Investment commentary - November 2018

Provided by EISS.
The geopolitical concerns outweighed relatively solid fundamental data in November, with most major global stock markets unable to recover the sizeable declines registered in October. Conversely, Australian and Global bonds recorded positive returns aided by falling yields. This was largely attributable to the continued risk-off sentiment, as well as comments from the US Federal Reserve’s (Fed) Chair that rates are now “just below” the neutral level, suggesting fewer future rate rises.  

Geopolitical concerns between the US and China continued to play out with a meeting between President Xi and President Trump at the G20 summit showing some inclination to de-escalate the tensions with a 90-day pause on any tariff increases. However, there are still significant points of contention between the two countries which are increasing investor concerns of a potential slowdown in economic growth. Brexit negotiations showed progress with a withdrawal agreement approved between the UK and the European Union (EU), however, the agreement still needs to be submitted to the UK Parliament where there is considerable skepticism the deal will be passed. In Italy, recent discussions between the Italian government and the EU over the previously submitted Italian budget plan appear to be more constructive and suggest the possibility of a compromise.

In the US, the S&P 500 rose by 2.0%, partially recovering October’s falls following a strong thirdquarter earnings season in which earnings per share (EPS) grew in excess of 25% year-on-year. Further gains were constrained by poor sentiment and investor sensitivity to future earnings guidance. US core inflation declined to 2.1% year-on-year (headline inflation 2.5%), highlighting a lack of meaningful acceleration in the underlying pace of inflation.

In Australia, the Reserve Bank of Australia (RBA) kept rates on hold for the 25th consecutive meeting at 1.50%, sighting low and stable inflation and an expectation that this low rate will gradually produce reduced unemployment and increase inflation to its 2-3% target band. In contrast to global markets, the ASX 300 fell 2.2% over the month. The decline was driven by the Energy sector (-10.7%) following a significant decline in the oil price and increased regulatory scrutiny, and the Materials sector (-4.7%) where concerns around slowing Chinese growth weighed. The IT (1.0%) and Financials (1.4%) sectors were the strongest performing, retracting some of their prior losses. Australian small caps stocks (0.4%) outperformed, while large caps (-1.6%) underperformed. 

From a currency perspective, the Australian dollar appreciated against major currencies during November, which were likely motivated by the RBA’s updated growth forecasts and comments. The AUD rose against the USD (3.0%), Yen (3.7%), Pound (3.2%) and the Euro (3.1%). In aggregate, these moves resulted in unhedged equities (-1.8%) underperforming hedged equites (1.3%).  

US yields saw a similar pattern to October, with the US 10-year Treasury yield initially rising early (peaked at 3.23%) but rallying down to 3.01% by the end of November, primarily on concerns relating to global growth and the impact of failing oil prices on inflation. Yields also fell in other developed markets including Australia, the UK, Europe, and Japan. Italian 10-years yields continued their recent volatility, falling to 3.21% on the back of the constructive budget discussion.


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