Investment market review
13 Nov 2017
By Shadforth Financial Group
The S&P/ASX 300 Accumulation Index underperformed most global markets in the September quarter.
The index was up 0.8% driven by mixed economic indicators and a marginally disappointing reporting season. The key themes to come out of reporting season were moves toward capital expenditure at the expense of dividends and capital returns, disappointing cost guidance and earnings growth skewed to resources. On a sector level, the best performers were energy up 5.9%, materials up 5.0% and consumer staples up 2.1%. The worst performing sectors were telecommunications down 18.3%, utilities down 7.1% and health care down 6.1%.
Listed property trusts
The A-REIT sector generated a positive return of 1.9% for the September quarter despite a rise in bond yields that would normally see a move away from bond proxies such as A-REIT’s.
A-REIT’s performance was in line with guidance during reporting season but it was evident that many were impacted by softer retail conditions. As a result, retail underperformed office and asset managers.
Global markets had a strong quarter with the MSCI World Index in Australian dollar terms recording a gain of 2.8%.
The strength can be attributed to improving corporate earnings, economic fundamentals and forward looking indicators such as purchasing manager indices. The synchronicity of these improving factors across the globe is something that hasn’t been seen in a number of years and it is providing a lot of support for risk assets. US shares continued to hit all-time highs with buying appetite fuelled by Donald Trump’s plan to overhaul the US tax code. Investors weren’t deterred by a further escalation in geopolitical tensions between the US and North Korea. North Korea remains a tail risk for financial markets but risk assets are unlikely to be deterred unless the situation evolves into armed conflict. The S&P 500 gained 4.0%, the FTSE 100 was up 0.8%, the German DAX 30 was up 4.1% and the Nikkei 225 was up 1.6%.
The US Federal Reserve announced that balance sheet normalisation will begin in October in a gradual and predictable manner. There is no precedent for a quantitative easing unwind like this which makes it difficult to gauge how markets will react.
The Australian 3-year bond yield was 24bps higher at 2.15% and the 10-year rose 24bps to 2.84%.
The US yield curve flattened with the 3-year bond yield rising 8bps to 1.62% and the 10-year rising 3bps to 2.33%. Yields rose as President Donald Trump and Congressional Republicans unveiled a plan to overhaul the US tax code and reduce both corporate and individual tax rates. A moderately hawkish US Fed statement including a confirmation that the Fed will begin shrinking its $4.5 trillion balance sheet in October, also helped yields move higher.
The RBA left the cash rate unchanged at a historical low of 1.50% in the September quarter, maintaining their concern over low wage growth, high levels of household debt and Australian dollar appreciation going into the early September meeting, stating it could result in a “slower pick-up in economic activity and inflation”.
The long view
This chart displays the highest and lowest 12-month returns of the major asset classes since December 1997.* 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.