Equity markets extended their rally in November with major indices reaching new highs. Unhedged Overseas Small Caps led the rally returning 5.2% over the month, followed by Unhedged Overseas Developed Shares which increased by 4.7%.
Markets were encouraged by reported progress on trade negotiations between the US and China, coupled with stable economic readings in the US and initial signs that growth deterioration in Europe may have bottomed.
Investors favoured growth and higher beta stocks, while value, quality and momentum factors lagged. Geopolitical and policy risks remain heightened, as Brexit uncertainties persist in light of upcoming general elections and President Trump signed two bills aiming to protect human rights of protesters, following continued protests in Hong Kong.
In Spain, the Socialist Party failed to win the majority, requiring a coalition to form the government. Tension in the Middle East and Latin America added to market uncertainties.
Major central banks, with the exception of China, left policies unchanged. Rising debt levels have supported global growth since the 2008 financial crisis. A decade of easy money has meant global debt is now at a record high of $250 trillion, increasing the global debt-to-GDP ratio to 320%. Officials have indicated, during the IMF and World Bank annual meetings, that monetary policy may have reached its limits and are considering greater use of fiscal policy as a tool to manage business cycles and support economic growth.
Global growth continued to slow, most notably in China. The OECD estimates that global growth is now at its slowest rate since the financial crisis and has cut global GDP projections to 2.9% for 2020. In response to slowing growth and weaker demand, China’s central bank cut the interest rate on its open market operation and medium-term loans for the first time since early 2016. Aside from trade wars and a sharp Chinese slowdown, additional investor concerns that have recently come to light include climate change, digitalisation and deglobalisation. Manufacturing is in a recession globally and the latest readings for the US also confirms slowing industrial output. However, economic confidence improved in Europe over November. Christine Lagarde, the new president of the European Central Bank, confirmed that monetary policy will continue to support growth and called on Eurozone governments to do more to stimulate the economy. Within emerging markets, seven countries lowered their monetary policy benchmarks in November
Bond indexes posted mixed returns over the month. US Treasury yields generally rose as the yield curve steepened. Over November, the US Treasury yield curve shifted slightly upward while the spread between corporate bonds Treasuries rose to 1.05%. Total global negative yielding debt pulled back from the record highs in August 2019 as global yields rebounded slightly.
The Australian equity market rebounded from October, with the S&P/ASX300 returning 3.2%, performing in line with its hedged overseas counterpart. Domestic small caps also achieved a positive return over November, returning 1.6%. IT (+10.6%) and Healthcare (+8.8%) were the best performing sectors over the month, while the weakest performing sectors were Financials (-2.0%) and Utilities (-0.5%).
- Following the Reserve Bank of Australia’s (RBA) decision to leave the cash rate unchanged in early November, the RBA has again decided to leave the cash rate unchanged in its early December 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 very low and a number of central banks around the world have eased monetary policy in response to the subdued inflationary environment. Employment growth has continued strongly, despite the unemployment rate recently remaining steady at 5.3% over recent months. The unemployment rate is expected to remain at this level for some time, before dropping just under 5.0% in 2021. 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% in 2020 and 2021. There are further signs of a turnaround in house prices in Sydney and Melbourne, with the growth in housing credit remaining low. The easy monetary policy this year has lowered the exchange rate, supporting activity across a range of industries. The Board has noted that it 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 decreased by 19,000 in October, below expectations for a 15,000 rise while September figures were revised to an increase of 12,500. The unemployment rate increased to 5.3% for October, above expectations for 5.2%. The participation rate decreased to 66.0%, below expectations for 66.1%. Part time jobs decreased by 8,700 and full time jobs decreased by 10,300.
- Australian building approvals decreased 8.1% month-on-month to be down 23.6% for the year to October, compared to previous levels of 7.2% and -17.0% (revised) for respective periods ending September.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 48.1 in November, below consensus for 49.2, and below the 48.3 recorded in October. Of the 18 manufacturing industries, Apparel, Leather & Allied Products, Food, Beverage & Tobacco Products and Paper Products were the top contributors, while Wood Products, Printing & Related Support Activities and Furniture & Related Products were the largest detractors over the month. The ISM Non-Manufacturing Index recorded 53.9 in November, below consensus for 54.5 and below the 54.7 recorded in October. Of the 18 non-manufacturing industries, the top performers in November were Real Estate, Rental & Leasing, Health Care & Social Assistance and Arts, Entertainment & Recreation. Agriculture, Forestry, Fishing & Hunting, Mining, Wholesale Trade, Construction and Other Services were the industries which reported a decrease over the month.
- US Non-Farm Payrolls increased by 266,000 in November, above the previous 156,000 increase (revised) for October. The unemployment rate decreased to 3.5% over November.
- US gross domestic product (GDP) second estimate for Q3 2019 is 2.1% quarter on quarter (QoQ) annualised, above expectations for 1.9%.
- The Caixin Manufacturing PMI in China recorded 51.8 in November, above expectations for 51.5. The indicator signalled a further modest improvement in the health of China’s manufacturing sector, increasing for the fourth successive month.
- A preliminary estimate of the European Core Consumer Price Index (CPI) recorded 1.3% over the year to November, above expectations for 1.2%.
- The Eurozone composite PMI remained at 50.6 in November and above expectations for 50.3.
- The final estimate recorded for Q3 2019 Eurozone seasonally adjusted GDP was 1.2% for year-on-year (YoY) and 0.2% QoQ.
The Australian equity market performed in line with its hedged overseas counterpart index over the month, as the S&P/ASX 300 Index increased 3.2%. The S&P/ASX Mid 50 was the strongest relative performer, increasing 4.1%, while the S&P/ASX Small Ords was the weakest, increasing 1.6% over the month.
The best performing sectors were IT (+10.6%) and Healthcare (+8.8%), while the weakest performing sectors were Financials (-2.0%) and Utilities (-0.5%). The largest positive stock contributors to the index return were CSL, BHP and Telstra with absolute returns of 10.8%, 6.8% and 10.9% respectively. In contrast, the most significant detractors were Westpac, NAB and ANZ with absolute returns of -12.6%, -9.0% and -6.6%, respectively.
The broad MSCI World ex Australia (NR) Index increased 3.2% in hedged terms and 4.7% in unhedged terms over the month, as the Australian dollar (AUD) depreciated against most major currencies. The strongest performing sectors were IT (+7.3%) and Healthcare (+6.7%), while Utilities (-0.1%) and Real Estate (+0.1%) were the worst performers. In AUD terms, the Global Small Cap and Emerging Market sectors were up 5.2% and 1.7% respectively over November.
Over November, the NASDAQ increased 4.5%, the S&P 500 Composite Index increased 3.6% and the Dow Jones Industrial Average also increased 4.1%, all in USD terms. In local currency terms, major European equity markets experienced positive returns as the CAC 40 (France) increased 3.1%, the DAX 30 (Germany) increased 2.9% and the FTSE 100 (UK) increased 1.8%. Returns were mixed in Asia, as the Japanese TOPIX (+1.9%) and the Indian S&P BSE 500 (+1.2%) increased, whilst the Hang Seng (-2.0%) and the Chinese SSE Composite (-1.9%) decreased over November.
The Real Assets sector experienced mixed returns over November. The FTSE Global Core Infrastructure index fell by 0.8% and the Global Real Estate Investment Trusts (REITs) index fell by 0.9% over the month (both in AUD hedged terms). Domestic REITs increased 2.3% over November, while Australian Direct Property (NAV) returned 0.4% on a one-month lagged basis.
Global bond markets were broadly negative over November as yields increased across most major regions. The Barclays Capital Global Aggregate Bond Index (Hedged) decreased 0.2% over the month and the FTSE World Government Bond (exAustralia) Index (Hedged) decreased 0.5%. Tenyear bond yields increased in the US (+10bps to 1.79%), Japan (+6bps to -0.08%), Germany (+5bps to -0.35%) and the UK (+16bps to 0.70%). Twoyear bond yields experienced positive movements over the month with UK (+4bps to 0.55%), German (+2bps to -0.64%), Japanese (+6bps to -0.17%) and US (+8bps to 1.63%) bond yields increasing.
Returns for domestic bondholders were positive over November, with 10-year yields (-10bps to 1.04%), five-year yields (-15bps to 0.74%) and two-year yields (-16bps to 0.70%) all decreasing. Of the Bloomberg Ausbond indices, the Inflation Index produced the highest return, increasing 1.6% over the month.
The AUD Trade Weighted Index decreased to 59.0 over November, down 1.7% from the previous month. The AUD depreciated against most major currencies, including the Euro (-0.8%), Japanese Yen (-1.4%), US dollar (-1.8%) and Pound Sterling (-2.0%).
Iron Ore increased 4.8% over November, finishing the month at $87.0 per metric tonne. The S&P GSCI Commodity Total Return Index increased 1.8% over the month. Gold prices finished the month at US$1,461.54 per ounce, decreasing 3.2% over the period, while the oil price increased 4.0% to $62.62 per barrel over November.