The year 2019 began with a rebound in returns across a majority of growth asset classes, following significant drawdowns in equity markets and weak performances across most other growth asset classes during the fourth quarter of 2018.
Overseas developed shares in hedged terms increased by 7.1%, as the Australian Dollar (AUD) appreciated against most major currencies. The Energy sector proved to be a strong performer over the month both domestically (11.5%) and abroad (+6.6%), following the sharp upward movement in oil prices.
At the same time, the Consumer Staples sector performed more mutely across the markets, returning 2.7% domestically and 1.4% abroad.
The market recovery, in particular strong gains for United States (US) equities, arose following several influential events in the global economy. The US Government shutdown found some relief in January 2019 as President Trump temporarily reopened the Government, but the Democrat-controlled Congress remains uncompromising over funding a border wall.
Activity also spiked following the first FOMC meeting of the year where the US Federal Reserve (Fed) lowered its rate hike projections and reinforced its dovish stance. Consequently, emerging markets (EM) rallied and equity flows were at the highest level in 12 months. The MSCI Emerging Markets (NR) Index advanced 5.0% for the month and outperformed the MSCI World ex Australia (NR) Index by 0.9%. Brazil led the EM rally as its economy begins to slowly recover from the recent recession.
Meanwhile, the Chinese economy continues to face downward pressure from a number of sources. The first round of US-China trade negotiations ended with mutually positive press releases from both parties. Chinese stimulus measures worth approximately USD$600 billion were announced in an effort to target small businesses and the manufacturing sector.
Following the Fed’s decision to keep the benchmark interest rate unchanged at a range between 2.25% and 2.5%, bond markets posted gains as credit spreads tightened and yields decreased. The Barclays Capital Global Aggregate Bond Index (Hedged) increased 1.0% and the FTSE World Government Bond (ex-Australia) Index (Hedged) increased 0.8% over the month. In terms of Australian bonds, returns for existing bondholders were positive over January as 5-year yields fell 13 basis points (bps) to 1.86% and 10-year yields fell 7bps to 2.24%.
The Australian equity market underperformed its hedged international counterpart, with the S&P/ASX 300 Index increasing 3.9% during January. Australian employment indicators remained positive over the month against a continued slowing in the housing sector and on the back of reduced consumer sentiment in December 2018. At its early February meeting, the Reserve Bank of Australia (RBA) acknowledged a recent increase in downside risks globally and in Australia and consequently, revised its Australian growth forecast down to 3% for the year. The AUD appreciated against most major currencies during January, including the US dollar (USD) (3.6%). Australia’s currency appreciation was aided by higher than expected inflation results for 2018 and rising iron ore prices.
- The RBA decided to leave the cash rate unchanged again in its early February meeting at 1.50% per annum (pa), remaining at the same level since August 2016. RBA Governor, Philip Lowe, noted that the global economy grew above trend in 2018 but slowed in the second half of the year. Outlook for global growth remains reasonable, however downside risks have increased. Growth in the Chinese economy has continued to slow, with authorities easing policy while also paying attention to risks in the financial sector. Government bond yields, both domestically and globally, have recently experienced a decline. The Governor also noted that Australia’s central scenario is for the economy to grow by around 3% this year and by slightly less in 2020, due to slower export growth of resources. Over 2018, consumer price index (CPI) Inflation was 1.8% and in underlying terms inflation was 1.75%, with the RBA expecting underlying inflation to be 2% this year and 2.25% in 2020. Conditions in Sydney and Melbourne’s housing markets have weakened further and the demand for credit has slowed noticeably. The RBA continues to view a low level of interest rates as ideal in supporting the current Australian economy.
- Australian seasonally adjusted employment increased 21,600 in December, above expectations for an 18,000 rise while November figures were revised to an increase of 39,000. The unemployment rate decreased to 5.0% for December, below expectations for 5.1%. The participation rate decreased to 65.6%, below expectations of 65.7%. Part time jobs increased by 24,600 and full time jobs decreased by 3,000.
- Australian building approvals decreased 8.4% month-on-month to be down 22.5% for the year to December, compared to previous levels of -9.8% (revised) and -33.5% (revised) for respective periods ending November.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 56.6 in January, above consensus for 54.0, and above the 54.3 (revised) recorded in December. Of the 18 manufacturing industries, Textile Mills, Computer & Electronic Products and Plastics & Rubber Products were the top contributors while Nonmetallic Mineral Products was the only industry that reported a decrease in January. The ISM Non-Manufacturing Index recorded 56.7 in January, below consensus for 57.1 and below the 58.0 (revised) for December. Of the 17 non-manufacturing industries, the top performers in January were Transportation & Warehousing, Health Care & Social Assistance and Mining. Retail Trade, Educational Services and Information were the top three industries to report a contraction over the month.
- US Non-Farm Payrolls increased by 304,000 in January, above the previous 222,000 increase (revised) for December. The unemployment rate increased to 4.0% in January.
- US gross domestic product (GDP) third estimate for Q3 2018 is 3.4% quarter on quarter (QoQ) annualised, below expectations for 3.5%.
- The Caixin Manufacturing purchasing managers’ index (PMI) in China recorded 48.3 in January, below expectations for 49.6. The indicator generally signalled subdued operating conditions in the Chinese manufacturing sector for the start of 2019.
- An advanced estimate of the European Core CPI increased to 1.1% over the year to January, above expectations for 1.0%.
- The Eurozone composite PMI decreased to 51.0 in January, below 51.1 for December, registering its weakest level for five-and-a-half years.
- The advanced estimate released for Q4 2018 Eurozone seasonally adjusted GDP was 1.2% for year-on-year (YoY) and 0.2% QoQ, in line with expectations for both.
The Australian equity market underperformed its hedged international counterpart index over the month, as the S&P/ASX 300 Index increased 3.9%. The S&P/ASX Small Ords was the strongest relative performer, increasing 5.6%, while the S&P/ASX 50 was the weakest, increasing 3.5% over the month.
The best performing sectors were Energy (+11.5%) and IT (+8.8%), while the weakest performing sectors were Financials (-0.3%) and Consumer Staples (+2.7%). The largest positive contributors to the index return were CSL, Rio Tinto and Telstra, with absolute returns of 5.3%, 11.4% and 9.6% respectively. In contrast, the most significant detractors from performance were CBA, ResMed, and Challenger with absolute returns of -3.4%, -17.9% and -23.3%, respectively.
The broad MSCI World ex Australia (NR) Index increased 7.1% in hedged terms and 4.1% in unhedged terms over the month, as the Australian dollar (AUD) appreciated against most major developed market currencies. The strongest performing sectors were Real Estate (+6.7%) and Energy (+6.6%), while Consumer Staples (+1.4%) and Utilities (+1.5%) were the worst performers. In AUD terms, the Global Small Cap sector was up 6.5% and Emerging Markets was up 5.0% over January.
Over January, the NASDAQ increased 9.7%, the S&P 500 Composite Index increased by 8.0% and the Dow Jones Industrial Average increased by 7.3%, all in USD terms. In local currency terms, major European equity markets experienced positive returns as the FTSE 100 (UK) increased 3.6%, the CAC 40 (France) increased by 5.6% and the DAX 30 (Germany) also increased by 5.8%. In Asia, the Japanese TOPIX (4.9%), the Hang Seng (8.1%) and the Chinese SSE Composite (3.6%) all increased, whilst the Indian S&P BSE 500 (-1.8%) decreased over January.
The Real Assets sector was positive for both domestic and global investors over January. The FTSE Global Core Infrastructure index increased 6.5% and Global Real Estate Investment Trusts (REITs) increased 10.0% over the month (both in AUD hedged terms). Domestic REITs posted an increase of 6.0% over January, while Australian Direct Property (NAV) returned 1.3% on a one month lagged basis.
Global bond markets were broadly positive over January as yields decreased across most major regions. The Barclays Capital Global Aggregate Bond Index (Hedged) increased 1.0% and the FTSE World Government Bond (ex-Australia) Index (Hedged) increased 0.8% over the month. Ten-year bond yields decreased in Germany (-15 basis points (bps) to 0.10%), in the US (-5bps to 2.64%) and in the UK (-4bps to 1.23%), whilst Japanese (0.00%) yields remained flat.
Two-year bond yields experienced mixed movements over the month as Japanese yields decreased (-3bps to -0.17%) along with the US (-4bps to 2.47%). German two-year bond yields increased (+7bps to -0.57%), whilst UK (0.75%) yields remained flat. Returns for existing domestic bond holders were positive over January, with 10-year yields (-7bps to 2.24%) decreasing, whilst five-year yields (-13bps to 1.86%) and two-year yields (-5bps to 1.85%) also decreased. Of the Bloomberg Ausbond indices, the Inflation Index produced the highest return, increasing 1.1% over the month, while the Bank Bill Index return was the lowest at 0.2% over the month.
The AUD appreciated against the USD over January, finishing with a Trade Weighted Index of 61.6 on 31 January 2019. The AUD depreciated against the Pound Sterling (-0.5%), but appreciated against the Euro (2.3%), the Japanese Yen (1.5%) and the USD (3.6%). On a trade-weighted basis, the local currency increased 1.5% over the month.
Iron Ore increased 18.2% over January, finishing the month at $84.5 per metric tonne. The S&P GSCI Commodity Total Return Index increased 5.2% over the month. Gold prices finished the month at US$1,322.59 per ounce, rising 3.2% over the period, while the oil price increased 17.2% to $62.27 per barrel over January.
Source: Mercer LLC