Investment market review
24 May 2018
By Shadforth Financial Group
The S&P/ASX 300 Accumulation Index underperformed most global markets in the March 2018 quarter. The index was down 3.8% driven by weakness in financial and telecommunications stocks, which outweighed a mixed but overall positive reporting season. Seven of the ten major sectors that make up the ASX saw upgrades on earnings expectations. The best performers were healthcare (up 6.1%), information technology (up 0.7%) and consumer staples (down only 1.3%). The worst performing sectors were telecommunications down 12.8%, utilities (down 8.3%) and energy (down 7.7%).
Listed property trusts
The Australian Real Estate Investment Trust (A-REIT) sector fell 6.2% in the March 2018 quarter, as the upward trend of bond yields weighed negatively on the asset class. A-REITs are viewed as a proxy for bonds so poor performance in fixed income, in this case because of the prospect of higher interest rates, can result in poor performance for this asset class. Retail A-REITs continue to struggle relative to other types, such as, residential and office A-REITs, given the ongoing concern over the weakness of their tenants.
Global markets had a strong quarter in relative terms with the MSCI World Index gaining 0.3% for the quarter. This can be attributed to improving corporate earnings, economic fundamentals and forward-looking indicators. This strong backdrop continues to provide support for risk assets across the globe. However, it has faded somewhat in recent months with leading indicators of business activity in both the manufacturing and services sectors not accelerating at the pace shown in January. The share market has been led globally by the technology sector in recent years but the privacy scandal embroiling Facebook’s handling of user data weighed on the sector overall, helping to drive equity returns lower than during the previous quarter. In addition, fears of a series of interest rate hikes by the Federal Reserve saw a sudden increase in volatility in early February. The prospect of a trade war between the US and China, as a result of increasingly aggressive rhetoric between the two following the implementation of tariffs on steel and aluminium imports by President Trump, contributed to this volatility. As a result the S&P 500 fell 1.2%, the FTSE 100 declined 8.2%, the German market lost 6.4% and the Japanese market shed 7.1% during the quarter. US technology stocks (up 2.3%) and emerging markets (up 0.9%) were a few notable shelters from this broad decline. The performance of companies such as Microsoft and Google in January offset the damage caused by the Facebook saga and general market weakness.
The Australian three-year bond yield was 7 basis points (bps) lower at 2.05% and the ten-year bond yield fell by 3bps to 2.6% during the March 2018 quarter. The US yield curve rose with the three-year bond yield climbing 39bps to 2.28% and the ten-year up 33bps to 2.8%. At the start of the year, yields rose due to investor optimism surrounding accelerating global growth and the tax reforms introduced by President Trump coming into effect. Rate increases
by the Federal Reserve helped drive yields higher as did more hawkish forecasts by the Federal Reserve on the future outlook of interest rates. These factors were countered by increased demand for safe-haven assets, particularly in March, as global trade war fears led to some investors fleeing
equity markets which caused yields to fall during March in both Australia and the US.
The Reserve Bank of Australia (RBA) left the cash rate unchanged at a historical low of 1.5% in the March quarter. The RBA maintained their concern over low wage growth and high levels of household debt. The RBA’s April minutes from the monetary policy meeting also highlighted that while leading indicators should see wage growth rise, the economic growth picture is less rosy. The RBA implicitly downgraded their growth forecast from 3% for 2018 to ‘growth higher than last year’. The calendar year 2017 generated Gross Domestic Product growth of 2.3%.
Winners and losers
Ranks the highest and lowest performing asset classes since 2010 and their overall rank for the last 10 years.