The market was hit during the last quarter, with significant sell-offs in equity markets as investors became increasingly nervous about the European sovereign debt issues.

The Greek debt crisis continued throughout the quarter as it was announced that Greece would require a second bail-out package in order for the nation to service its debt obligations.

The Greek Prime Minister George Papandreou fought a legislative battle to introduce an austerity plan and withstood a confidence vote, staving off default. He won parliamentary approval to implement a €78 billion (US$112 billion) package that was a condition of receiving further European Union (EU) aid. Markets rallied in response to the passing of the austerity package, but the Greek people didn’t take the news so well, taking to the streets to riot.

Despite the passing of the austerity package, the risk of further trouble remains. Greece’s debt is unsustainable and is due to surpass 160% of Gross Domestic Product (GDP) in the months to come. The austerity plan does not reduce this debt. Greece cannot finance its own budget deficit and will run out of money by mid-July without financial help from the rest of the EU and the International Monetary Fund.

In addition to this, the quarter saw the end of the quantitative easing programme (QE2) in the US. This policy was designed to increase liquidity in the market to encourage corporate and consumer spending. Markets reacted positively when the programme was first announced, but less favourably when it was wound up. US Federal Reserve Chairman Ben Bernancke has hinted in several speeches that a further round of quantitative easing is unlikely, which worried investors. Despite the near-zero interest rates in the US, there is still little by way of consumer spending and economic growth.

The market commentary below is provided to give an indication of the various factors affecting the investment performance of individual asset classes. It is based only on the gross performance of the relevant market index and no allowance is made for taxes or fees as they apply to your superannuation investment. It is provided merely as an indication of relative performance between asset classes and should not be used as a measure for judging the performance of your investment strategy.

Australian Equities

The Australian share market benchmark, the S&P/ASX200 Accumulation Index, returned -4.0% for the quarter, This was the result of significant sell-offs, as investors became increasingly nervous about the sovereign debt crisis emanating from Europe. Australia suffered worse than the majority of developed markets due to concerns over the sustainability of Chinese growth amidst interest rate increases in China.

International Equities

International equities performed similarly to the Australian market, with the benchmark for global shares, the MSCI World ex-Australia Index, returning -2.9% on an unhedged basis. The continued appreciation of the Australian dollar helped this, however, with the hedged version of the benchmark returning -0.5%. As well as the European concerns mentioned above, the US economy is still on shaky ground and despite a strong start the quarter, the US market only just returned positive performance, with the quarter finishing up at 0.1% in local currency.

Listed Property

Australian listed property finished the quarter up with the S&P/ASX200 A-REIT Accumulation marginally down, with a return of -0.5% as property provided protection from the falling equity market. Globally, the returns were even better as the standard global listed property benchmark (the FTSE EPRA/NAREIT Developed Total Return Index) returned 2.9% on a currency hedged basis, as investors sought returns in an otherwise low-return environment.

Cash and Fixed Interest

Interest rates in Australia remained at 4.75% during the quarter as the Reserve Bank of Australia deemed the current rate to be consistent with that for achieving its target rate of inflation.

Short term money markets produced average returns with the UBS Bank Bill Index finishing up 1.2% for the quarter. Meanwhile, government bonds proved to be a safe-haven for investors with returns of 2.4% and 2.7% for Australian and global government bonds respectively.

Financial year ended 30 June 2011

The 2010/2011 financial year produced excellent returns from equity markets, in line with long-term averages. The Australian share market was up nearly 12%, albeit with a three month sell-off at the end of the year when markets retreated back 4%.

Globally, returns from equity markets differed greatly depending on the currency in which it is being measured. During the year, the Australian dollar appreciated by 26.8% against the US dollar and appreciated against all other major currencies except for the Swiss franc. To give an example of the importance of currency for the previous financial year; if you take the global equity benchmark returns on an unhedged basis the return for the year was 22.3%. In hedged terms this becomes 2.7%.

Much of the positive returns in equity markets came even through a torrent of global economic uncertainty and natural disasters.

The US economy muddled through the year without being able to provide much in the way of positive news and reverted to thrusting significant stimulus measures into the economy in the form of the quantitative easing programme (colloquially termed “QE”), whereby the government purchases previously issued financial instruments from private institutions via newly created money with the hope of providing additional liquidity into the economy. This, in turn, encourages businesses to spend and increases consumer confidence. The second of these initiatives concluded in June 2011 when the US Federal Reserve finalised the purchase of US$600 billion worth of previously issued bonds. This was in addition to the previous programme, where an estimated US$1.25 trillion worth of assets were purchased.

The market generally reacted positively to these initiatives and it was certainly a major contributory factor in the performance of equity markets. Some, however, are still questioning what long-term affect this will have on the US economy and the risk of higher-than-average inflation is present with the amount of additional money that has been pumped into the market.

Elsewhere, the European debt crisis continued to play on investors’ minds as the problems we saw emanating from Greece spread to other European countries with Ireland receiving bail-out funds of approximately US$115 billion to avoid defaulting on its debt obligations. Fear resonated through markets as investors were speculating on who would be next with Portugal, Spain and Italy seemingly the most likely. It was, in fact, Greece which required a second bail-out package to the value of US$112 billion to aid in its debt repayments towards the end of the financial year.

Overall, investors will generally be happy with how the 2011 financial year played out. Returns in all major assets were in line with historical averages, implying that we may have entered into a more ‘normal’ period as markets consolidate after a tumultuous couple of years. It remains to be seen what the 2012 financial year will hold in store and there are certain economic issues that will need to be resolved before investors will be confident in a sustained recovery, but investors will certainly welcome more of the same.