Market Review

Australian Economy

The High Court ruled that five MP’s were not eligible to sit in parliament due to holding dual citizenship, including Deputy Prime Minister Barnaby Joyce – who got nominated for NZ citizen of the year by his fellow countrymen (pun intended). Several other MPs have also since resigned over the same issue. As a result, the government lost its lower-house majority, now entirely dependent on crossbenchers’ support to ensure political continuity/survival. Economically, Australia was in reasonable shape. Unemployment for October dropped to 5.4% with substantial gains in full-time employment. Wage growth had also picked up marginally to 2.0% year-on-year (y-o-y), an increase of 0.1% from the June 2017 reading.

Global Economy

Catalonia’s unofficial independence referendum did not cause any turbulences on a European level as it was mostly regarded a domestic issue. Madrid meanwhile suspended the power of the region’s government and officially took over the responsibilities of the independent parliament, and called fresh regional elections for 21 December 2017. Simultaneously, Spain also issued arrest warrants against former Catalan leader Carles Puigdemont and other former Catalan politicians. Meanwhile in the UK, the Bank of England was forced to increase the target interest rate by 25 basis points on the back of soaring inflation whilst Theresa May’s incompetence regarding the Brexit negotiations and other political matters becomes more evident by the week.

GDP in the US expanded 2.3% y-o-y in Q3 with an inflation rate of 2.2% y-o-y. In general, main forward-looking indicators show positive sentiment toward economic growth and unemployment decreased further to 4.1% in October. On the political front, Trump got increasingly tied into the Russian conspiracy allegations regarding the KGB’s involvement into the US election and possible collusions between Trump’s entourage and Moscow officials.

The European Central Bank (ECB) kept their interest rate policy unchanged at their October meeting. Despite ECB’s President Mario Draghi positive assessment of the eurozone economy, the quantitative easing programme got extended to September 2018, though at a slower pace of €30 billion of asset purchases a month. Euro area real GDP growth in Q3 was 2.6% y-o-y whilst inflation eased marginally to 1.4% y-o-y in October. The seasonally-adjusted unemployment rate also marginally declined to 8.9%, the lowest reading since January 2009. On the back of soaring GDP data, first interest rate hikes may be a lot earlier than commonly expected as the ECB may feel pressured to take action in order not to overheat the economy.

China’s 19th Party Congress had a relatively muted impact on markets given the lack of any surprises. Meanwhile, the Chinese economy advanced 6.8% y-o-y in the third quarter of 2017, following a 6.9% growth in the previous two periods and matching market consensus. The slight deceleration reflected poor investment dynamics partially due to stricter environmental regulations. Recent data for October suggested the economy may have lost some momentum, with the manufacturing PMI receding, trade data weakening and the housing market showing signs of stagnation.

Table 1: Market Performance – Periods to 31 October 2017

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares 4.0 4.7 16.1 6.9 10.3
International Shares ($A) 4.3 8.7 22.0 13.4 18.8
Emerging Market Shares ($A) 5.9 9.7 25.5 10.6 11.4
Australian Listed Property 2.2 4.1 7.9 10.6 12.3
International Listed Property ($A) 1.9 3.6 6.2 9.2 14.2
Australian Direct Property 0.4 3.5 13.6 13.3 11.6
Australian Fixed Interest 1.1 0.8 1.6 3.9 4.1
International Fixed Interest (Hedged) 0.5 0.9 1.0 4.5 5.2
Cash (UBSA Bank Bill 0 + yrs) 0.1 0.4 1.8 2.1 2.4
    Change over the month    
Australian govt. 10 yr bond yield 2.78% 8 bps    
AUD/USD $0.77 -$0.02    

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

Australian shares rose 4.0% over the month of October. Sector performance was positive with the weakest performing sector being Property Trusts (2.3%). Primary contributors to performance were Information Technology (8.8%), followed by Energy (6.5%), Consumer Discretionary (6.2%) and Health Care (5.6%). Trailing P/E Ratio is currently at 15.8x and is marginally above the long-term average of 15.5x. The forward P/E Ratio is at 15.9x. P/BV is at 2.0x. The VIX was at 11.3 indicating extremely low levels of market volatility.

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

International shares on an unhedged basis rose 4.3% in September compared to international shares on a hedged basis which rose 2.5%. Currency impact over the month was material. The index finished trading at a P/BV of 2.4x and a P/E Ratio of 21.5x. The forward P/E Ratio is at 17.0x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares rose 5.9% over the month. The index ended trading at a P/E Ratio of 15.8.

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

Australian listed property rose 2.2% during the month. The sector ended trading at approximately 8.2% discount to Net Asset Value with forecast earnings yield for 2017 at 5.9%. Gearing on a look-through basis was at 28.0%.

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

G-REITs on an unhedged basis rose 1.9% and 0.1% on a hedged basis. Currency impact over the month was material.

Australian Direct Property (Atchison Consultants Unlisted Property Funds Index)

Australian direct property posted a return of 0.4% over the month. Capitalisation rates across property sectors trending downwards. Cap rates across office, industrial and retail properties are currently in the range of 5.0% – 8.5%.

Australian Fixed Interest (Bloomberg AusBond Composite Index)

Australian fixed interest rose 1.1% over the month. Australian government 10-year bond yields rose 8 bps to 2.78%. Single A corporate credit spreads fell 6 bps from 0.73% to 0.67%.

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

International fixed interest rose 0.5% over the month. The 10-year US government bond yields rose 16 bps to 2.36% and US corporate investment grade credit fell 12 bps to 1.32%.

Australian Economy

Retail sales in August unexpectedly decreased by 0.6% in every Australian state and territory, following an upwardly revised 0.2% fall in July and missing market consensus of a 0.3% gain. While consumer spending was down, Australia’s trade surplus increased 22.4% to $0.99 billion in August from an upwardly revised $0.81 billion in July. Exports went up 1.0% from a month earlier to $32.23 billion while imports were almost unchanged.

Global Economy

The IMF research report, released at the end of September, warned that weather impacts may have lasting effects on economies and that the increasing global temperatures may lead to lower output, particularly in countries with warm climates. The IMF research predicts that warmer temperatures will eventually lead to agricultural output declines and a reduction in productivity. It also spells out how climate scientists are predicting more intense and destructive storms as the sea surface temperature continues to rise with their analysis suggesting that “the average country would suffer an additional 0.1% of per capita output loss every time it is hit by an average tropical cyclone, with smaller states experiencing 0.2% greater damage.” It is estimated that tropical cyclones and hurricanes have cumulatively caused damage of $548 billion worldwide during 2000 to 2014, according to the International Disasters Database.

Meanwhile in the US, the Federal Reserve (Fed) held interest rates steady but the chair Janet Yellen stated it would consider a further rate rise this year. In a unanimous decision, the Fed also said it would start normalising its balance sheet by not reinvesting payments it receives on a portfolio of government bonds and mortgage-backed securities (MBS). Starting with a tightening of a total of US$ 10 billion per month in October and gradually increasing it in quarterly intervals until US$50 billion per month at the end of 2018. It is noted that the Fed more than quadrupled the size of its balance sheet to US$4.5 trillion under Ben Bernanke, its former chairman. Considering this size, the quantitative tightening is a drop in the ocean. Meanwhile, retail sales unexpectedly fell 0.2% during August. Unemployment for September also fell unexpectedly to 4.2%. It was the lowest jobless rate since February 2001.

The European Central Bank (ECB) kept their interest rate policy unchanged at their September meeting and confirmed their asset purchase programme of €60 billion per month until December 2017. On the political front, Angela Merkel won the German elections. Despite a weaker-than-expected result, the political agenda is not expected to be substantially impacted. All PMI indicators across the region are in positive territory, indicating strong positive economic sentiment. The positive momentum was also reflected in consensus GDP forecasts. Ten European economies saw their GDP forecasts lifted including Greece and Spain. None of the economies’ projections were downgraded.

In China, all eyes are on the government’s 19th National Congress of the Communist Party on 18 October 2017. Five of the seven members of the standing committee are due to retire, and their replacements will shape the future of China’s policy. President Xi Jinping is also expected to lay out the party’s priorities for the next five years.

Table 1: Market Performance – Periods to 30 September 2017

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares 0.0 0.7 9.2 7.1 10.1
International Shares ($A) 3.4 2.5 15.4 11.8 17.7
Emerging Market Shares ($A) 0.7 5.5 19.4 8.8 10.0
Australian Listed Property 0.5 1.7 -2.8 12.2 13.0
International Listed Property ($A) 0.9 -0.6 -0.9 10.7 13.9
Australian Direct Property 1.8 3.6 14.0 13.4 11.6
Australian Fixed Interest -0.3 -0.1 -0.7 3.9 3.9
International Fixed Interest (Hedged) -0.6 0.7 -0.7 4.7 5.1
Cash (UBSA Bank Bill 0 + yrs) 0.1 0.4 1.8 2.1 2.4
Change over the month
Australian govt. 10 yr bond yield 2.70% 10 bps
AUD/USD $0.78 -$0.01

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

Australian shares were flat over the month of September. Sector performance was mixed. Primary contributors to performance were Health Care (2.2%), followed by Energy (1.2%) and Financials (1.1%). Weakest performing sectors were Telecommunication Services (-4.6%), Utilities (-3.7%) and Consumer Staple (-1.9%). Trailing P/E Ratio is currently at 15.3x and is marginally below the long-term average of 15.5x. The forward P/E Ratio is at 15.5x. P/BV is at 2.0x. The VIX was at 11.1 indicating extremely low levels of market volatility.

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

International shares on an unhedged basis rose 3.4% in September compared to international shares on a hedged basis which rose 2.4%. Currency impact over the month was material. The index finished trading at a P/BV of 2.4x and a P/E Ratio of 21.0x. The forward P/E Ratio is at 16.7x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares rose 0.7% over the month. The index ended trading at a P/E Ratio of 15.3.

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

Australian listed property rose 0.5% during the month. The sector ended trading at approximately 10.0% 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 0.9% and was flat on a hedged basis. Currency impact over the month was material.

Australian Direct Property (Atchison Consultants Unlisted Property Funds Index)

Australian direct property posted a return of 1.8% over the month. Capitalisation rates across property sectors trending downwards. Cap rates across office, industrial and retail properties are currently in the range of 5.1% – 8.5%.

Australian Fixed Interest (Bloomberg AusBond Composite Index)

Australian fixed interest fell by 0.3% over the month. Australian government 10-year bond yields rose 10 bps to 2.70%. Single A corporate credit spreads fell 4 bps from 0.77% to 0.73%.

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

International fixed interest rose 0.1% over the month. The 10-year US government bond yields fell 1 bps to 2.20% and US corporate investment grade credit fell 1 bps to 1.44%.

Australian Economy

Employment growth was stronger over recent months and increased in all states. The seasonally-adjusted unemployment rate in July was at 5.6%. Wage growth, however, remained low and was one of RBA’s major concerns. Despite the stronger conditions in the labour market, which should see some lift in incomes over time, rising levels of household indebtedness on the back of high housing prices should dampen consumer spending – which makes up more than 50% of GDP. The seasonally-adjusted GDP growth was 1.8% year-on-year (y-o-y) over the quarter to June 2017.

Global Economy

Whilst the total solar eclipse temporarily left parts of the North American continent in the moon’s shadow global equity markets were hardly impacted by rising tensions between North Korea and the United States and its allies, following the successful launch of an intercontinental ballistic missile over Japan that landed in the Pacific. In fact, all listed equity rose over the month of August (compare Table 1). Conditions in the global economy continued to improve. Labour markets have tightened further and above-trend growth is expected in a number of advanced economies.

In the US, retail sales were unexpectedly strong at 0.6% over the month of July beating market expectations by 0.2%. Consumers continued to benefit from a healthy jobs market – with an unemployment rate at a 16-year low – and healthy balance sheets while companies posted solid profits on the back of low borrowing costs and low wage growth. Essentially all business indicators in August indicated towards expansion in business activity with the IHS Markit Composite PMI returning a reading of 55.3. Meanwhile, inflation data remained sluggish with a core inflation rate for July of 1.7% y-o-y.

The euro area seasonally-adjusted unemployment rate was 9.1 % in July 2017, stable compared to June 2017. The largest decreases were registered in Croatia (from 13.2% to 10.6%) and Spain (from 19.6% to 17.1%) while France’s unemployment rate continued to hover persistently around 10%. It is France’s infamous, almost indecipherable “Code du Travail”, a mind-numbing 3,324 pages long labour code, that makes it expensive for employers to hire new workers and even more costly and difficult to fire them. Whilst Unions hold its protections sacred energetic young president, Emmanuel Macron, is determined to lighten the code by September — a centrepiece of his promise to revitalise the economy versus a touchstone of French economic life for over a century.

Whilst China’s economy advanced 6.9% y-o-y in the second quarter, inflation of 1.8% y-o-y in August seemed low when compared to other emerging economies. For the last 5 years, inflation ranged in the vicinity of around 2.0% indicating towards the Chinese authorities managing it rather successfully. The official manufacturing Purchasing Managers’ Index came in at 51.6 and the Caixin China Services PMI also rose in August to a reading of 52.7 – both above expectations indicating toward expansion. Retail sales rose 10.4% y-o-y in July of 2017, following an 11.0% increase in the previous month and missing market consensus of 10.0%.

Table 1: Market Performance – Periods to 31 August 2017

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares 0.7 0.9 9.8 5.1 10.6
International Shares ($A) 0.8 -3.5 10.1 12.1 17.4
Emerging Market Shares ($A) 2.9 2.7 18.0 8.2 11.0
Australian Listed Property 1.3 -3.7 -7.4 10.0 13.2
International Listed Property ($A) 0.9 -3.3 -4.2 10.6 14.0
Australian Direct Property 1.3 3.6 13.8 13.0 11.3
Australian Fixed Interest 0.0 -0.7 -0.7 3.9 4.2
International Fixed Interest (Hedged) 1.1 1.0 -0.1 4.9 5.4
Cash (UBSA Bank Bill 0 + yrs) 0.1 0.4 1.8 2.2 2.5
Change over the month
Australian govt. 10 yr bond yield 2.60% -4 bps
AUD/USD $0.79 -$0.01

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

Australian shares rose 0.7% over the month of August. Sector performance was mixed. Primary contributors to performance were Energy (5.7%), followed by Consumer Staple (5.3%) and Industrials (4.6%). Weakest performing sectors were Telecommunication Services (-7.4%), Financials (-2.2%) and Consumer Discretionary (-1.5%). Trailing P/E Ratio is currently at 15.5x matching the long-term average. The forward P/E Ratio is at 15.7x. P/BV is at 2.0x. The VIX was at 12.4 indicating very low levels of market volatility.

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

International shares on an unhedged basis rose 0.8% in August compared to international shares on a hedged basis which rose 0.1%. Currency impact over the month was marginal. The index finished trading at a P/BV of 2.3x and a P/E Ratio of 20.9x. The forward P/E Ratio is at 16.4x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares rose 2.9% over the month. The index ended trading at a P/E Ratio of 15.7.

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

Australian listed property rose 1.3% during the month. The sector ended trading at approximately 10.1% discount to Net Asset Value with forecast earnings yield for 2017 at 5.8%. Gearing on a look-through basis was at 28.0%.

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

G-REITs on an unhedged basis rose 0.9% and on a hedged basis increased by 0.3%. Currency impact over the month was marginal.

Australian Direct Property (Atchison Consultants Unlisted Property Funds Index)

Australian direct property posted a return of 1.3% over the month. Capitalisation rates across property sectors trending downwards. Cap rates across office, industrial and retail properties are currently in the range of 5.1% – 8.5%.

Australian Fixed Interest (Bloomberg AusBond Composite Index)

Australian fixed interest was flat over the month. Australian government 10-year bond yields fell 4 bps to 2.60%. Single A corporate credit spreads rose 3 bps from 0.74% to 0.77%.

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

International fixed interest rose 1.1% over the month. The 10-year US government bond yields fell 11 bps to 2.21% and US corporate investment grade credit rose 4 bps to 1.45%.