Investment market review - quarter ended 31 December 2018
21 Mar 2019
By Shadforth Financial Group
The S&P/ASX 300 Accumulation Index declined by 8.4% but outperformed global markets in the December 2018 quarter.
The December 2018 quarter was dominated by a sharp fall in October due to concerns over rising US interest rates and the trade war between the US and China. The best performing sectors were Property (down 3.7%), Utilities (down 4.1%) and Materials (down 5%). The worst performer was the Energy sector (down 21.3%) caused by lower oil prices which were driven by a mix of excess global production and concerns regarding global growth. The Telecommunications sector was also much weaker (down 14.8%) as concerns mounted over the Australian Competition and Consumer Commission’s (ACCC) action against the proposed TPG-Vodafone merger.
Listed property trusts
The Australian real estate investment trust (A-REIT) sector held up comparatively well, declining only 1.7% during the December 2018 quarter.
The relative strength of the sector was caused by a decline in bond yields and investor preference for lower risk investments. A-REITs are viewed as a proxy for bonds because they produce an income stream from rental payments, which means they tend to rise in price when bond prices rise.
Global share markets were weak in the December 2018 quarter with the MSCI World Index in Australian dollar terms recording a decline of 11.1%.
This negative return was somewhat reduced because of the depreciation of the Australian dollar (down 2.4%) with the MSCI World Index down 13.3% in US dollar terms. The Australian dollar fell, owing to concerns over China’s growth prospects and the implications for Australia. The global share market decline was led by the US market which had, until this quarter, performed well during the year. Interest rate increases and their predicted future path was a key issue for investors who fear excessive interest rate hikes could slow down economic growth. There was also sizeable concern regarding earnings in the technology sector. This was triggered by weak Apple iPhone sales. This saw the tech-heavy NASDAQ Index decline 17.5% while the US share market (with technology making up 20% of it) falling 14% in US dollar terms.
The Australian 3-year bond yield was 20 basis points (bps) lower at 1.85% and the 10-year bond yield fell by 35bps to 2.32% in the December quarter.
The US yield curve also dropped with the 3-year bond yield falling 43bps to 2.46% and the 10-year by 38bps to 2.68%. Global trade concerns continued and only abated when the US and China agreed to a temporary tariff ceasefire in mid-December. This happened only weeks before the US had scheduled tariffs to increase from 10% to 25%. Concerns about US economic growth drove volatility in bond yields with the US 10-year rising to 3.23% at one point in late October. It then declined due to a combination of weak economic data which showed business investment and housing construction was weaker than expected and investor demand for safe assets to protect against a falling share market.
The economy grew 0.3% in the September quarter but growth of 0.6% was expected. This disappointment, along with the continued correction in property prices, has contributed to concerns about the future growth outlook. It may also mean an upcoming Reserve Bank of Australia (RBA) interest rate cut.
The RBA left the cash rate unchanged at a historical low of 1.5% in the December 2018 quarter, maintaining their concern over low wage growth and high levels of household debt.
In addition, weakening global trade and lower oil prices suggest inflation may remain muted in the future. The weakness in housing markets has also been due to a reduction in lending by banks. The lower than expected GDP growth in the September quarter may see the RBA revise its 2018 growth forecast. The RBA may also change its opinion that the interest rate will increase in the future.
Events around the world in 2018
Australian share market movements and some key social, economic and political events that shaped the 2018 calendar year.