Fund Performance Review (August 2008) : US stimulus policy took effect

In late August, US announced a surprisingly upward revision of the second quarter GDP to 3.3 percent from 1.9 percent. This unexpected growth in GDP gives a break to the US .....

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August Fund Performance Review: US stimulus policy took effect
Editorial &Research Team, Morningstar Asia Ltd. | 2008-09-15

In late August, US announced a surprisingly upward revision of the second quarter GDP to 3.3 percent from 1.9 percent. This unexpected growth in GDP gives a break to the US economy from falling into the abyss of recession. On the other hand, the new claims for unemployment benefits fell by 10,000 to 425,000, giving the U.S. stock market a favorable impact to the US stock market.

Although some economic gauges are surprising on upside, it is still too early to conclude that U.S has successfully swum again recessionary pressure and started enjoying exp

ansion again. Economists argue that the growth in the second quarter gross domestic product was the result of federal income-tax rebates earlier this year, while the stimulating effect is fading away. With slumping house prices and withering consumer confidence, the U.S. economy outlook remains uncertain.

U.S. equity funds did very well - four U.S. equity fund categories, including U.S. Small-Cap Equity, U.S. Large-Cap Blend Equity, U.S. Large-Cap Value Equity and U.S. Mid-Cap Equity, become four of the top five performing fund categories in August. These four categories recorded 1.19 percent, 1.02 percent, 0.83 percent and 0.65 percent growth respectively in August.

Inflation chasing
Besides U.S., Europe is another victim that soaks with economic woe. Weak economic data dominated the headlines in August - contracted GDP growth, worsening unemployment rate, widening trade deficit gave a heavy plunge to the European equity markets. Eurozone Small-Cap Equity funds, registering an average loss of 3.48 percent in August, won all its European peers in August, though it is still negative.

Serious inflation still caught the attention from the globe, especially in the emerging world, including South Africa, Malaysia, India and Korea. The latest inflation figures in August hit the 10-year and 16-year high in South Africa and India respectively. Central banks of Thailand and Philippines raised interest rate by 0.25 percent in late August to curb inflation. Encompassed by the murky economic outlook and worse than expected inflation, Emerging Markets Equity funds, which lost 8.01 percent on average, ranked low among all fund categories in August.

While emerging countries are drowned in the inflationary fear, China is walking out of it. Given a narrowed growth in China's CPI for the third straight month, PRC government's violent controls to curb inflation seems successful so far. Inflationary pressure eased, but freefalling house prices triggered a deep worry about the prospect of economy. In August, investors focused more on growth than inflation, hence equities tumbled. China Equity funds lost 8.07 percent on average and Hong Kong Equity funds were averagely down 6.43 percent.

Oil is the king, a failed one
If investors need a piece of good news amid the current panic, there was one, although it is the only one - declining oil price, which may help to ease the inflationary pressure around the globe. Oil Price peaked in mid-July at around USD150 per barrel and slumped persistently down to USD115 per barrel in August. Oil stocks took the hit from this deep correction - MSCI World Energy Index lost 1.29 percent, while the Sector Equity Energy funds posted a deeper loss of 3.67 percent on average in August.

Other energy-heavy countries also suffered. Latin America Equity funds had a negative return of 9.05 percent, and Russia Equity funds, with a loss of 13.21 percent, become the worst performing fund category in August. Actually, the oil price correction is not the only reason why Russian equities tanked. Russia's military actions to Georgia aroused worries to a new Cold War in the 21st century.

Against all negatives, technology stocks generally had a good month in August - NASDAQ gained 1.8 percent and the MSCI World Information Technology Index also rose 0.82 percent. In the meantime, Sector Equity Technology funds gained 0.78 percent on average, occupying the fourth place in the August fund category ranking.

Dollar Bond won
Dollar bond outperformed Euro bond and Sterling bond in August. Dollar Government Bond, Dollar Corporate Bond and Dollar Diversified Bond posted positive results of 0.48 percent, 0.44 percent and 0.03 percent respectively. Let's take Government Bond as examples, the Euro Government Bond lost 4.66% while the Sterling Government Bond lost 5.17%. In August, correction of oil price brought back a stronger Dollar. Together with the weak economic data in Europe, Dollar bond obtained a fertile ground for a strong rebound. Although the current rebound is strong, investor should keep an eye on whether this rebound is long-lasting as U.S. economy is still at stake.

Editorial &Research Team, Morningstar Asia Ltd. can be reached at hksupport@asia.morningstar.com
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