Growth investors would prove well positioned over February 2019 as the majority of equity markets experienced positive returns, continuing their rebound in performance from the previous month.
Overseas developed shares increased by 3.4% in hedged terms, as the Australian dollar (AUD) depreciated against the majority of major currencies. Productive trade negotiations between China and the United States (US) led positive consumer sentiment over the month, as the two parties made headway on a potential end to the trade dispute, while a scheduled increase in tariffs was suspended by the US. Avoidance of another government lock down in the US also boosted confidence.
However, the Venezuelan crisis and renewed tension between India and Pakistan was a reminder that markets are still volatile. The International Monetary Fund (IMF) cut estimates for global growth over 2019 and 2020 due to the concern of the effects on the global economy from a “no-deal” Brexit and China slowdown.
The US Federal Reserve (Fed) minutes from its January meeting revealed plans to reassess the current strategy of monetary tightening and whether further rate hikes would be needed in 2019. Markets received the news positively, boosted by the prospect of friendlier market conditions.
In Europe, the focus was still on Brexit as Theresa May held discussions with the European Commission on a potential deal. However, discussions did not appear fruitful following dispirited comments by the President of the European Commission, JeanClaude Juncker. The month ended with no clear developments, and opposition leader Jeremy Corbyn supporting a second public vote on the issue, which boosted sentiment due to the prospect of a no-Brexit scenario.
The Australian equity market outperformed its hedged international counterpart, as the S&P/ ASX 300 Index increased 6.0% over February. Australian Small cap equities also enjoyed a solid month, returning 6.8%. Performance was driven in part by a rebound across the banks as the fallout from the Royal Banking Commission proved to be less severe than expected. However, the housing situation in Australia continues to erode as prices continued to fall over February. There appears to be little support in the near future with lending standards tightening as a result of increased scrutiny from the Royal Commission.
The fall in house prices has affected forecasts by the Reserve Bank of Australia (RBA). The minutes from the RBA’s recent meeting outlined concern on the effect falling housing prices will have on inflation and growth forecasts. Monetary policy has since moved into neutral territory, with a rate cut as likely as a hike predicted for the next implemented change by the RBA.
- The RBA decided to leave the cash rate unchanged again in its early March 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. In most advanced economies, unemployment is low and wage growth has picked up. Growth in the Chinese economy has continued to slow, with authorities easing policy while also paying attention to risks in the financial sector.
- Financial conditions have eased recently after tightening towards the end of last year, where long-term bond yields have declined, consistent with the subdued outlook for inflation and lower expectations for future rate hikes in several economies. The Governor also noted that Australia’s central scenario is for the economy to grow by around 3%, driven by rising business investment, higher spending on public infrastructure and increased employment. The RBA is expecting underlying inflation to be 2% this year and 2.25% in 2020. Conditions in Sydney and Melbourne’s housing markets have continued adjusting, after the earlier large build up in prices. The RBA continues to view a low level of interest rates as ideal in supporting the current Australian economy.
- Australian seasonally adjusted employment increased by 39,100 in January, above expectations for a 15,000 rise while December figures were revised to an increase of 16,900. The unemployment rate remained at 5.0% for January, in line with expectations. The participation rate increased to 65.7%, above expectations for 65.6%. Part time jobs decreased by 26,300 and full time jobs increased by 65,400.
- Australian building approvals increased 2.5% month-on-month to be down 28.6% for the year to January, compared to previous levels of -8.1% (revised) and -22.0% (revised) for respective periods ending December.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 54.2 in February, below consensus for 55.8, and below the 56.6 recorded in January. Of the 18 manufacturing industries, Printing & Related Support Activities; Textile Mills and Computer & Electronic Products were the top contributors, while Non-metallic Mineral Products was the only industry that reported a decrease in February. The ISM Non-Manufacturing Index recorded 59.7 in February, above consensus for 57.4 and above the 56.7 for January. Of the 18 nonmanufacturing industries, the top performers in February were Transportation & Warehousing; Management of Companies & Support Services and Wholesale Trade. None of the industries reported a contraction over the month.
- US Non-Farm Payrolls increased by 20,000 in February, below the previous 311,000 increase (revised) for January. The unemployment rate decreased to 3.8% in February.
- US gross domestic product (GDP) advanced estimate for Q4 2018 is 2.6% quarter on quarter (QoQ) annualised, above expectations for 2.2%.
- The Caixin Manufacturing purchasing managers’ index (PMI) in China recorded 49.9 in February, above expectations for 48.5. The indicator signalled broadly stable operating conditions in February.
- An advanced estimate of the European Core Consumer Price Index (CPI) decreased to 1.0% over the year to February, below expectations for 1.1%.
- The Eurozone composite PMI increased to 51.9 in February, above 51.0 for January, indicating a modest improvement in growth.
- The final estimate released for Q4 2018 Eurozone seasonally adjusted GDP was 1.2% for year-on-year (YoY) and 0.3% QoQ, in line with expectations for both.
The Australian equity market outperformed its hedged international counterpart index over the month, as the S&P/ASX 300 Index increased 6.0%. The S&P/ASX Small Ords was the strongest relative performer, increasing 6.8%, while the S&P/ASX Mid 50 was the weakest, increasing 5.0% over the month.
The best performing sectors were Financials (+9.1%) and Energy (+7.8%), while the weakest performing sectors were Consumer Staples (-1.4%) and Healthcare (+1.3%). The largest positive contributors to the index return were CBA, ANZ and Westpac, with absolute returns of 8.8%, 12.4% and 10.4% respectively. In contrast, the most significant detractors from performance were Coles, Cochlear, and Stockland with absolute returns of -9.4%, -11.7% and -6.9%, respectively.
The broad MSCI World ex Australia (NR) Index increased 3.4% in hedged terms and 5.6% in unhedged terms over the month, as the AUD depreciated against most major developed market currencies. The strongest performing sectors were Information Technology (+9.1%) and Industrials (+7.3%), while Real Estate (+2.9%) and Communication Services (+3.3%) were the worst performers.
In AUD terms, the Global Small Cap sector was up 6.4% and Emerging Markets was up 2.7% over February.
Over February, the NASDAQ increased 3.4%, the S&P 500 Composite Index increased by 3.2% and the Dow Jones Industrial Average increased by 4.0%, all in USD terms. In local currency terms, major European equity markets experienced positive returns as the FTSE 100 (UK) increased 2.3%, the CAC 40 (France) increased by 5.0% and the DAX 30 (Germany) also increased by 3.1%. In Asia, the Japanese TOPIX (2.6%), the Hang Seng (2.7%) and the Chinese SSE Composite (13.8%) all increased, whilst the Indian S&P BSE 500 (-0.6%) decreased over February.
The Real Assets sector was positive for both domestic and global investors over February. The FTSE Global Core Infrastructure index increased 2.9% and Global Real Estate Investment Trusts (REITs) increased 0.4% over the month (both in AUD hedged terms). Domestic REITs posted an increase of 1.8% over February, while Australian Direct Property (NAV) returned 0.3% on a one month lagged basis.
Global bond markets were broadly negative over February as yields increased across most major regions. The Barclays Capital Global Aggregate Bond Index (Hedged) increased 0.1% and the FTSE World Government Bond (ex-Australia) Index (Hedged) decreased 0.2% over the month. Ten year bond yields increased in Germany (+3 basis points (bps) to 0.13%), in the US (+8bps to 2.72%) and in the UK (+8bps to 1.31%), whilst Japanese yields decreased (-3bps to -0.02%). Two-year bond yields experienced positive movements over the month as German bond yields increased (+1bp to -0.55%), along with the UK (+8bps to 0.83%), US (+6bps to 2.53%) and Japan (+2bps to -0.15%).
Returns for existing domestic bond holders were positive over February, with 10-year yields (-14bps to 2.10%) decreasing, whilst five-year yields (-15bps to 1.71%) and two-year yields (-14bps to 1.72%) also decreased. Of the Bloomberg Ausbond indices, the Treasury Index produced the highest return, increasing 1.0% over the month, while the Bank Bill Index return was the lowest at 0.2% over the month.
The AUD depreciated against the USD over February, finishing with a Trade Weighted Index of 60.7 on 28 February 2019. The AUD appreciated against the Japanese Yen (0.2%), but depreciated against the Euro (-0.6%), the Pound Sterling (-3.0%) and the USD (-2.4%). On a trade-weighted basis, the local currency decreased 1.5% over the month.
Iron Ore increased 0.6% over February, finishing the month at $85 per metric tonne. The S&P GSCI Commodity Total Return Index increased 6.4% over the month. Gold prices finished the month at US$1,315.65 per ounce, falling 0.5% over the period, while the oil price increased 6.0% to $66.02 per barrel over February.
Source: Mercer LLC