Global equity markets staged a strong finish to 2019, with investors favouring riskier assets amidst declining trade war concerns and easing geopolitical tensions. US equities posted solid returns over December, as Hedged Overseas Developed Shares increased by 2.3%.
The UK and Emerging Markets rallied in December as growth sentiment and labour markets strengthened, with Unhedged Emerging Markets Shares returning 3.4% over the month. This was largely driven by renewed trade optimism and easing Brexit concerns. Investors favoured higher beta and growth stocks, while value, quality and momentum factors lagged. In terms of sectors, Technology and Financials performed strongly in global markets.
Gold reached its highest value since September, driven by global quantitative easing and prevailing low interest rates globally.
Geopolitical tensions eased slightly over the month as President Trump called off plans for tariff increases on Chinese goods, with the US and China reaching a preliminary trade agreement. In addition, Brexit uncertainties weakened following Prime Minister Boris Johnson’s majority win in the election and the British Parliament passed a withdrawal agreement. Markets also looked past political tensions in the US, where the House of Representatives passed two articles of impeachment against President Trump.
However, macroeconomic outlook continues to be uncertain with tighter financial conditions in Argentina, ongoing unrest in Iran and persisting anti-government protests in Hong Kong. The US Dollar weakened against major currencies, particularly the British pound and emerging market currencies, as investors favoured riskier assets. Many major central banks left policies unchanged in December, pausing to evaluate the effects of previous rate cuts.
The US treasury yield curve steepened in December on the back of a slight recovery in risk appetite, while global bond markets delivered mixed results. During December, emerging market debt returned 0.2%, strengthening as a result of capital inflows and a weaker US Dollar. Total global negative yielding debt pulled back modestly as bond markets recovered from a flight to quality earlier in the year, with negative yielding bonds falling to 20% of the investment grade market at year end.
The Australian equity market fell over December, with the S&P/ASX300 returning -2.0%, deeply underperforming its hedged international counterpart by 4.3%. Domestic small caps also displayed some weak performance over December, returning -0.3%. Materials (+1.8%) and Utilities (+0.8%) were the best performing sectors, while the weakest performing sectors were Consumer Staples (- 7.8%) and Communication Services (-5.5%).
- 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). Please note, the RBA did not hold a meeting in January. 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, despite 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 increased by 39,900 in November, above expectations for a 15,000 rise while October figures were revised to a decrease of 24,800. The unemployment rate decreased to 5.2% for November, below expectations for 5.3%. The participation rate remained at 66.0%, in line with expectations. Part time jobs increased by 35,700 and full time jobs increased by 4,200.
- Australian building approvals increased 11.8% month-on-month, but were down -3.8% for the year to November, compared to previous levels of 2.2% and -18.6% (revised) for respective periods ending October.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 47.2 in December, below consensus for 49.0, and below the 48.1 recorded in November. Of the 18 manufacturing industries, Food, Beverage & Tobacco Products; Miscellaneous Manufacturing were the top contributors, Chemical Products, Plastics and Rubber Products and Machinery were the largest detractors over the month. The ISM Non-Manufacturing Index recorded 55.0 in December, above consensus for 54.5 and below the 53.9 recorded in November. Of the 18 non-manufacturing industries, the top performers in December were Retail Trade, Arts, Entertainment & Recreation Agriculture and Management of Companies & Support Services while Educational Services, Real Estate, Rental & Leasing were the industries which reported a decrease over the month.
- US Non-Farm Payrolls increased by 145,000 in December, below the previous 256,000 increase (revised) for November. The unemployment rate remained at 3.5% over December.
- US gross domestic product (GDP) third estimate for Q3 2019 is 2.1% quarter on quarter (QoQ) annualised, in line with expectations.
- The Caixin Manufacturing PMI in China recorded 51.5 in December, below expectations for 51.6. The indicator signalled a further modest improvement in the health of China’s manufacturing sector, increasing for the fifth successive month.
- A preliminary estimate of the European Core Consumer Price Index (CPI) recorded 1.3% over the year to December, in line with expectations for 1.3%.
- The Eurozone composite PMI increased to 50.9 in December, above expectations for 50.6.
- 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 underperformed its hedged overseas counterpart index over the month, as the S&P/ASX 300 Index returned -2.0%. The S&P/ASX Small Caps was the strongest relative performer, decreasing -0.3%, while the S&P/ASX 50 was the weakest, decreasing -2.4% over the month.
The best performing sectors were Materials (+1.8%) and Utilities (+0.8%), while the weakest performing sectors were Consumer Staples (-7.8%) and Communication Services (-5.5%). The largest positive stock contributors to the index return were BHP, Fortesue and Rio Tinto with absolute returns of 2.2%, 10.3% and 4.0% respectively. In contrast, the most significant detractors were Woolworths Group, Telstra and CSL with absolute returns of -9.1%, -8.1% and -2.7%, respectively.
The broad MSCI World ex Australia (NR) Index decreased 0.9% in unhedged terms and increased 2.3% in hedged terms over the month, as the Australian dollar (AUD) appreciated against most major currencies.
The strongest performing sectors were Energy (+1.4%), Materials (+0.2%) and IT (+0.2%), while Industrials (-2.8%) and Real Estate (-2.7%) were the worst performers. In AUD terms, the Global Small Cap index was down -0.4% and Emerging Market index was up 3.4% over December.
Over December, the NASDAQ increased 3.5%, the S&P 500 Composite Index increased 3.0% and the Dow Jones Industrial Average also increased 1.9%, all in USD terms. In local currency terms, major European equity markets experienced positive returns as the CAC 40 (France) increased 1.3%, the DAX 30 (Germany) increased 0.1% and the FTSE 100 (UK) increased 2.8%. Returns were also positive in Asia, as the Japanese TOPIX (+1.4%), the Indian S&P BSE 500 (+0.6%), Hang Seng (+7.0%) and the Chinese SSE Composite (+6.2%) increased over December.
The Real Assets sector experienced mixed returns over December. The FTSE Global Core Infrastructure Index rose by 3.1% and the Global Real Estate Investment Trusts (REITs) Index fell by 0.1% over the month (both in AUD hedged terms). Domestic REITs decreased 4.2% over December while Australian Direct Property (NAV) returned 0.3% on a one-month lagged basis.
Global bond markets were broadly negative over December 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 0.6%. Ten-year bond yields increased in the US (+13bps to 1.92%), Japan (+6bps to -0.02%), Germany (+17bps to -0.19%) and the UK (+12bps to 0.83%). Two-year bond yields experienced mixed movements over the month with German (+3bps to -0.61%) and Japanese (+5bps to -0.13%) bond yields increasing, whilst US (-5bps to 1.58%) and UK (-2bps to 0.54%) bond yields decreased.
Returns for domestic bondholders were negative over December, with 10-year yields (+34bps to 1.37%), five-year yields (+31bps to 1.04%) and two-year yields (+23bps to 0.93%) all increasing. Of the Bloomberg Ausbond indices, the Bank Bill produced the highest return, increasing 0.1% over the month.
The AUD Trade Weighted Index increased to 60.3 over December, up by 2.2% from the previous month. The AUD appreciated against most major currencies, including the Euro (+1.6%), Japanese Yen (+2.7%), US dollar (+3.9%) and Pound Sterling (+1.7%).
Iron Ore increased 5.7% over December, finishing the month at US$92.0 per metric tonne. The S&P GSCI Commodity Total Return Index increased 2.9% over the month. Gold prices finished the month at US$1,520.50 per ounce, increasing 4.0% over the period and the oil price increased 5.9% to US$66.31 per barrel over December.
Source: Mercer LLC