Market Review

Australian Economy

The Reserve Bank of Australia (RBA) left the cash rate target unchanged at 1.5% at their March meeting despite expectations of stronger GDP growth in 2018 (compared to 2017). The improved outlook was backed by increased investment and hiring activity, as well as a lift in exports and a pick-up in wages growth. A serious escalation of trade tensions and the domestic household debt burden were considered threats to the Australian economy. Reflecting the improved economic outlook, Phillip Lowe, Governor of the RBA, pointed out that the next move in the cash rate will be up, not down and notes that because “the pick-up in wages growth and inflation [are] only gradual […] the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy.”

Global Economy

Overall, investor sentiment during the month was muted due to rising levels of US protectionism. President Donald Trump announced tariffs on steel and aluminium imports on a range of economies (except for the EU member states, Canada, Mexico, Brazil, Argentina, South Korea and Australia) and also revealed plans to impose additional tariffs of up to US$60 billion on imports from China. This triggered an immediate response from Chinese authorities to impose tariffs on goods and services from the USA of equivalent size. Equity indices around the world plunged sharply amid fears that an escalating trade war could undermine economic growth. In the meantime, Russia went to the polls on 14th March 2018 to elect a new President and, in the least surprising result of the year, Vladimir Putin won another six-year term.

On the back of rising inflation and near full employment, the Federal Reserve (Fed) raised interest rates 25 basis points to a range of 1.5% to 1.75% in line with market expectations. The Fed also indicated further tightening if necessary. Inflation rose to 2.4% year-on-year (y-o-y) in March while the unemployment rate remained steady at 4.1%. Business sentiment dropped sharply from a reading of 55.8 (US Composite PMI) in February but remained high at 54.2 in March indicating toward economic expansion.

In Europe, the ECB held target rates unchanged at the same low levels. The ECB also confirmed its bond-purchase programme of €30 billion per month; however, indicated that it may not be extended beyond September 2018. Inflation picked up to 1.4% y-o-y in March. The seasonally-adjusted unemployment rate fell by 0.1% to 8.5% in February. Regarding the British exit from the EU bloc, commonly known as Brexit, the UK and EU managed to reach an agreement on “a large part” of the terms of the Brexit transition, but the issue of Northern Ireland remained a sticking point.

China surprisingly reported a trade deficit of US$4.98 billion in March of 2018, compared to a US$23.56 billion surplus in the same month a year earlier. It is the first trade gap since February 2017, as imports surged while exports unexpectedly fell. Despite the unexpected trade deficit in March, China’s US dollar-denominated trade surplus with the United States rose 19.4% in the first quarter to March 2018. Both, Manufacturing and Services PMI, remained above 50 and thereby indicating positive economic sentiments.

Table 1: Market Performance – Periods to 31 March 2018

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares -3.8 -3.9 2.5 3.8 7.7
International Shares ($A) -0.5 0.8 13.3 8.0 17.0
Emerging Market Shares ($A) -0.3 3.4 24.2 8.7 11.6
Australian Listed Property 0.1 -6.4 -0.8 5.4 10.6
International Listed Property ($A) 4.4 -2.2 3.9 2.1 11.7
Australian Direct Property 0.3 0.6 11.0 13.0 11.6
Australian Fixed Interest 0.8 0.9 3.3 2.4 4.3
International Fixed Interest (Hedged) 1.2 0.6 3.2 3.1 4.8
Cash (UBSA Bank Bill 0 + yrs) 0.1 0.4 1.7 2.0 2.3
    Change over the month    
Australian govt. 10 yr bond yield 2.72% -14 bps    
AUD/USD $0.77 -$0.01    

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

Australian shares fell 3.8% over the month of March. All sectors posted negative returns except for Property Trusts that were marginally positive by 0.1%. The poorest performing sectors were Telecommunication Services (-6.1%), Financials (-5.9%) and Materials (-4.3%).). Trailing P/E Ratio was at 15.4x at the end of the month and thereby around the long-term average of 15.5x. The VIX was at 16.6 indicating regular levels of market volatility.

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

International shares on an unhedged basis fell 0.5% in March compared to international shares on a hedged basis which fell 2.3%. Currency impact over the month was material. The index finished trading at a P/E Ratio of 19.8x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares fell 0.3% over the month. The index ended trading at a P/E Ratio of 14.7x.

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

Australian listed property marginally rose 0.1% during the month. The sector ended trading at approximately 10.2% discount to Net Asset Value with forecast earnings yield for 2018 at 6.7%. Gearing on a look-through basis was at 27.0%.

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

G-REITs on an unhedged basis surged 4.4% and on a hedged basis 2.7%. Currency impact over the month was material.

Australian Direct Property (Atchison Consultants Unlisted Property Funds Index)

Australian direct property posted a return of 0.3% over the month. Capitalisation rates across property sectors continued to trend downwards. Cap rates across office, industrial and retail properties were 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 14 bps to 2.72% while single A corporate credit spreads rose 6 bps to 0.69%.

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

International fixed interest marginally rose 1.2% over the month. The 10-year US government bond yields fell 2 bps to 2.84% and US corporate investment grade credit spread rose 14 bps to 1.37%.

Australian Economy

The RBA left the cash rate target unchanged at 1.5% at their February meeting. Manufacturing and Service PMI remain at high levels indicating positive economic sentiments. Retail sales increased 2.3% over the year to January 2018 and wages increased by 2.1% over the same period. Meanwhile, the International Monetary Fund (IMF) warned that weak wages growth was threatening the Turnbull government’s forecast for a budget surplus in mid-2021. The IMF expected wages to grow sub 3.0% while the government saw wages growth at 3.5% in their annual report Budget 2017 – 2018. The IMF revised Australia’s GDP growth forecast and lifted it to 3.0% for both 2018 and 2019 on the back of an upgraded global growth forecast to 3.9% of which Australia should be a beneficiary.

Global Economy

Early February the Dow Jones plunged almost 1,600 points – the biggest point decline in history during a trading day – and subsequently recovered a bit to finish the day 1,175 points down, equivalent to a 4.6% loss. Presumably, the correction was caused by an uptick in US wage and inflation data that triggered market participants to reassess the Federal Reserve’s (Fed) likely pace of policy tightening. The market drop was exacerbated by a rise in the VIX (volatility) index, which forced leveraged short volatility strategies to close their positions. By the end of the month, however, markets recovered as US macroeconomic data remained broadly resilient.

The US inflation rate was 2.2% year-on-year (y-o-y) and the unemployment rate was steady at 4.1%. Business confidence remained near all-time highs at a reading of 55.8 indicating toward expansion of the economy. Consumer confidence was also steady at near historic highs with the University of Michigan Consumer Sentiment index posting its second highest reading since February 2004.

In Europe, Angela Merkel, Chancellor of Germany, was finally able to form a Grand Coalition with the social democrats (SPD). The coalition agreement was devoid of major reforms and broadly took a pro-European stance. Meanwhile, Italy went to the polls to deliver a hung parliament with a record number of voters supporting anti-establishment and far-right parties. On the economic front, price inflation was expected to ease to a 14-months low of 1.2% y-o-y. The seasonally-adjusted unemployment rate remained steady at 8.6% in January.

In China, exports soared 44.5% y-o-y to US$171.6 billion in February 2018, far above estimates of a 13.6% growth and after a 11.1% increase in a month earlier. It was the strongest rise in outbound shipments in three years. Comparably, imports rose 6.3% to US$137.9 billion resulting in a trade surplus of US$33.74 billion. Meanwhile, China’s president Xi Jinping established his “ideas” in the party’s constitution and is set to become de facto emperor for life as precedency term limits were to be abolished putting him on par with Mao Zedong in a historic context.

Table 1: Market Performance – Periods to 28 February 2018

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares 0.4 1.7 10.1 5.1 8.0
International Shares ($A) -0.4 -0.4 16.0 8.5 17.2
Emerging Market Shares ($A) -0.9 4.3 28.8 9.1 10.9
Australian Listed Property -3.3 -6.2 -0.2 4.6 10.0
International Listed Property ($A) -3.0 -7.9 -1.1 1.5 10.9
Australian Direct Property 0.1 2.7 12.9 13.4 11.8
Australian Fixed Interest 0.3 -0.5 2.9 2.4 4.1
International Fixed Interest (Hedged) 0.1 -0.5 1.9 3.0 4.7
Cash (UBSA Bank Bill 0 + yrs) 0.1 0.4 1.7 2.0 2.3
    Change over the month    
Australian govt. 10 yr bond yield 2.86% 11 bps    
AUD/USD $0.78 -$0.03    

 

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

Australian shares rose 0.4% over the month of February. Sector performance was mixed. Primary contributors to performance were Health Care (7.0%), followed by Consumer Staple (2.2%) and Information Technology (1.3%). Weakest performing sector were Telecommunication Services (-6.0%), Energy (-3.7%) and Property Trusts (-3.3%). Trailing P/E Ratio is currently at 16.0x and above the long-term average of 15.5x. The forward P/E Ratio is at 15.7x. P/BV is at 2.0x. The VIX was at 13.6 indicating low levels of market volatility.

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

International shares on an unhedged basis fell 0.4% in February compared to international shares on a hedged basis which fell 3.6%. Currency impact over the month was material. The index finished trading at a P/BV of 2.4x and a P/E Ratio of 22.2x. The forward P/E Ratio is at 16.0x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares fell 0.9% over the month. The index ended trading at a P/E Ratio of 15.5.

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

Australian listed property fell 3.3% during the month. The sector ended trading at approximately 10.6% premium to Net Asset Value with forecast earnings yield for 2018 at 6.6%. Gearing on a look-through basis was at 25.0%.

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

G-REITs on an unhedged basis fell 3.0% and 6.4% 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 0.1% over the month. Capitalisation rates across property sectors trending downwards. Cap rates across office, industrial and retail properties are currently in the range of 5.5% – 6.5%.

Australian Fixed Interest (Bloomberg AusBond Composite Index)

Australian fixed interest rose 0.3% over the month. Australian government 10-year bond yields rose 11 bps to 2.86%. Single A corporate credit spreads fell 1 bp to 0.63%.

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 surged 28 bps to 2.86% and US corporate investment grade credit rose 1 bp to 1.23%.

Australian Economy

The economy overall seemed to be in moderate shape. Inflation was 1.8% over the year to December while the seasonally adjusted unemployment rate unexpectedly rose by 0.1% to 5.5%. Retail sales increased 2.0% during 2017. Consumer confidence reached a multi-year high in January.

Meanwhile, the RBA forecasted the economy to expand a bit above 3.0% p.a. over the next couple of years and noted the positive business conditions and the improving outlook for non-mining business investment. Increased public infrastructure investment was also supporting the economy. On the downside, the residential property market softened, particularly in Sydney, and wage growth remained weak. Household incomes were growing slowly and debt levels were high.

Global Economy

The International Monetary Fund (IMF) estimated that the global output had grown by 3.7% in 2017, which was 0.1% faster than projected. The pickup in growth was mainly attributed to upside surprises in Europe and Asia. Global growth forecasts for 2018 and 2019 had consequently been revised upward by 0.2% to 3.9% on the back of increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes.

The economy in the USA grew 2.5% over the year and inflation was at 2.1%. Survey-based manufacturing data for December and January showed soaring order books, while the US unemployment rate stood at a 17-year low of 4.1% in January 2018. Average weekly earnings increased 2.6% year-on-year in January. Despite the positive economic picture, political headlines continued to dominate during the month. Following a brief shutdown, Congress achieved a deal on 22 January to reopen the federal government through to 8 February. However, the underlying issues that caused the shutdown, including an agreement on the spending bill and Deferred Action for Childhood Arrivals (DACA, commonly known as DREAMers program), were not resolved.

In Europe, real GDP growth for the year 2017 was 2.6% while inflation was at 1.3%. The seasonally-adjusted unemployment rate remained steady at 8.7% in December. Minutes from the European Central Bank’s December meeting discussed the bloc’s “expansion” rather than “recovery”. The change of tone raised the prospect that the ECB could bring its ultra-loose monetary policy stance to an end sooner than markets had expected.  This possibility saw bond yields rise and the euro strengthen.

GDP in China expanded 6.8% annually for the year 2017, driven predominantly by private consumption and service activities. In addition, the economy was also supported by strong global demand. Conversely, investment growth continued to moderate over the quarter to December 2017 amid the government’s efforts to curb pollution and overcapacity in certain industries.

Table 1: Market Performance – Periods to 31 January 2018

Sector 1 Month
%
3 Months
%
1 Year
%
3 Years
%
pa
5 Years
%
pa
Australian Shares -0.4 3.0 12.2 7.3 9.1
International Shares ($A) 1.8 3.2 18.1 10.5 17.8
Emerging Market Shares ($A) 4.6 6.5 32.2 10.4 11.2
Australian Listed Property -3.3 2.1 7.5 7.1 11.5
International Listed Property ($A) -3.4 -1.4 3.7 2.1 12.2
Australian Direct Property 0.3 3.3 13.6 13.6 11.9
Australian Fixed Interest -0.3 0.1 2.7 2.4 4.1
International Fixed Interest (Hedged) -0.7 -0.3 2.8 2.8 4.9
Cash (UBSA Bank Bill 0 + yrs) 0.2 0.4 1.7 2.0 2.3
    Change over the month    
Australian govt. 10 yr bond yield 2.75% 17 bps    
AUD/USD $0.81 $0.03    

 

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

Australian shares fell 0.4% over the month of December. Sector performance was mixed. Primary contributors to performance were Health Care (3.2%), followed by Information Technology (2.0%) and Telecommunication Services (0.8%). Weakest performing sector were Utilities (-4.5%), Property Trusts (-3.3%) and Industrials (-2.1%). Trailing P/E Ratio is currently at 16.0x and above the long-term average of 15.5x. The forward P/E Ratio is at 16.0x. P/BV is at 2.1x. The VIX was at 12.4 indicating low levels of market volatility.

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

International shares on an unhedged basis rose 1.8% in January compared to international shares on a hedged basis which rose 3.9%. Currency impact over the month was material. The index finished trading at a P/BV of 2.5x and a P/E Ratio of 22.5x. The forward P/E Ratio is at 17.1x.

Emerging Market Shares (MSCI EM, Net $A)

Emerging market shares rose 4.6% over the month. The index ended trading at a P/E Ratio of 16.0.

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

Australian listed property fell 3.3% during the month. The sector ended trading at approximately 20.6% premium to Net Asset Value with forecast earnings yield for 2018 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 fell 3.4% and 1.2% 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 0.3% over the month. Capitalisation rates across property sectors trending downwards. Cap rates across office, industrial and retail properties are currently in the range of 5.0% – 8.5%.

Australian Fixed Interest (Bloomberg AusBond Composite Index)

Australian fixed interest fell 0.3% over the month. Australian government 10-year bond yields surged 17 bps to 2.75%. Single A corporate credit spreads fell 4 bps to 0.64%.

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

International fixed interest fell 0.7% over the month. The 10-year US government bond yields rose 18 bps to 2.58% and US corporate investment grade credit fell 8 bps to 1.22%.