Market Review

Australian Economy

On 9 May 2017 treasurer Scott Morrison handed down the Budget 2017-18. Projections saw real GDP growth at 3.0% in 2020 with an unemployment rate of 5.5% and an inflation rate of 2.5%. Mostly criticised was a forecasted wage growth of 3.0% in 2019. In light of continuing subdued wage growth of currently 1.9%, forecasted revenue growth from income tax may be a bit too opportunistic. Last time wage growth stood at 3.0% was four years ago in the first half of 2013. Return to budget surplus was expected in 2021. Overall, the Budget 2017-18 was commonly perceived as underwhelming with proposed means to tackle housing affordability not going far enough.

Global Economy

The victory of Emmanuel Macron to become the successor of French president Francois Hollande was well received within the European Union and clearly eased the pressure on the common currency. The euro gained substantially in the following weeks against other major currencies and temporarily silenced many eurosceptics. In Brazil, the Supreme Court began investigating president Michel Temer on corruption charges as the country was just starting to climb out of its worst-ever recession. At stake was a pension reform, imperative for balancing the Brazilian budget. Meanwhile, Moody’s downgraded China’s sovereign credit rating on the back of excessive debt levels and slowing economic growth from Aa3 to A1 and changed its outlook from negative to stable.

US markets reported solid earnings growth across all sectors with over three-quarters of US companies beating revenue estimates. The unemployment rate fell further to 4.4% in May, particularly good news after the weak payrolls report for the previous month. Economic sentiment continued to remain very positive. The seasonally adjusted IHS Markit Flash US Composite PMI Output Index rose to 53.9 in May, indicating towards expansion.

In Europe, the seasonally adjusted unemployment rate continued to gradually fall and was at 9.3% in April and consumer confidence hit a post-crisis high. The German Ifo survey on business sentiment reached its highest level since inception in 1991. Inflation is expected to slow in May to 1.4%, following a 1.9% rise in April. Solid earnings expectations continued on in May with consensus expectations of 14% earnings growth across the region.

The Caixin Manufacturing PMI in China unexpectedly fell to 49.6 in May from 50.3 in April and missing market consensus of 50.1, indicating contraction of the sector. It was the first drop in manufacturing activity since June 2016, as employment detracted the most since last September, with confidence at a four-month low while output rose the least in 11 months. The Non-Manufacturing PMI in China rose to 54.5 in May from 54.0 in April, indicating towards expansion of the sector. New orders rose at a faster pace and business expectations strengthened markedly while new export orders contracted.

Table 1: Market Performance – Periods to 31 May 2017

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares -2.8 1.5 11.1 6.0 11.9
International Shares ($A) 2.8 8.4 13.3 14.2 18.7
Emerging Market Shares ($A) 3.4 11.4 24.0 9.5 10.2
Australian Listed Property -1.1 2.1 2.0 15.1 16.3
International Listed Property ($A) 1.6 4.1 1.2 12.7 15.5
Australian Direct Property 0.2 2.4 12.3 12.4 10.9
Australian Fixed Interest 1.2 2.4 2.5 4.9 4.5
International Fixed Interest (Hedged) 0.6 1.3 1.6 5.5 5.5
Cash (UBSA Bank Bill 0 + yrs) 0.1 0.4 1.8 2.2 2.6
Change over the month
Australian govt. 10 yr bond yield 2.54% -2 bps
AUD/USD $0.74 -$0.01

Australian Shares (S&P/ASX 200 Accumulation Index)

Australian shares fell 2.8% over the month of May. Sector performance was mixed. Primary contributors to performance were Industrials (4.7%), followed by Telecommunication Services (3.4%) and Energy (2.0%). Weakest performing sectors were Financials (-7.7%), Health Care (-2.1%), and Property Trusts (-1.1%). Trailing P/E Ratio is currently at 19.1x and at elevated levels when compared to the long-term average of 15.5x. The VIX was at 11.9 indicating very low levels of market volatility.

International Shares (MSCI World ex Australia, Net $A)

International shares on an unhedged basis rose 2.8% in May compared to international shares on a hedged basis which rose 1.6%. Currency impact over the month was material. The index finished trading at a P/E Ratio of 21.8x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares rose 3.4% over the month. The index ended trading at a P/E Ratio of 15.25x.

AREITs (S&P/ASX 200 A-REIT Accumulation Index)

Australian listed property fell 1.1% during the month. The sector ended trading at approximately 3.0% discount to Net Asset Value with forecast earnings yield for 2017 at 5.7%. Gearing on a look-through basis was at 29.0%.

G-REITs (FTSE EPRA/NAREIT Developed ex-Australia Index)

G-REITs on an unhedged basis rose 1.6% and on a hedged basis increased by 0.7%. Currency impact over the month was material.

Australian Direct Property (Atchison Consultants Unlisted Property Funds Index)

Australian direct property posted a return of 0.2% over the month. Capitalisation rates across property sectors trending downwards. Cap rates across office, industrial and retail properties are currently in the range of 6.0% – 8.5%.

Australian Fixed Interest (Bloomberg AusBond Composite Index)

Australian fixed interest rose 1.2% over the month. Australian government 10-year bond yields fell 2 bps to 2.54%. Single A corporate credit spreads marginally fell from 0.82% to 0.79%.

International Fixed Interest (Citigroup World Govt., Hedged to AUD)

International fixed interest rose 0.6% over the month. The 10-year US government bond yields fell 8 bps to 2.21% and US corporate investment grade credit fell 7 bps to 1.50%.

Australian Economy

Private business surveys indicated that the Australian economy had begun 2017 on a positive note with improvement in business conditions, centred on the goods sectors (construction and manufacturing), as well as household services. Retail, however, remained a weak spot and continued trending downwards. Retail Sales increased 2.5% year-on-year in March. Out of cycle interest rate hikes by the major banks may force some mortgage holders to tighten their belts. The surveys also reported an improvement in employment conditions and capex early in 2017.

Global Economy

Although official March quarter GDP figures were still outstanding for most of the world’s key economies, available data suggested that growth remained resilient in the Euro area as a firm job market and stronger global demand were supporting economic sentiment. The political climate was also improving following the victory of centrist Emmanuel Macron in the first round of the presidential elections on 23 April. The ECB decided to keep its policy rate unchanged at its meeting on 27th April with its asset purchase program at 60 billion euros a month to be continuing until the end of this year.

In a surprise move on 18th April, UK Prime Minister Theresa May called a snap general election to be held on 8th June. The political move sought to strengthen her hand in Brexit negotiations and to give her a clear mandate. Meanwhile, the UK’s economic strong resilience observed since last year’s referendum started to fade as consumers seemed to be feeling the impact of weak wage growth and high inflation. As a result, GDP growth slowed to a one-year low in Q1.

In the US, GDP growth of 0.7% over the year to March 2017 disappointed. The “advanced” estimates released by the Bureau of Economic Analysis attributed the slowdown in real GDP growth to a deceleration in personal consumption expenditures, downturns in private inventory investment and in state and local government spending. This was partly offset by an upturn in exports and accelerations in both non-residential and residential fixed investment. The seasonally adjusted Markit US Composite PMI Output Index remains high at 53.2 indicating towards expansion of the economy.

Economic growth in Japan strengthened, driven by a weak yen and strong global demand. In March, exports rose at the fastest pace in over two years and expanded at a double-digit rate for the second consecutive month. The strong rebound in exports since late 2016 prompted business sentiment to improve. Moreover, the economy was benefiting from a declining unemployment rate, which decreased to a 22-year low in March.

In China, GDP growth increased to 6.9% year-on-year in March 2017, driven by strong investment among private companies and healthy external demand, which translated into an acceleration in manufacturing output. Moreover, the real estate sector continued defying the authorities’ attempt to cool the property market and recorded substantial gains. Consequently, stronger-than-expected growth in China was supporting the outlook for Asia ex-Japan economies.

Table 1: Market Performance – Periods to 30 April 2017

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares 1.0 6.7 17.8 7.3 11.0
International Shares ($A) 3.6 7.0 16.9 13.7 17.7
Emerging Market Shares ($A) 4.2 9.6 21.6 9.3 8.4
Australian Listed Property 2.6 7.5 5.8 15.5 16.2
International Listed Property ($A) 3.2 4.2 5.1 13.2 15.3
Australian Direct Property 0.2 3.1 13.0 12.6 11.0
Australian Fixed Interest 0.8 1.4 2.6 4.9 4.9
International Fixed Interest (Hedged) 0.7 1.6 1.7 5.7 5.8
Cash (UBSA Bank Bill 0 + yrs) 0.2 0.4 1.9 2.3 2.6
Change over the month
Australian govt. 10 yr bond yield 2.56% -25 bps
AUD/USD $0.75 -$0.01

Australian Shares (S&P/ASX 200 Accumulation Index)

Australian shares rose 1.0% over the month of April. Sector performance was mixed. Primary contributors to performance were Industrials (4.4%), followed by Information Technology (3.9%) and Health Care (3.2%).  Weakest performing sectors were Telecommunication Services (-9.9%), Consumer Staples (-2.6%), and Energy (-0.6%). Trailing P/E Ratio is currently at 19.1x and at elevated levels when compared to the long-term average of 15.5x. The VIX was at 11.4 indicating very low levels of market volatility.

International Shares (MSCI World ex Australia, Net $A)

International shares on an unhedged basis rose 3.6% in April compared to international shares on a hedged basis which rose 1.1%. Currency impact over the month was material. The index finished trading at a P/E Ratio of 22.5x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares rose 4.2% over the month. The index ended trading at a P/E Ratio of 15.2x.

AREITs (S&P/ASX 200 A-REIT Accumulation Index)

Australian listed property rose 2.6% during the month. The sector ended trading at approximately 2.4% discount to Net Asset Value with forecast earnings yield for 2017 at 5.8%. Gearing on a look-through basis was at 29.0%.

G-REITs (FTSE EPRA/NAREIT Developed ex-Australia Index)

G-REITs on an unhedged basis rose 3.2% and on a hedged basis increased by 1.0%. Currency impact over the month was material.

Australian Direct Property (Atchison Consultants Unlisted Property Funds Index)

Australian direct property posted a return of 0.2% over the month. Capitalisation rates across property sectors trending downwards. Cap rates across office, industrial and retail properties are currently in the range of 6.0% – 8.5%.

Australian Fixed Interest (Bloomberg AusBond Composite Index)

Australian fixed interest rose 0.8% over the month. Australian government 10-year bond yields fell 25 bps to 2.56%. Single A corporate credit spreads marginally rose 1bp to 0.86%.

International Fixed Interest (Citigroup World Govt., Hedged to AUD)

International fixed interest rose 0.2% over the month. The 10-year US government bond yields fell 18 bps to 2.30% and US corporate investment grade credit rose 3 bps to 1.57%.

Australian Economy

A rebound in GDP over the December 2016 quarter expanding 1.1% confirms that Australia is continuing to avoid a recession.  In fact, due to Australia’s flexible economy, we are on track to take out the Netherlands for the longest period without a recession (102 quarters without a recession versus Netherland’s record of 103 quarters without a recession).  The December quarter rebound of 1.1% was on the back of; stronger consumer spending, housing investment, public demand and export volumes.  The cash rate is expected to remain on hold at the record low of 1.5% even though Sydney and Melbourne residential house prices are uncomfortably hot.

Global Economy

The International Monetary Fund (IMF) published their World Economic Outlook in April 2017.  Conclusions drawn from their analysis indicates that there has been consistently good economic news since the summer of 2016, and it is starting to add up to a brightening global outlook.  The World Economic Outlook (WEO) has raised its projection for 2017 global growth to 3.5%, up from recently forecast 3.4%.  The 2018 forecast holds steady, with the world’s economy’s growth improvements in 2017 (3.5%) and 2018 (3.6%) are broadly based, although growth remains tepid in many advanced economies, and commodity exporters continue to struggle.

According to the IMF, activity is projected to pick up markedly in emerging markets and developing economies because conditions in commodity exporters, experiencing macroeconomic strains are gradually expected to improve, supported by the partial recovery in commodity prices.  While growth is projected to remain strong in China and many other commodity importers. In advanced economies, the pick-up is primarily driven by higher projected growth in the US, where activity was held back in 2016 by inventory adjustment and weak investment.

For advanced economies, projected growth has been revised upward in the US, reflecting the assumed fiscal policy easing and an expected uptick in confidence, especially after the November elections, will reinforce the cyclical momentum and strengthen the US dollar coupled with higher US Treasury interest rates.  The outlook has also improved for Japan and Europe based on a cyclical recovery in global manufacturing and trade that started in the second half of 2016.

Downward revisions to growth forecast are centred on Latin America and the Middle East, reflecting; continued adjustment to the decline in their terms of trade in recent years, oil production cuts, and idiosyncratic factors.  The 2017 and 2018 growth forecasts have been marked up for China, reflecting stronger-than -expected policy support, as well as for Russia, where activity appears to have bottomed out and higher oil prices bolster the recovery.

To preserve global expansion necessitates policymakers to avoid protectionism measures and to do more to ensure that gains from growth are shared more widely.  Key areas for collective action include; preserving an open trading system, safeguarding global financial stability, achieving equitable tax systems, continuing to support low-income countries, and mitigating and adapting to climate change.

Table 1: Market Performance – Periods to 31 March 2017

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares 3.3 4.8 20.5 7.5 11.1
International Shares ($A) 1.8 0.9 15.6 12.8 16.4
Emerging Market Shares ($A) 3.3 5.8 18.2 8.0 7.2
Australian Listed Property 0.6 -0.3 6.0 16.7 16.9
International Listed Property ($A) -0.7 -3.0 2.5 13.1 14.9
Australian Direct Property 2.2 3.3 13.3 12.7 11.1
Australian Fixed Interest 0.4 1.2 2.1 5.0 5.0
International Fixed Interest (Hedged) 0.0 0.2 1.0 5.7 5.8
Cash (UBSA Bank Bill 0 + yrs) 0.2 0.4 1.9 2.3 2.6
Change over the month
Australian govt. 10 yr bond yield 2.81% 6 bps
AUD/USD $0.76 -$0

Australian Shares (S&P/ASX 200 Accumulation Index)

Australian shares rose 3.3% over the month of March.. All sectors posted positive returns, led by strong performance from Utilities (6.3%) followed by Healthcare (5.5%), and Consumer Stables (5.4%).  The poorest performing sector was Telecom Services (+0.2%), Materials (+0.4%), and A-REITs (+0.6%).). Trailing P/E Ratio is currently at 18.5x and at elevated levels when compared to the long-term average of 15.9x. The VIX is at 13.8 indicating very low levels of market volatility.

International Shares (MSCI World ex Australia, Net $A)

International shares on an unhedged basis rose 1.8% in March compared to international shares on a hedged basis which rose 0.9%. Currency impact over the month was material. The index finished trading at a P/E Ratio of 22.5x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares rose 3.3% over the month. The index ended trading at a P/E Ratio of 15.3x.

AREITs (S&P/ASX 200 A-REIT Accumulation Index)

Australian listed property rose 0.6% during the month. The sector ended trading at approximately 6.6% discount to Net Asset Value with forecast earnings yield for 2017 at 5.7%. Gearing on a look-through basis was at 29.0%.

G-REITs (FTSE EPRA/NAREIT Developed ex-Australia Index)

G-REITs on an unhedged basis fell -0.7% and on a hedged basis, fell by -1.5%. Currency impact over the month was material.

Australian Direct Property (Atchison Consultants Unlisted Property Funds Index)

Australian direct property posted a return of 2.2% over the month. Capitalisation rates across property sectors trending downwards. Cap rates across office, industrial and retail properties are currently in the range of 6.0% – 8.5%.

Australian Fixed Interest (Bloomberg AusBond Composite Index)

Australian fixed interest rose 0.4% over the month. Australian government 10-year bond yields fell 2 bps to 2.73%. Single A corporate credit spreads declined 97 bps to 0.91%.

International Fixed Interest (Citigroup World Govt., Hedged to AUD)

International fixed interest remained flat over the month. The 10-year US government bond yields fell 4 bps to 2.38% and US corporate investment grade credit spread fell 1 bps to 1.57%.