Equity markets returned mixed results during October. The US equity market rallied higher with major US indices reaching fresh highs. Hedged Overseas Developed Shares increased by 1.8% over the month. Markets were encouraged by the progress made on the US-China trade negotiations front and economic readings, which suggest that global growth may have stabilised.
Investors favoured growth and higher beta stocks, while the momentum factor lagged. Uncertainties around Brexit persist despite the negotiation of the withdrawal agreement and the European Union’s decision to grant the UK a three-month extension on Brexit negotiations. Central banks continued to ease, which further supported investor sentiment.
Consistent with expectations, the US Fed cut rates for the third time in 2019 by 25 basis points to a range of 1.50% – 1.75%, despite relatively solid economic growth, while the Reserve Bank of Australia lowered its policy rate to a new record low of 0.75%. A number of emerging markets, including India, Brazil and Russia also eased, boosting market performance by 2.0% over the month. Growth stocks outperformed value stocks over the month and within sectors, Healthcare (+2.8%) and IT (+1.7%) performed strongly in global markets.
Despite signs that global growth may be stabilising, growth continues to be hurt by rising trade barriers and increasing geopolitical tensions, and trade uncertainty continues to weigh on investor sentiment and outlook.
While policy makers have taken steps to ease, they are yet to undertake more aggressive actions utilized in prior growth downturns. Mario Draghi has handed over the presidency of the ECB to former IMF leader, Christine Lagarde, after eight years as the bank’s president. Manufacturing is in a global recession, with PMIs particularly in the Eurozone, indicating contracting activity. Service indicators generally remain in expansionary territory, but have weakened over the past few months.
Developed sovereign bond indices returned poor results over October. US Treasury yields were mixed as the yield curve steepened, while credit spreads contracted. Total global negative yielding debt has reached record levels in 2019, following a global resurgence in easy monetary policy. Low long-term rates suggest weak long-term economic growth. Over October, the US Treasury yield curve steepened, with 3-month Treasury yields declining by 34bps to 1.52%. Meanwhile, 10- year and 30-year Treasury yields rose by 1bp and 5bps to 1.73% and 2.21%, respectively. The spread between Treasuries and corporate bonds fell by 5bps to 1.10%.
The Australian equity market fell from September, with the S&P/ASX300 returning -0.4%, underperforming its hedged overseas counterpart by 2.2%. Domestic small caps also performed poorly over October, returning -0.5%. Healthcare (+7.3%) and Industrials (+2.9%) were the best performing sectors, while the weakest performing sectors were IT (-3.2%) and Financials (-2.9%).
- Following the Reserve Bank of Australia’s (RBA) cut in the cash rate in early October, the RBA decided leave the cash rate unchanged in its early November meeting at 0.75% per annum (pa). RBA Governor, Philip Lowe, noted that the outlook for the global economy remains reasonable, however risks are tilted to the downside due to trade disputes and a slowdown in international trade, as businesses scale back future spending plans as a result of increased uncertainty.
- Interest rates around the world are quite low and a number of central banks around the world have eased monetary policy in response to the subdued inflationary environment. The outlook for the Australian economy has not changed from the past 3 months. Employment growth has continued strongly, despite the unemployment rate recently remaining steady at 5.3% over recent months. Inflation pressures remain subdued and this is likely to continue for some time. The RBA estimates both headline and underlying inflation to be close to 2.0% over 2020 and 2021. There are tentative signs that house prices are now stabilising in Sydney and Melbourne, with credit conditions also stabilising. The Board has noted that is reasonable to expect an extended period of low interest rates in order to reach full employment and achieve the inflation target in Australia.
- Australian seasonally adjusted employment increased by 14,700 in September, below expectations for a 15,000 rise while August figures were revised to an increase of 37,900. The unemployment rate decreased to 5.2% for September, below expectations for 5.3%. The participation rate decreased to 66.1%, below expectations for 66.2%. Part time jobs decreased by 11,400 and full time jobs increased by 26,200.
- Australian building approvals increased 7.6% month-on-month to be down 19.0% for the year to September, compared to previous levels of -0.6% and -21.1% (revised) for respective periods ending August.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 48.3 in October, below consensus for 48.9, and above the 47.8 recorded in September. Of the 18 manufacturing industries, Furniture & Related Products, Printing & Related Support Activities and Food, Beverage & Tobacco Products were the top contributors, while Primary Metals, Apparel, Leather & Allied Products and Textile Mills were the largest detractors over the month. The ISM NonManufacturing Index recorded 54.7 in October, above consensus for 53.5 and above the 52.6 for September. Of the 18 non-manufacturing industries, the top performers in October were Agriculture, Forestry, Fishing & Hunting, Utilities and Professional, Scientific & Technical Services. Educational Services, Other Services, Retail Trade, Wholesale Trade and Mining were the five industries which reported a decrease over the month.
- US Non-Farm Payrolls increased by 128,000 in October, below the previous 180,000 increase (revised) for September. The unemployment rate increased to 3.6% over October.
- US gross domestic product (GDP) advanced estimate for Q3 2019 is 1.9% quarter on quarter (QoQ) annualised, above expectations for 1.6%.
- The Caixin Manufacturing PMI in China recorded 51.7 in October, above expectations for 51.0. The indicator signalled an improvement in the overall health of the sector for the third month in a row and the strongest improvement seen since February 2017.
- A preliminary estimate of the European Core Consumer Price Index (CPI) recorded 1.1% over the year to October, above expectations for 1.0%.
- The Eurozone composite PMI increased to 50.6 in October, above expectations for 50.2 and above 50.1 recorded for September.
- The advanced estimate recorded for Q3 2019 Eurozone seasonally adjusted GDP was 1.1% for year-on-year (YoY) and 0.2% QoQ.
The Australian equity market underperformed its hedged overseas counterpart index over the month, as the S&P/ASX 300 Index decreased 0.4%. The S&P/ ASX Mid 50 was the strongest relative performer, decreasing 0.3%, while the S&P/ASX Small Ords was the weakest, decreasing 0.5% over the month.
The best performing sectors were Healthcare (+7.3%) and Industrials (+2.9%), while the weakest performing sectors were IT (-3.2%) and Financials (-2.9%). The largest positive stock contributors to the index return were CSL, Sydney Airport and Macquarie with absolute returns of 9.7%, 9.3% and 2.6% respectively. In contrast, the most significant detractors were ANZ, Westpac and CBA with absolute returns of -5.8%, -4.3% and -2.7%, respectively.
The broad MSCI World ex Australia (NR) Index increased 1.8% in hedged terms and 0.4% in unhedged terms over the month, as the Australian dollar (AUD) appreciated against most major currencies.
The strongest performing sectors were Healthcare (+2.8%) and IT (+1.7%), while Energy (-3.7%) and Consumer Staples (-2.4%) were the worst performers. In AUD terms, both the Global Small Cap and Emerging Market sectors were up 0.6% and 2.0% respectively over October.
Over October, the NASDAQ increased 3.7%, the S&P 500 Composite Index increased 2.2% and the Dow Jones Industrial Average also increased 0.6%, all in USD terms. In local currency terms, major European equity markets experienced broadly positive returns as the CAC 40 (France) increased by 0.9% and the DAX 30 (Germany) increased by 3.5%, whilst the FTSE 100 (UK) decreased 1.9%. Positive returns were experienced in Asia also, as the Japanese TOPIX (5.0%), the Hang Seng (3.3%), the Chinese SSE Composite (0.8%) and the Indian S&P BSE 500 (3.9%) increased over October.
The Real Assets sector experienced broadly positive returns. The FTSE Global Core Infrastructure index returned flat and the Global Real Estate Investment Trusts (REITs) index rose by 1.8% over the month (both in AUD hedged terms). Domestic REITs increased 1.4% over October, while Australian Direct Property (NAV) returned 0.7% on a one-month lagged basis.
Global bond markets were broadly negative over October as yields increased across most major regions. The Barclays Capital Global Aggregate Bond Index (Hedged) decreased 0.3% over the month and the FTSE World Government Bond (ex-Australia) Index (Hedged) decreased 0.5%. Ten-year bond yields increased in the US (+2bps to 1.69%), Japan (+8bps to -0.14%), Germany (+17bps to -0.40%) and the UK (+14bps to 0.54%). Twoyear bond yields experienced generally positive movements over the month with UK (+14bps to 0.51%), German (+9bps to -0.66%) and Japanese (+9bps to -0.23%) bond yields increasing, whilst US (-11bps to 1.55%) bond yields decreased.
Returns for domestic bond holders were negative over October, with 10-year yields (+13bps to 1.14%), five-year yields (+11bps to 0.88%) and two-year yields (+12bps to 0.86%) all increasing. Of the Bloomberg Ausbond indices, the Bank Bill Index produced the highest return, increasing 0.1% over the month.
The AUD Trade Weighted Index increased to 60.0 over October, up 1.4% from the previous month. The AUD appreciated against most major currencies, including the Euro (+0.5%), Japanese Yen (+3.5%) and US dollar (+2.1%), but fell against the Pound Sterling (-2.4%).
Iron Ore decreased 10.8% over October, finishing the month at $83.0 per metric tonne. The S&P GSCI Commodity Total Return Index decreased 0.9% over the month. Gold prices finished the month at US$1,510.23 per ounce, increasing 2.5% over the period, while the oil price decreased 1.1% to $60.21 per barrel over October.
Source: Mercer LLC