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 January 2018

  Global economic conditions continued to strengthen and remained broadly synchronised in the new year, which led to most developed equity markets posting gains in January. Labour markets continued to tighten, with the Eurozone unemployment rate reaching a nine year low of 8.7% and the US rate remaining at its 17-year low of 4.1%. With unemployment continuing to grind lower, wage growth began to show strength as the US recorded a year-on-year rise of 2.9% in January. Such supportive economic conditions caused inflationary expectations to rise, with the US 10-Year Government bond yield increasing to 2.7%, its highest level since early 2014.

  US equities were strong in January following major tax reform legislation announced by the Trump administration in December and even a brief government shut-down was unable to slow the S&P500 which returned 5.7%. Economic indicators in the US were mixed, with annualised December quarter GDP coming in at 2.6% and missing broader market expectations of 3.0%. Consumer confidence was revised higher, as sentiment was bolstered by large firms, such as Apple, American Airlines and JP Morgan, announcing wage increases following the tax reduction bill passing through the Senate. The US macroeconomic picture remained strong, with low unemployment and a sustainable level of economic activity.

  In Australia, the RBA kept the cash rate on hold at 1.5%, with its forward-looking guidance remaining largely unchanged. While uncertainty remains regarding household consumption, the central bank anticipates Australian GDP growth of approximately 3% p.a. over the coming years. Inflation data for the December quarter was released, with the reading of 0.6% slightly below the consensus forecast of 0.7%. Australian retail data surprised on the upside, with a 1.2% gain month-on-month as both business and consumer confidence rose over the month.

  The Australian equity market went against the trend in January, with the ASX300 drifting 0.4% lower, while most other developed markets saw positive returns. The Telecommunications sector rose 0.8%, recording its first consecutive monthly gain since mid-2016. Healthcare (3.1%) was the standout sector for the month due to corporate activity with Sirtex Medical Ltd rising 66.2% after receiving a takeover offer. Interest rate sensitive sectors such as Utilities and Real Estate struggled against a backdrop of rising bond yields.

  The MSCI World Index ex-Australia (hedged into AUD) rose 3.9% over the month. The Australian dollar had mixed results against other developed market currencies, appreciating strongly against the USD (3.5%), however depreciating against the Pound Sterling (-1.5%). In aggregate, the AUD strengthened in January resulting in the unhedged MSCI World Index (ex-Australia) rising 1.8%. In developed markets, the US (5.7%) and Hong Kong (4.7%) outperformed the broader market, while the UK (-2.0%) and Canada (-1.1%) underperformed. The MSCI Emerging Markets Index (4.6%) outperformed unhedged developed markets.

  The S&P/ASX300 Accumulation Index fell 0.4% over the month. Small Cap (-0.5%) stocks marginally underperformed the broader market, while Large Caps (-0.4%) performed in-line. Healthcare (3.1%) and Information Technology (2.5%) were the strongest performing sectors in Australia, whilst Utilities (-4.3%) and Real Estate (-3.3%) were the weakest performers.

  The yield on 10-year Australian Government bonds rose to 2.8% over the month. Elsewhere in the world, bond yields rose across most developed countries. In Australia, short dated bonds outperformed the broader market, while inflation-linked bonds under-performed.

  

  

• Market Commentary December 2017

  The equity bull market continued to run through December, with all major equity markets closing out 2017 with strong gains. Given the widespread improvement in economic growth, it is perhaps unsurprising that equity markets have been almost universally positive over 2017. The US saw particularly strong gains over the year, with 2017 representing the first time in history that the S&P 500 ended every month of the calendar year with a gain.

  During the month, US President Donald Trump had his first major legislative victory as the Senate passed the administration’s extensive tax code reform bill, which includes a reduction in the corporate tax rate to 21%. While the market reaction to the passing of the bill was muted, expectations of tax cuts have been one of the key drivers of US equity market strength since Trump’s election in November 2016.

  December also saw continued improvement in the US economy, enabling the US Federal Reserve (Fed) to progress with a 25-basis point increase in interest rates (to 1.5%). The Fed raised its 2018 GDP estimate from 2.1% to 2.5%, whilst also increasing its inflation estimate from 1.6% to 1.7%. Tightening labour markets, rising household consumption and growth in business fixed investment were cited as key reasons for the upwardly revised estimates. With such supportive conditions in the US, investors are broadly anticipating that the central bank will look to raise rates at least three times throughout 2018. This further reaffirms the Fed’s plan to reverse Quantitative Easing (QE) and normalise interest rates.

  December saw Brexit remain in the headlines, with the conclusion of the first phase of negotiations in mid-December. While the final terms of the exit are yet to be agreed, the completion of the first phase indicates that there is sufficient common understanding on the terms of exit to allow the second phase of negotiations, which will finalise the terms of the transition period and exit, to commence.  Pressure on negotiations remain high, with agreement required by October 2018 in order to meet the deadline for ratification by the European Parliament in March 2019.

  In Australia, the Reserve Bank of Australia (RBA) left the official cash rate on hold at 1.5%, with the bank citing low inflation and low wage growth as reasons for holding rates steady. Housing prices showed further signs of cooling, with the Australian Bureau of Statistics (ABS) National House Price Index dipping 0.2%. Amazon made its long-awaited entry into the domestic market, having little impact on local competition and alleviating fears of margin compression for retailers, at least for now. The ASX Consumer Discretionary Index rose 3% during the month, despite Myer falling 20% due to weaker than expected retail sales during the Christmas period. Commodities rallied, with Copper, Iron Ore and Coal spot prices all rising between 4% and 6%. As a result, the ASX300 Commodities index leapt 7.1% during the month, primarily driven by the smaller commodities companies in the index.

  The MSCI World Index ex-Australia (hedged into AUD) rose 1.2% over the month. The Australian dollar appreciated against most developed market currencies in December, which resulted in a return for unhedged overseas equities of -1.7% (in AUD). In developed markets, the UK (5.0%) and Japan (1.4%) outperformed the broader market, while France (-0.9%) and Germany (-0.7%) underperformed. The MSCI Emerging Markets Index (0.6%) underperformed unhedged developed markets.

  The S&P/ASX300 Accumulation Index rose 1.9% over the month. Small Cap (3.2%) stocks strongly outperformed the broader market, while Large Cap (2%) performed in line. Energy (6.5%) and Materials (6.1%) were the strongest performing sectors in Australia, whilst Utilities (-4.5%) and Industrials (-1.0%) were the weakest performers.  

  The yield on 10-year Australian Government bonds rose to 2.7% over the month. Elsewhere in the world, bond yields rose across most developed nations. In Australia, short dated bonds outperformed the broader market, while inflation-linked bonds underperformed.

  

  

• Market Commentary November 2017

  Global economic conditions continued to improve in November, although inflation remains subdued. Geopolitical risks were elevated over the month, with North Korea conducting further missile tests, Venezuela defaulting on their foreign debt and a corruption crackdown sweeping across Saudi Arabia. Organisation of the Petroleum Exporting Countries (OPEC) revised their global oil demand forecast to expect a larger production deficit in 2018, leading to an increase in Brent Oil prices, which ended the month 3.6% higher. Political risks increased across Europe, as German Chancellor Angela Merkel’s plans to form a four-party government fails, while a growing portion of the UK Conservative Party lost confidence in Prime Minister Theresa May as progress on Brexit negotiations were scant. Despite weak economic growth in the UK, the Bank of England raised interest rates for the first time in 10 years, from 0.25% to 0.5%, citing higher inflation and a low unemployment rate, with the latter falling to a 42-year low.

  Over in the US, Jerome Powell will be replacing Janet Yellen as the Chair of the US Federal Reserve (Fed), with the transition expected to occur in February 2018. Powell is expected to provide continuity to the Fed’s ongoing monetary tightening plans, while differing to Yellen in his support to potentially lighten regulations on the financial sector.

  Over in Australia, Reserve Bank of Australia (RBA) deputy governor Guy Debelle expressed growing confidence that non-mining business investments have been rising and expects Australia to join the synchronised pickup of global growth. However, wage growth remains subdued at 2% for the September quarter (year-on-year), despite achieving a 5-year low unemployment rate of 5.4%. Organisation for Economic Co-operation and Development (OECD) also urged Australia to begin increasing official interest rates, despite persistently weak inflation, to cool the housing market and prevent a blowout in risky debt levels. The Australian Bureau of Statistics (ABS) estimated that ‘true’ inflation is currently overstated by around 0.22% due to a shift in spending patterns as rising rental prices, childcare and education are taking a larger proportion of the average household income. As a result, the ABS announced that they will ‘re-weight’ the Consumer Price Index (CPI) benchmark starting from the December 2017 quarter. Escalating citizenship Member of Parliament eligibility also continued to increase risks of political instability in Australia, as John Alexander became the second government member in the lower house to resign.

  The MSCI World Index ex-Australia (hedged into AUD) rose 1.7% over the month. The Australian dollar depreciated against most developed market currencies in November, which resulted in a return for unhedged overseas equities of 3.3% (in AUD). In developed markets, Hong Kong (3.5%) and the US (3.0%) outperformed the broader market, while France (-2.0%) and the UK (-1.8%) underperformed. The MSCI Emerging Markets Index (1.2%) underperformed unhedged developed markets.

  The S&P/ASX300 Accumulation Index rose 1.7% over the month. Small Cap (3.9%) stocks strongly outperformed the broader market, while Large Cap (1.2%) stocks underperformed. Property Trusts (5.3%), IT (4.5%) and Energy (4.3%) outperformed, while Telecommunication Services (-1.6%) and Financials (0.0%) were the worst performing sectors.

  The yield on 10-year Australian Government bonds fell to 2.5% over the month. Elsewhere in the world, the Japanese and New Zealand 10-year Government bond yields fell, while the US, UK and Euro 10-year Government bond yields was broadly unchanged. In Australia, short dated bonds under-performed the broader market, while inflation-linked bonds outperformed.

   

  

  Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

• Market Commentary October 2017

  Global markets performed strongly in October as synchronised global economic growth continued. Japanese Prime Minister Shinzo Abe achieved a solid victory in a snap election over the month, fueling investors’ expectations of continued monetary easing by the Bank of Japan. This comes at a time when most major central banks have commenced, or are considering tightening monetary policy. This led to the Japanese Nikkei 225 Index rallying 8.2% over the month. The 19^th National Congress of the Communist Party of China was held in Beijing. President Xi Jinping further solidified his grip on power while also unveiling new members of the Central Committee. Late in the month, the European Central Bank announced a 9-month extension to the Quantitative Easing program at a tapered rate of €30bn bond purchases per month, starting from January 2018. The Euro depreciated by almost 2% against the US dollar on the day following the announcement.

  The US ISM Manufacturing Index rose to a 13-year high over the month of September, illustrating the benefits of a prolonged weakness in the US dollar and an increase in global demand over the year. Despite a strong recovery of the US economy and labour market, Federal Reserve Chair Janet Yellen commented that the low inflation has been the ‘biggest surprise in the US economy’ this year (core US inflation was 1.7% in the year to September). Late in October, the US Senate announced that they had achieved significant progress on their proposed $1.5tn tax cut plans. Buoyed by positive economic data and the recent optimism over progress on tax reform, the US 10-year Government bond yield rallied to hit a 7-month high of 2.475%.

  Australian equities ended the month higher, largely driven by strong performance of the Energy sector following strong gains in Crude Oil prices (7.2%). Inflation continues to miss expectations, as the September quarter inflation came in at 1.8% year-on-year, lowering expectations of an interest rate increase by the Reserve Bank of Australia in the near term. At the end of the month, the Australian High Court disqualified Deputy Prime Minister Barnaby Joyce from the Parliament due to his dual-citizenship status, leading to the government losing a one seat majority. Against the backdrop of increased political uncertainty and lower interest rate expectations, the Australian Dollar fell by 2.3% against the US Dollar over the month.

  The MSCI World Index ex-Australia (hedged into AUD) rose 2.7% over the month. The Australian dollar depreciated against most developed market currencies in October, which resulted in a return for unhedged overseas equities of 4.3% (in AUD). In developed markets, Japan (5.6%) and Germany (3.0%) outperformed the broader market, while Switzerland (1.3%) and the UK (1.6%) underperformed. The MSCI Emerging Markets Index (5.9%) outperformed unhedged developed markets.

  The S&P/ASX300 Accumulation Index rose 4.0% over the month. Small Cap (6.0%) stocks strongly outperformed the broader market, while Large Cap (3.5%) stocks underperformed. IT (8.4%), Energy (6.4%) and Health Care (5.5%) outperformed, while Property Trusts (2.2%) and Telecommunication Services (2.4%) were the worst performing sectors.

  The yield on 10-year Australian Government bonds fell to 2.7% over the month. Elsewhere in the world, the US and Japanese 10-year Government bond yields rose, while the UK, Euro and New Zealand 10-year Government bond yields fell. In Australia, short dated bonds underperformed the broader market, while inflation-linked bonds outperformed.

  Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

  Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays