Investment market review
24 Nov 2016
By Shadforth Financial Group
The S&P/ASX 300 Accumulation Index rose 5.3% in the September quarter.
The best performing sectors were materials, up 12.8%, consumer staples which rose 10.5% and information technology that climbed 9.0%. Materials led the market despite a volatile quarter that saw iron ore fall 10.3% and crude oil fall 1.3%. The worst performing sectors were telecommunications, which fell 8.8% and utilities which lost 3.3%. The telecommunications sector suffered as TPG Telecom fell 27.6% during the quarter as management downgraded guidance for FY17. Vocus Communications also declined, down 26.0%, as investors became more negative in their outlook and the Chief Financial Officer resigned.
Listed property trusts
The A-REIT sector declined 1.9% during the September quarter.
The sector underperformed the general market and lost some of its attraction to investors as global bond yields rose. Some market participants view REITs as a proxy for bonds so with the US three-year and ten-year bond yields rising 18bps and 12bps, REITs experienced a fall in demand. Low interest rates in Australia are still supportive for A-REITs but the sector is expensive on an historic, relative and absolute basis.
International shares posted strong results for the September quarter.
Share markets showed resilience despite events such as the UK’s decision to leave the European Union (EU), which did not have the negative impact that some participants expected it to. The S&P 500 gained 3.3%, the FTSE 100 was up 6.1%, the German DAX 30 rose 8.6% and the Nikkei 225 climbed 5.6%. The MSCI World Index in Australian dollar terms was up 2.0% in the September quarter.
Policy easing in China has helped stabilise GDP growth at 6.7% and it appears that the People’s Bank of China is now focusing on discouraging the use of excessive leverage in the financial system. The European Central Bank left monetary policy unchanged because recent data has indicated resilience in the Euro area following the Brexit referendum. The Bank of England cut the interest rate by 25 basis points to 0.25% because the outlook for the UK economy has deteriorated as a consequence of Brexit. The US Federal Reserve maintained the official cash rate within a range of 0.25-0.50%. US economic data is, however, becoming increasingly supportive of a rate increase.
International bond yields were mixed over the quarter.
The US ten-year bond yield rose 12 basis points but the Australian ten-year bond yield actually fell 7 basis points. The mixed performance reflects diverging monetary policies as the US Fed is likely to increase interest rates by 25bps this year but the Reserve Bank of Australia has cut interest rates to 1.50%. Global bond yields moved higher towards the end of the quarter as the European Central Bank’s decision to keep monetary policy unchanged began a bond market sell-off offshore. The Bank of Japan’s decision to steepen the Japanese Government Bond yield curve by implementing a yield curve targeting measure also helped global bond yields move higher.
The RBA lowered the cash rate by 25bps to 1.50% in the September quarter.
Inflation was an important catalyst in the decision because headline inflation was reported at 1.0%, well below the RBA’s medium term target zone of 2.0% to 3.0%. The new RBA Governor, Phillip Lowe, has given indications that greater emphasis will be placed on the medium-term nature of the inflation target. The RBA is therefore unlikely to cut interest rates again in 2016.
The long view
This chart displays the highest and lowest 12-month returns of the major asset classes since September 1996.* As you can see, cash provides stability and security, having never generated a negative return over a 12-month period. The trade-off for this stability and lower risk is that cash will be unlikely to match the higher returns generated by other asset classes.