JANA Investment commentary - October 2017

12/12/2017
Provided by EISS.
Global markets performed strongly in October as synchronised global economic growth continued. Japanese Prime Minister Shinzo Abe achieved a solid victory in a snap election over the month, fueling investors’ expectations of continued monetary easing by the Bank of Japan. This comes at a time when most major central banks have commenced, or are considering tightening monetary policy. This led to the Japanese Nikkei 225 Index rallying 8.2% over the month. The 19th National Congress of the Communist Party of China was held in Beijing. President Xi Jinping further solidified his grip on power while also unveiling new members of the Central Committee.

Late in the month, the European Central Bank announced a 9-month extension to the Quantitative Easing program at a tapered rate of €30bn bond purchases per month, starting from January 2018. The Euro depreciated by almost 2% against the US dollar on the day following the announcement.

The US ISM Manufacturing Index rose to a 13-year high over the month of September, illustrating the benefits of a prolonged weakness in the US dollar and an increase in global demand over the year. Despite a strong recovery of the US economy and labour market, Federal Reserve Chair Janet Yellen commented that the low inflation has been the ‘biggest surprise in the US economy’ this year (core US inflation was 1.7% in the year to September).

Late in October, the US Senate announced that they had achieved significant progress on their proposed $1.5tn tax cut plans. Buoyed by positive economic data and the recent optimism over progress on tax reform, the US 10-year Government bond yield rallied to hit a 7-month high of 2.475%.

Australian equities ended the month higher, largely driven by strong performance of the Energy sector following strong gains in Crude Oil prices (7.2%). Inflation continues to miss expectations, as the September quarter inflation came in at 1.8% year-on-year, lowering expectations of an interest rate increase by the Reserve Bank of Australia in the near term.

At the end of the month, the Australian High Court disqualified Deputy Prime Minister Barnaby Joyce from the Parliament due to his dual-citizenship status, leading to the government losing a one seat majority. Against the backdrop of increased political uncertainty and lower interest rate expectations, the Australian Dollar fell by 2.3% against the US Dollar over the month.

The MSCI World Index ex-Australia (hedged into AUD) rose 2.7% over the month. The Australian dollar depreciated against most developed market currencies in October, which resulted in a return for unhedged overseas equities of 4.3% (in AUD). In developed markets, Japan (5.6%) and Germany (3.0%) outperformed the broader market, while Switzerland (1.3%) and the UK (1.6%) underperformed. The MSCI Emerging Markets Index (5.9%) outperformed unhedged developed markets.

The S&P/ASX300 Accumulation Index rose 4.0% over the month. Small Cap (6.0%) stocks strongly outperformed the broader market, while Large Cap (3.5%) stocks underperformed. IT (8.4%), Energy (6.4%) and Health Care (5.5%) outperformed, while Property Trusts (2.2%) and Telecommunication Services (2.4%) were the worst performing sectors.

The yield on 10-year Australian Government bonds fell to 2.7% over the month. Elsewhere in the world, the US and Japanese 10-year Government bond yields rose, while the UK, Euro and New Zealand 10-year Government bond yields fell. In Australia, short dated bonds underperformed the broader market, while inflation-linked bonds outperformed.
 
  


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