strong gains. Performance was primarily driven by the combination of a fall in the cost of capital and an improvement in earnings outlook. Growth in Asian economies continues to surprise on the upside, with Australia an example of resilience in the region. However mixed economic data from the US, including further significant job losses, has the potential to throw a dampener on growth.

Outlook: The extent of the global downturn and sharp recovery now underway in some parts of the world is expected to keep sharemarkets buoyant.

Australian shares

The Australian sharemarket finished the quarter strongly, with the ASX200 climbing 19.9%, its best quarterly return in 20 years.² Mounting evidence that the Australian economy is stabilising saw the domestic market keeping pace with its global peers. Banks led the way, as investors became less concerned about loan losses. Resources suffered at the hands of mixed commodity prices, but still ended the quarter on a positive note.

Outlook: The economic recovery and predicted increase in merger and acquisition activity in 2010 are positive signs for Australian sharemarket returns.

Fixed interest (Bonds)

Global credit markets performed strongly over the September 2009 quarter, with markets benefiting from improved liquidity conditions. Global inflation rates plummeted, reflecting the rising rate of unemployment and pullback in wages growth. Policy makers around the world recognised the need to maintain extraordinary stimulatory policy settings, creating favourable market conditions. Domestically, recent economic data has reinforced the view that various fiscal measures aimed at supporting the economy are having the desired effect.

Outlook: While global economic sentiment continues to improve, this is to some degree merely an improvement from very dire predictions. Recovery is likely to be modest by historic standards and vulnerable to unforseen ‘events’. This should support fixed interest markets.

Currencies

Emerging market and commodity currencies were the strong performers over the September quarter, as investors’ risk appetites returned. The Australian dollar put in a strong showing in September and finally breached the US$0.90 mark on 8 October. The euro too continued its trek upward, reaching US$1.47 on 22 September – its highest level in a year. Both the US dollar and UK pound underperformed relative to other currencies.

Outlook: The Australian dollar is supported by increasing interest rate differentials, stronger relative growth prospects, and an improvement in commodity prices.

Property

In line with management's expectation, the September 2009 round of re-valuations saw the external valuations across the majority of QIC's property portfolio remain generally flat. The impact of a softening in the capital values at three of the portfolio's core assets was offset by organic growth. This resulted in a small positive net gain, the first positive gain since the June 2008 quarter. Despite the positive growth, there remains the potential for further softening across both retail and office assets if market movements continue to deteriorate.

In recent editions of QIC’s investor update QIC has referred to the highly successful Robina Town Centre Northern Malls extension, which opened in three stages in November 2008, April 2009, and June 2009. QIC, in partnership with Westfield, is progressing plans for another exciting development in the Brisbane / Gold Coast corridor. Over 45 hectares of land have been secured at Coomera for development of the future Coomera Town Centre. Coomera is located around 50 kilometres south of Brisbane and 20 kilometres north of Surfers Paradise and is an area earmarked for extensive residential development. The site for the new shopping centre is adjacent to Coomera train station and 700 metres east of the M1 Pacific Motorway, providing excellent public and private transport access. This property is an asset in the QIC Property Fund in which QSuper is invested. The development of a greenfield site into a successful regional shopping centre with scope for future expansion is consistent with QIC's strategy for the QIC Property Fund.

In the Brisbane CBD the Q&A (Queen and Albert) complex continues to progress well, and a large number of retailers are in fit-out mode and preparing to open before Christmas 2009.

Outlook: The outlook for property valuations appears to be stabilising however, there remains the potential for further reductions in capital values during the 2009/2010 financial year.