Investment market review
12 May 2017
By Shadforth Financial Group
The S&P/ASX 300 Accumulation Index was up +4.7% in the March quarter.
On a sector level, the best performing sectors were health care up +13.8%, utilities up +9.6%, consumer staples up +8.7% and financials up +4.9%. There was some rotation into defensive and bond sensitive equities such as health care, infrastructure and utilities as investors found comfort in predictable cash flows as bond yields fell. The worst performing sectors were telecommunications down -7.3%, real estate down -0.5% and information technology down -0.1%.
Listed property trusts
The A-REIT sector generated a negative return of -0.03% for the March quarter.
The sector has been under pressure since global bond yields began to move higher in the second half of 2016 due to signs of higher inflation and the expectation of fiscal stimulus in the United States. REITs results were in line with expectations during reporting season but there was some impact from softer retail conditions. Additionally, the market is becoming overly pessimistic on the impact of Amazon on the retail sector and the retail REIT’s.
Many major global equity markets hit, or came close to hitting historic highs over the March quarter.
This performance was despite the political risk in Britain, the Netherlands and the United States. The British Prime Minister, Theresa May, invoked article 50 of the Lisbon Treaty, officially beginning the exit from the European Union. In the U.S., the Republican Party’s replacement of ‘Obamacare’ was withdrawn due to lack of support in Congress. This has raised some concerns that there is
less scope for Trump to be able to push through major fiscal changes. The S&P 500 gained +5.5%, the FTSE 100 was up +2.5%, the German DAX 30 was up +7.3% and the Nikkei 225 was down -1.1%. The MSCI World Index in Australian dollar terms was up +0.5% in the March quarter.
The European Central Bank left monetary policy unchanged. As announced in December, the ECB will continue the QE program at a reduced amount of €60 billion worth of assets per month from April to December 2017. The U.S. Federal Reserve increased the federal funds rate by 25 basis points to a target range of 0.75 — 1.00 per cent at its March meeting. We continue to expect a gradual move towards policy normalisation, likely culminating in a maximum of three interest rate hikes this year.
The U.S. Fed minutes also indicated that tightening of quantitative easing could be appropriate this year.
U.S. and Australian yield curves were flatter over the quarter.
The Australian three-year bond yield fell -5bps and the ten-year fell -6bps. The U.S. three-year bond yield rose +4bps and the ten-year fell -6bps. Bond yields appear to have stabilised for now following the significant run up last quarter as a result of Donald Trump’s proposed policies. Concerns have grown about the ability of the Trump administration to push through legislation and this has weighed on bond yields. We still however expect higher bond yields in the future given the path to monetary policy normalisation in the U.S. and rising inflation in many parts of the world.
The RBA left the cash rate unchanged at 1.50 per cent in the March quarter.
The RBA noted that the rise in commodity prices over the past year could have a bigger flow through to the economy than forecast. On the flipside, the RBA appears concerned about the labour market,as well as the build-up of risks associated with the housing market. It’s likely the RBA will leave the cash rate on hold in 2017, and will be very reluctant to cut the cash rate to prevent fuelling further price gains in the housing market.
The long view
This chart displays the highest and lowest 12-month returns of the major asset classes since December 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.
Source: Morningstar. Indices used are: Cash — AusBond Bank Bill; Fixed Interest — AusBond Composite 0+ year; Australian shares — S&P/ASX 300 Accumulation; International shares — MSCI World Accumulation Index (AUD); Listed property trusts — S&P/ASX 300 A-REIT Accumulation.
* The listed property index is only available from June 2001 and the international shares index is only available from January 1999.