Overseas developed shares experienced positive performance in August 2018, with gains mostly driven by United States (US) stocks reaching all-time highs on the S&P 500. The MSCI World ex Australia Index (Unhedged (UH)) rose 4.1% and overseas small caps returned 5.1%, the strongest return over the month. Outside the US, markets generally declined with large losses particularly evident in some emerging markets, as economic hardship intensified in Turkey and Argentina.
Trade tensions also continued to weigh on market sentiment, as USD16 billion worth of tariffs on China came into play in early August, while the Trump administration continues to discuss plans to implement a further USD200 billion worth of tariffs. As a result of the sustained tariff news affecting China, the Chinese SSE Composite fell 5.3% over the month. Meanwhile, the US relationship with Mexico turned positive after reaching a trade agreement to replace the North American Free Trade Agreement (NAFTA), while negotiations with Canada are currently at a standstill.
Attention was on Italy due to its newly elected government’s release of its budget plans, which could see the nation break the European Union’s 3% deficit limit.
Global monetary policy continues to turn less stimulative, as major central banks gradually remove their support. At the annual Economic Policy Symposium in Jackson Hole, the US Federal Reserve (Fed) chair defended the gradual rate increases and all but guaranteed that another hike will be coming next month. The Bank of England increased its benchmark rate in early August and the currency turmoil in emerging markets caused Argentina to raise its rate to 60%. Domestically, the Reserve Bank of Australia (RBA) kept the cash rate on hold at 1.5% for another month.
Over to the US, overall positive economic data and solid Q2 earnings reports released over August helped to contain market volatility. Consumer confidence reached its highest since October 2000, while Q2 gross domestic product (GDP) growth was revised upward from an initial estimate of 4.1% to 4.2%. Early August saw Apple become the first publicly-traded US company to hit a market cap of USD1 trillion, while technology stocks, such as Tesla, Facebook and Twitter experienced slowed growth. The US dollar continues to strengthen, as higher rates and faster domestic growth have attracted inflows. As a result of a stronger US dollar, gold prices declined to an eight-month low during August. The steep depreciation in emerging market currencies also continued, as the Turkish Lira and Argentinian Peso declined.
Australia’s housing market downturn has continued for the eleventh consecutive month, as national dwelling values fell by 0.3% over the month, to finish 2.2% below their peak in September 2017. The end of August also saw the Australian political landscape in disarray, as Scott Morrison was elected in a Liberal party room ballot as Australia’s new prime minister. The leadership upheaval pushed Australian business confidence to its lowest levels in around two years (NAB survey), even as business conditions rebounded in August.
The Australian equity market slightly underperformed its hedged international counterpart index over the month, as the S&P/ ASX 300 Index increased 1.4%. The S&P/ASX mid 50 Index was the strongest relative performer, increasing 2.9%, while the S&P/ASX 50 was the weakest, increasing 1.0% over the month. The best performing sectors were Telecom Services (+13.0%) and IT (+12.2%), while the weakest performing sectors were Materials (-4.9%) and Energy (-1.2%). The largest positive contributors to the return of the index were CSL, Telstra and Wesfarmers, with absolute returns of 15.7%, 9.8% and 4.4% respectively. In contrast, the most significant detractors from performance were BHP Billiton, Rio Tinto and Origin Energy with absolute returns of -4.3%, -10.0% and -18.6% respectively.
The broad MSCI World ex Australia (NR) Index increased 1.5% in hedged terms and 4.1% in unhedged terms over the month, as the AUD depreciated against most major currencies. The strongest performing sectors were IT (+9.5%) and Healthcare (+5.8%), while Energy (-0.8%) and Materials (-0.4%) were the worst performers. In AUD terms, the Global Small Cap sector was up 5.1% while Emerging Markets were flat over August. Over August, the NASDAQ increased 5.7%, the S&P 500 Composite Index increased by 3.3% and the Dow Jones Industrial Average increased by 2.6%, all in USD terms. In local currency terms, major European equity markets experienced negative returns as the FTSE 100 (UK) decreased 3.3%, the DAX 30 (Germany) decreased by 3.4% and the CAC 40 (France) decreased by 1.9%. In Asia, the Japanese TOPIX (-1.0%), Chinese SSE Composite (-5.3%) and the Hang Seng (-2.1%) all decreased while the Indian S&P BSE 500 (+3.5%) increased over August.
The AUD depreciated against the USD over August, ultimately finishing with a lower Trade Weighted Index of 62.2 on 31 August 2018. The AUD depreciated against the Yen (-2.5%), the Pound Sterling (-1.5%), the USD (-2.7%) and against the Euro (-2.0%). On a trade-weighted basis, the local currency decreased 2.0% over the month.