Each month we call on investment consultants, JANA Investment Advisers, for the latest market updates highlighting national and international events with current market trends.  Reports from the last few months’ can be found below.

• Market Commentary July 2018

  Despite trade and geopolitical tensions persisting through July, global equities moved higher, rising 3.2% on a hedged AUD basis. Tensions between the US and China heightened further, with the Trump administration outlining an additional US$200bn worth of Chinese goods eligible for tariffs, which was soon followed by China announcing tariffs on US agriculture products. This contrasted with European negotiations, where EU President Jean-Claude Juncker pledged to work towards easing trade barriers with the US during his trip to Washington. Brexit continued to dominate headlines in the UK as the March 2019 deadline to reach a final agreement nears with no formal agreement in sight. In the Middle East, geopolitical tension between the US and Iran intensified, as President Trump continued to threaten countries who accept Iranian oil exports.

  US markets responded positively to US corporate earnings results, with the S&P 500 rising 3.6%. The vast majority (~80%) of US firms surpassed Wall Street expectations, and ten out of eleven sectors increased earnings by at least double digits. The favorable corporate backdrop is in part due to US corporate tax reductions passed into legislation at the end of 2017. This has also supported US economic activity which grew at an annualised rate of 4.1% during the second quarter. Unsurprisingly, businesses are optimistic, with the manufacturing PMI remaining well in expansionary territory. US headline inflation stood at 2.9% (YoY) in July, well above the Federal Reserves target of 2%, although this is partly due to elevated oil prices which have a temporary effect.

  The Australian equity market underperformed global peers, as the ASX 300 returned 1.3% in July. However, it did register its first monthly close above 6200 in over 10 years. Economic data released during the month was strong, as consumer confidence rose to its highest level in over four years and unemployment remained at a five-and-a-half-year low of 5.4%. The RBA left the official cash rate on hold at 1.5% for the 23rd month in a row, with no change to their forward outlook. Commodity prices pulled back during the month, resulting in the Materials sector dragging on the ASX, particularly as coking coal (-13.2%), lead (-11.0%) and zinc (-7.9%) fell over the month. Australian residential prices continued to soften, declining 0.6% in July having now fallen 1.6% over the rolling 12 months.

  Australian small caps stocks (-1.1%) underperformed the broader market, while large caps (1.6%) outperformed. Utilities (-1.4%) and IT (-1.1%) underperformed in July, while Telecommunications significantly outperformed (7.6%), primarily due to Telstra which rose 8.4% as the market reacted positively to the organisation’s restructuring plans set to take effect in October.

  The Australian dollar appreciated against most major trading partners during the month, rising against the USD (0.6%), the Yen (1.7%) and the Pound (1.3%). The strengthening Australian dollar resulted in hedged global equities (3.2%) outperforming unhedged global equities (2.5%). Germany (4.1%) and the US (3.6%) were the top performing MSCI developed markets, whilst New Zealand (-1.0%) and Australia underperformed. In aggregate, developed markets (2.5%) outperformed emerging markets (1.7%).
  Bond yields rose slightly across most developed nations, as the UK 10-year yield rose to 1.34%, the US yield rose to 2.97% and the Euro 10-year closed at 0.45%. The Australian 10-year yield rose marginally to 2.66%, while New Zealand bond yields fell slightly to 2.76%.

  
  Source: FactSet / JANA

  
  Source: FactSet / JANA

   

   

• Market Commentary June 2018

  Global equity markets saw gains in June, rising 2.4% on an unhedged and 0.3% on an AUD hedged basis, but as usual these overall returns masked significant volatility across geographies. Geopolitical tensions eased somewhat, with the historic meeting between US President Donald Trump and North Korean leader Kim Jong-un taking place in Singapore. The two leaders signed an agreement pledging to work toward complete denuclearisation of the Korean peninsula, although it was criticised for being light on specifics. Trade concerns remain elevated due to the implementation of President Trump’s steel and aluminium tariffs on products imported from the EU, Canada and Mexico on 1 June. Additionally, the US Administration announced tariffs on a further US$50 billion of Chinese goods, including US$34 billion of goods on which a 25% tariff will apply from 6 July. These trade concerns mostly weighed on emerging market equities, chiefly China.

  In the US, stronger economic data released for May, including lower unemployment and evidence of a continued gradual uptrend in inflation, gave the Federal Reserve confidence to raise interest rates for the second time this year to the target range of 1.75% - 2.00%. The Fed also signaled two further rate hikes later this year, followed by three more next year. In contrast, the European Central Bank announced that rates are not likely to rise until mid-2019 due to low inflation and modest economic growth, however it did confirm that it would cease its quantitative easing programme at the end of the 2018 calendar year as scheduled. Italian bonds had a volatile month due to uncertainty surrounding the new government’s ambitious policy agenda and fiscal sustainability, but yields fell back slightly from their steep rises during May.

  In Australia, the Financial sector saw a broad recovery following the selloff that surrounded the Royal Commission, with only six of 26 companies in the ASX 200 Financials sector ending the month with a negative return. In terms of monetary policy, the RBA left the cash rate on hold at 1.50% for the twentieth meeting in a row while balancing concerns of international trade policy uncertainty, a continued easing in housing markets in Sydney and Melbourne and ongoing weak wage growth.
  The Australian dollar continued to depreciate against the USD (-2.4%) due to contrasting monetary policy and reduced commodity prices. The AUD also depreciated against the Yen (-0.4%), the Pound (-1.6%) and the Euro (-1.4%). In aggregate, this depreciation resulted in unhedged equities outperforming during the month as seen in the MSCI World ex-Australia Index unhedged return of 2.4% compared to the hedged return of 0.3%. Australia (3.2%) and Switzerland (2.0%) were the top performing developed markets, while Hong Kong (-4.9%) and Singapore (-5.6%) underperformed. Emerging markets (-1.8%) again underperformed developed markets (2.4%).

  The S&P/ASX300 Accumulation Index rose 3.2% over the month. Small cap stocks (1.1%) underperformed the broader market, while large caps (3.7%) outperformed. Energy was the top performing sector, returning 7.7% as crude oil prices traded higher. Telecommunications significantly underperformed (-5.5%) due to Telstra’s (83% of the sector) poorly received restructure announcement and silence from the company on forecasts for its FY19 dividend.

  Relatively flat bond yields over the month across most developed markets led to small positive returns for bond investors. The US 10-year yield (2.85%), whilst down on its intra-month high of 3% due to safe-haven buying around Italy’s election, remains higher than the Australian 10-year yield (2.64%). Elsewhere in the world, UK 10-year yields rose to 1.3%, Euro 10-year yields fell to 0.3%, Japanese 10-year yields were unchanged at 0.03%, and the New Zealand 10-year yield fell to 2.8%.

   
  Source: FactSet/JANA

  
  Source: FactSet/JANA

• Market Commentary May 2018

  Global equity markets saw gains in May, rising 1.4% on an AUD hedged basis which masked significant volatility and mixed results across geographies over the month. Geopolitical tensions remained elevated, with a potential meeting between US President Donald Trump and North Korean leader Kim Jong-un still unconfirmed as at month-end, and additional levies on steel and aluminum announced by the US which will impact major trading partners. Furthermore, Italian politics rattled investors towards the end of the month, with fears of a snap election and concerns over Italy’s intentions to remain in the EU weighing on European equity markets, with the MSCI AC Europe Index falling 3.4%, while Italian 10-year bond yields rose from 1.8% to 2.8%. Meanwhile OPEC and Russia indicated they were potentially willing to wind-back oil production cuts which led to declines in global oil prices.

  The US market balanced positive economic data with challenging geopolitical conditions. The unemployment report for April was released, showing labour markets continuing to tighten as the unemployment rate fell lower to 3.9%. In addition, consumer confidence remains close to 17-year highs, US corporates continue to benefit from corporate tax reductions, and inflation edged higher to 2.5%. In contrast, Donald Trump announced the withdrawal of the US from the Iran Nuclear Deal, the US Department of Commerce targeted additional import levies on steel (25%) and aluminum (10%) and the proposed meeting between North Korean and US leaders remained unconfirmed as both parties exchanged rhetoric on the global stage. Despite the mixed news throughout the month, US equities rose 2.4% in May driven by the Technology sector which continued to move higher, while US 10-year Treasury yields briefly touched 3.1% before closing the month lower at 2.8%.

  In Australia, May saw the release of the Federal Budget for the upcoming financial year, which outlined tax cuts for low and middle-income earners, reforms to superannuation administration and over $25 billion worth of infrastructure spending. The third round of the Royal Commission into banking also began which saw the Financial sector continue to struggle, declining 0.1% over the month with the major banks falling over 1%. In aggregate, the domestic market rose 1.2%, with Health Care being the standout sector, returning 5.5%. Telecommunications was the worst performing sector primarily due to Telstra declining 12% after announcing it would struggle to meet profit estimates, in addition to being downgraded by the credit rating agency Standard & Poors.

  In regard to currency movements, the Australian dollar appreciated slightly against the USD (0.2%) but was much stronger relative to the Euro and Pound, appreciating by 3.8% against each. In contrast, the AUD depreciated 0.5% against the Japanese Yen. In aggregate, the appreciation in the AUD saw lower unhedged returns in the MSCI World Index during the month (0.5% compared to the hedged return of 1.4%). There was significant dispersion across developed market returns in May, with Canada (3.2%), the UK (2.7%) and the US (2.4%) the top performers, while Italy (-8.1%), Singapore (-5.0%) and Japan (1.7%) lagged the broader market. Emerging Markets (-3.7%) significantly underperformed Developed Markets.

  The S&P/ASX300 Accumulation Index rose 1.2% as Small Cap stocks rebounded over the month, returning 3.7% and outperforming the broader market, while Large Caps (1.0%) slightly underperformed. Healthcare (5.5%) and Consumer Discretionary (5.3%) were the top performing sectors, while Telecommunications (-10.1%) and Financials (-0.1%) detracted.

  Yields over the month fell across most developed markets, with the US 10-year yield (2.8%) remaining higher than the Australian 10-year yield (2.7%). Meanwhile the German (0.4%), UK (1.2%) and the NZ yields (2.9%) all fell over the month.

  

   

• Market Commentary April 2018

  Global markets rebounded over the month of April, following elevated volatility and risk off sentiment over February and March. With a macroeconomic environment that is beginning to appear more inflationary, bond prices were under pressure with global bond markets declining 0.4% on an AUD hedged basis and US 10 Year Treasury yields touching 3% for the first time since 2014. The political environment was mixed, with China responding firmly to US tariffs, and escalating tensions in Syria resulting in the oil price rising over 5%. This contrasted with the easing of tensions on the Korean peninsula, with reports citing North Korean leader Kim Jong-un planning to shut down the rogue nation’s nuclear test site and suspend its missile testing program.

  In the US, corporate reporting season took place which saw over three quarters of companies beat earnings expectations, with an average of 23% growth in earnings. Despite strong results, the equity market reaction was muted. The S&P500 returned 0.4% for the month as much of the benefits resulting from reductions in corporate tax rates and a stronger US and global economy appear to have already been priced in by markets. Results from large US technology stocks were exceptional despite scandals and negative sentiment over recent months, with strong results announced.

  The Australian market outperformed global peers, with the ASX300 posting a monthly return of 3.8%. Aside from Financials, all sectors saw positive performance, with Energy (10.7%), Materials (7.4%) and Health Care (7.2%) the standouts. The second round of hearings for the Royal Commission into the financial sector however, uncovered a slew of compliance failings across the industry, as markets became concerned regarding the regulatory constraints this may place on financial institutions going forward. AMP and IOOF were the hardest hit, with the findings resulting in the immediate resignation of AMP’s Chairman, CEO and General Counsel. The RBA left rates on hold at 1.50% for the 18th month in a row and while uncertain as to the timing, Governor Phillip Lowe stated the next rate rise “will come as a shock to most people”.
  
  The MSCI World Index ex-Australia (hedged into AUD) rose 2.0% over the month. The Australian dollar again depreciated against the USD, as the market responded to higher US interest rates, however it did appreciate against the Yen (1.3%), the Pound (0.2%) and the Euro (0.2%). In aggregate, the depreciation in the AUD saw superior unhedged returns in the MSCI World Index during the month (2.8%). The UK (6.8%) and France (6.7%) were the top performing markets, while the US (0.4%) and Canada (1.9%) underperformed. Emerging Markets underperformed Developed Markets, returning 1.2% in April, however over the rolling 12-months returns remain strong at 21.0%.

  The S&P/ASX300 Accumulation Index rose 3.8% over the month. Small Cap stocks (2.8%) under-performed the broader market, while Large Caps (4.1%) outperformed. Energy was the top performing sector, returning 10.7% as oil prices rallied 5.6% over the month, while Materials (7.4%) also outperformed. Diversified Financials (-2.6%) and Telecommunications (1.9%) under-performed the domestic market.
  Yields over the month rose across most developed markets leading to small negative returns for bond investors, with the US 10-year yield (2.9%) now higher than the Australian 10-year yield (2.8%) for the first time in 18 years. Elsewhere in the world, UK 10-year yields rose to 1.4%, Euro 10-year yields rose to 0.6% and the NZ 10-year yield rose to 3.0%.

  

  

• Market Commentary March 2018

  Much of the focus in March was in relation to President Trump signing a memorandum imposing tariffs on over $50bn of Chinese imports, including steel and aluminum.  This followed an earlier announcement of broad based steel and aluminium tarrifs.  The initial response from China was modest with tariffs on $3bn of US imports, including wine, fresh fruit and nuts, however, it did spark fears of an escalating trade war.  Also contributing to the equity market weakness were concerns surrounding the ‘FANG’ stocks (Facebook, Amazon, Netflix, Google/Alphabet), which sold-off sharply following Facebook’s privacy breach and President Trumps rhetoric on Amazon detracting value from the US economy.  These factors had a contagion effect on global markets, as the MSCI ex-Australia (hedged) returned -2.2%.

  In the US, the S&P 500 had its worst month in two years, sliding 2.7% primarily as a result of uncertainty surrounding trade tensions and concerns over “new age” technology stocks.  This volatility in equity markets masked strong economic data, with the US unemployment rate stable at a 17 year low of 4.1% for the sixth consecutive month in March, consumer confidence being revised upwards during the month, and the Manufacturing PMI edging higher to 55.6 which is indicative of the strongest level of manufacturing since early 2015.  Due to the broad-based growth observed in the US economy, the Federal Reserve, led by Jerome Powell in his first meeting as Chairman, raised rates by 0.25% to a target range of 1.5% to 1.75%. This was the sixth rate rise since December 2015 as the Fed continues its path to normalise monetary policy following its quantitative easing program post the GFC.

  In Australia the ASX 300 fell by 3.7% as domestic equities were not immune from the sell-off impacting global markets. GDP data was released during the month, with growth slowing to 0.4% over the quarter and 2.4% over the year (from a previous level of 2.9%).  This is despite a tightening labour market and the improvement in consumer confidence observed over the past 12 months.  The RBA again left the official cash rate on hold at 1.5% for a record 17^th consecutive meeting, citing the ongoing concerns surrounding subdued wage growth, low inflation levels and a desire to reduce unemployment further before considering tightening.  The Financial Services Royal Commission resulted in negative sentiment which weighed on the banks, with the four majors falling between 5% and 7% over the month.

  The MSCI World Index ex-Australia (hedged into AUD) fell 2.2% over the month.  The Australian dollar depreciated against most developed market currencies in March, declining 1.9% against the Yen, 1.6% against the USD and 2.4% against the Euro.  This resulted in the unhedged MSCI World Index ex-Australia returning -0.5%.  In developed markets, Canada (-0.2%) and Switzerland (-0.3%) outperformed the broader market, while Australia (-3.7%) and Germany (-2.7%) underperformed.  Emerging Markets marginally outperformed Developed Markets, with the MSCI Emerging Market Index returning -0.3%.

  The S&P/ASX300 Accumulation Index fell 3.7% over the month.  Small Cap stocks (-2.3%) outperformed the broader market, while Large Caps (-4.1%) underperformed.  Defensive sectors of Real Estate (0.1%) and Utilities (-0.8%) were the strongest performing in Australia, whilst Telecommunications (-6.2%) and Financials (-5.9%) were the weakest.

  Yields over the month fell across most developed markets as volatility in equity markets resulted in a risk-off sentiment.  The yield on 10-year Australian and NZ Government bonds fell to 2.6% and 2.7% respectively.  Elsewhere in the world, US 10-year yields fell to 2.7%, UK 10-year yields fell to 1.4%, German 10-year yields fell to 0.5% with Japan remaining broadly flat.  In Australia both long dated bonds and inflation-linked bonds outperformed the broader market.

  

   

  

   

• Market Commentary February 2018

  Equity markets pulled back in February as investors began to worry about the prospect of the US Federal Reserve raising rates at a faster pace than had previously been anticipated.  This uncertainty also led to a rise in volatility, as measured by the CBOE Market Volatility Index (VIX), which spiked to levels last seen in mid-2015.  Despite this volatility in markets, macroeconomic data was strong with Eurozone unemployment (8.6%) continuing to grind towards near decade lows and fourth quarter 2017 US GDP registering annual growth of 2.5%.  Earnings growth expectations were also revised higher in the US, Europe and Japan given the stronger economic environment.

  The US equity market fell in February, declining nearly 9% early in the month before recovering to finish down 3.7%.  This was against a backdrop of continued strength in economic data, with unemployment standing at a 17 year low of 4.1% and business confidence at close to its highest level in over a decade on the back of recent tax reforms.  Jerome Powell gave his first address to Congress as the newly appointed Federal Reserve Chairman, taking a more hawkish tone (i.e. more biased to rates going up) and suggesting there could be as many as four interest rate hikes in 2018.  Yields on US 10-year Treasuries continued to rise on future growth and inflation expectations, with the 10-year yield edging closer towards 3%.

  The Australian market saw its interim reporting season take place in February, which in aggregate saw reasonable top-line revenue growth, with firms largely reaffirming or slightly upgrading full year guidance.  Cost inflation began to creep up with a broad-based uptick in input costs, while capital expenditure in the Materials sector increased.  The RBA held the official cash rate at 1.50%, citing ongoing concern regarding low real wage growth and high debt levels limiting spending in the household sector.  The domestic market outperformed global equities, with the ASX300 managing a small gain of 0.3%, primarily driven by the Health Care and Consumer Staples sectors which saw strong results from the likes of CSL and Woolworths.

  The MSCI World Index ex-Australia (hedged into AUD) fell 3.7% over the month.  The Australian dollar depreciated against most developed market currencies in February, declining 5.9% against the Yen, 3.8% against the USD and 1.7% against the Euro.  In aggregate, the AUD depreciated in February resulting in the unhedged MSCI World Index (ex-Australia) returning -0.4%.  In developed markets, Australia (0.3%) and France (-2.8%) outperformed the broader market, while the US (-3.7%) and Germany (-5.2%) underperformed.  The sell-off in global equities also extended to Emerging Markets, with the MSCI Emerging Markets Index (-0.9%) underperforming unhedged developed markets.

  The S&P/ASX300 Accumulation Index rose 0.3% over the month.  Small Cap stocks (0.0%) underperformed the broader market, while Large Caps (0.8%) outperformed.  Healthcare (7.0%) and Consumer Staples (2.1%) were the strongest performing sectors in Australia, whilst Telecommunications (-6.2%) and Real Estate (-3.2%) were the weakest.

  The yield on 10-year Australian Government bonds held steady at 2.8% over the month, while the 10-year yield in NZ rose to 3.0%. Elsewhere in the world, US 10-year yields rose to 2.9%, whilst remaining broadly flat in the UK, Eurozone and Japan.  In Australia, long dated bonds outperformed the broader market, while inflation-linked bonds underperformed.