Investment market review
20 Feb 2018
By Shadforth Financial Group
The Australian stock market ended the year on a high, up 7.7% over the December 2017 quarter.
It outperformed many of its global peers even though the near-term outlook for domestic growth is not as strong as other advanced economies. Broad-based price momentum in commodity markets drove index gains, providing a refreshing boost to the local market after a lacklustre September quarter. All sectors ended the quarter in positive territory, with energy well ahead of the pack thanks to a surge in oil prices. The banks posted a relatively modest result after the announcement of a Royal Commission into the banking sector.
Listed property trusts
Real estate investment trusts (REITs) delivered a 5.7% total return in 2017, underperforming the broader S&P/ASX 200 Index by 6.1% in the sector’s first year of underperformance since 2013.
The vast majority of REITs delivered positive total returns, with the exception of retail property giants Scentre Group (down 4.8%) and Vicinity Centres (down 3.3%). Within the S&P/ASX 200 REITs Index, the top performers were Abacus Group (up 44.6%), Charter Hall Group (up 34.5%) and Goodman Group (up 21.9%), which all benefited from buoyant transaction markets. Australian REITs underperformed wholesale property funds (+12.2%) and direct property (+12.0%), and most major global REIT markets except Japan (-4.9%) and the US (+3.9%). Europe and Asia (except Japan) REIT markets outperformed Australia. Pricing metrics softened slightly in 2017, with the sector closing at a 24.5% premium to net tangible assets (NTA), a 17.4x price earning (P/E) multiple and a 4.8% dividend yield.
Global shares delivered another quarterly gain, with the MSCI World Index rising 5.4% over the period. Within that, emerging markets jumped 7.1% to outperform their developed-market counterparts, which rose 5.1%.
US markets forged ahead, outstripping its string of record closes it set in the September quarter. Gains were bolstered as President Trump finally signed into law the comprehensive tax reform bill which will see the corporate tax rate slashed from 35% to 21%. Broadly positive economic data supported the US market, as the US Federal Reserve reiterated that the US economy was in robust-enough shape to handle the unwinding of its US$4.5 trillion balance sheet. The Dow Jones Industrial Average spiked at 10.3% and was the best-performer of the US market indices, with the NASDAQ Composite Index, up 6.3% and the S&P 500 Index rising 6.1%.
The Australian yield curve flattened marginally over the quarter with the spread between long-term rates and short-term rates narrowing once again.
At the end of the December quarter the Australian 10-year bond yield ended at 2.63%, down from 2.84%. The Australian three year bond yield ended the quarter at 2.12%, down from 2.15%. The US yield curve also flattened, although the move was notably more pronounced than that of the Australian yield curve. The US two-year bond yield ended the December quarter at 1.88%, up from 1.48% at the end of the previous quarter. The US 10-year bond yield ended at 2.41%, up from 2.33%.
The Reserve Bank of Australia left its cash rate unchanged at 1.50% throughout the quarter, while the US Federal Reserve Bank hiked rates by 25 basis points, taking its funds rate to a 1.25 — 1.50% target range.
They also took the opportunity to announce that the cap on its balance sheet run-off will double to $20 billion per month as of next quarter, unwinding its US$4.5 trillion balance sheet.
Events around the world in 2017
Australian share market movements and some of the social, economic and political events that shaped the 2017 calendar year.