JANA Investment commentary - August 2017

Provided by EISS.
Geopolitical risks escalated throughout the month of August as North Korea continued to defy UN restrictions by firing a missile across Japan, compounded by further tensions stemming from a ‘war of words’ with US President Donald Trump. As a result, the US, Japan and South Korea will meet with the United Nations Security Council to discuss proposals of new sanctions on North Korea. With this backdrop, it was unsurprising that investors took a more risk-off stance, reducing investments in equities and buying into safe haven assets such as the Japanese Yen and gold, with the latter rising by 3.9% over the month.

August also saw the majority of US companies report quarterly earnings with most S&P 500 firms beating analyst expectations. The US economy continues to observe strong jobs growth and a historically low unemployment rate of 4.3%. GDP also rebounded from a weak March quarter, to record 3% annualised growth for the June quarter. Despite achieving Trump’s GDP growth target, subdued inflation continues to be a concern, with the latest figure (as at July) of 1.7% p.a. continuing to miss their 2% p.a. target. As a result, a growing number of US Federal Reserve members expressed a desire to postpone the interest rate normalisation plans until a clear inflation trend can be observed.

The MSCI World Index ex-Australia (hedged into AUD) rose 0.3% over the month. The Australian dollar depreciated against most developed market currencies in August, which resulted in a return for unhedged overseas equities of 0.9% (in AUD). In developed markets, the UK (1.5%) outperformed the broader market, while Switzerland (-1.2%) and Germany (-0.6%) underperformed. The MSCI Emerging Markets Index (2.9%) outperformed unhedged developed markets.

The Reserve Bank of Australia (RBA) left interest rates unchanged over the month. Despite the fact that Australian economic conditions remain broadly on track, the RBA highlighted that uncertainties of a rising Australian Dollar, rising house prices and changes in China’s economic policies might be significant headwinds for the current growth path. As a result of the ‘dampening effect’ a rising Australian dollar has on inflation, growth and employment, the RBA lowered the growth forecast of the Australian economy. Domestic wage growth continues to be low, growing 0.5% over the June quarter which translates into a 1.9% rise over the year. From a half yearly corporate reporting perspective, Australian companies delivered mixed earnings results, however, there was an increase in the number of companies failing to meet expectations. The Resource sector was a strong positive over the reporting season, benefitting from high commodity prices as a result of China’s supply side reforms.

The S&P/ASX300 Accumulation Index rose 0.7% over the month. Small Cap (2.7%) stocks strongly outperformed the broader market over the month, while Large Cap (-0.8%) stocks underperformed. Energy (5.2%), Consumer Staples (5.2%) and Industrials (4.6%) outperformed, while Telecommunication Services (-7.2%) and Financials (-2.1%) were the worst performing sectors.

The yield on 10-year Australian Government bonds remained unchanged at 2.7% over the month. Elsewhere in the world, the US, UK, Japanese, Euro and New Zealand 10-year Government bond yields fell. In Australia, short dated bonds and inflation-linked bonds both outperformed the broader market.
 This information has been prepared by Electricity Industry Superannuation Board ABN 57 923 283 236 as Trustee of the Electricity Industry Superannuation Scheme. This material includes general advice. The general advice had been prepared without taking into account your personal objectives, financial situation or needs. Therefore, before acting on this advice you should consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. You should also consult a licensed or appropriately authorised financial adviser before making any investment decision. Neither Mercer (Australia) Pty Ltd nor Mercer Investment Nominees Limited take any responsibility for the content or presentation of the material provided by the Trustee.

Electricity Industry Superannuation Board ABN 57 923 283 236 as Trustee of the Electricity Industry Superannuation Scheme.

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