JANA Investment commentary - November 2017

10/01/2018
Provided by EISS.
Global economic conditions continued to improve in November, although inflation remains subdued. Geopolitical risks were elevated over the month, with North Korea conducting further missile tests, Venezuela defaulting on their foreign debt and a corruption crackdown sweeping across Saudi Arabia.

Organisation of the Petroleum Exporting Countries (OPEC) revised their global oil demand forecast to expect a larger production deficit in 2018, leading to an increase in Brent Oil prices, which ended the month 3.6% higher. Political risks increased across Europe, as German Chancellor Angela Merkel’s plans to form a four-party government fails, while a growing portion of the UK Conservative Party lost confidence in Prime Minister Theresa May as progress on Brexit negotiations were scant. Despite weak economic growth in the UK, the Bank of England raised interest rates for the first time in 10 years, from 0.25% to 0.5%, citing higher inflation and a low unemployment rate, with the latter falling to a 42-year low.

Over in the US, Jerome Powell will be replacing Janet Yellen as the Chair of the US Federal Reserve (Fed), with the transition expected to occur in February 2018. Powell is expected to provide continuity to the Fed’s ongoing monetary tightening plans, while differing to Yellen in his support to potentially lighten regulations on the financial sector.

Over in Australia, Reserve Bank of Australia (RBA) deputy governor Guy Debelle expressed growing confidence that non-mining business investments have been rising and expects Australia to join the synchronised pickup of global growth. However, wage growth remains subdued at 2% for the September quarter (year-on-year), despite achieving a 5-year low unemployment rate of 5.4%.

Organisation for Economic Co-operation and Development (OECD) also urged Australia to begin increasing official interest rates, despite persistently weak inflation, to cool the housing market and prevent a blowout in risky debt levels. The Australian Bureau of Statistics (ABS) estimated that ‘true’ inflation is currently overstated by around 0.22% due to a shift in spending patterns as rising rental prices, childcare and education are taking a larger proportion of the average household income. As a result, the ABS announced that they will ‘re-weight’ the Consumer Price Index (CPI) benchmark starting from the December 2017 quarter. Escalating citizenship Member of Parliament eligibility also continued to increase risks of political instability in Australia, as John Alexander became the second government member in the lower house to resign.

The MSCI World Index ex-Australia (hedged into AUD) rose 1.7% over the month. The Australian dollar depreciated against most developed market currencies in November, which resulted in a return for unhedged overseas equities of 3.3% (in AUD). In developed markets, Hong Kong (3.5%) and the US (3.0%) outperformed the broader market, while France (-2.0%) and the UK (-1.8%) underperformed. The MSCI Emerging Markets Index (1.2%) underperformed unhedged developed markets.

The S&P/ASX300 Accumulation Index rose 1.7% over the month. Small Cap (3.9%) stocks strongly outperformed the broader market, while Large Cap (1.2%) stocks underperformed. Property Trusts (5.3%), IT (4.5%) and Energy (4.3%) outperformed, while Telecommunication Services (-1.6%) and Financials (0.0%) were the worst performing sectors.

The yield on 10-year Australian Government bonds fell to 2.5% over the month. Elsewhere in the world, the Japanese and New Zealand 10-year Government bond yields fell, while the US, UK and Euro 10-year Government bond yields was broadly unchanged. In Australia, short dated bonds underperformed the broader market, while inflation-linked bonds outperformed.


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

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