JANA Investment commentary - December 2017

Provided by EISS.
The equity bull market continued to run through December, with all major equity markets closing out 2017 with strong gains. Given the widespread improvement in economic growth, it is perhaps unsurprising that equity markets have been almost universally positive over 2017. The US saw particularly strong gains over the year, with 2017 representing the first time in history that the S&P 500 ended every month of the calendar year with a gain.

During the month, US President Donald Trump had his first major legislative victory as the Senate passed the administration’s extensive tax code reform bill, which includes a reduction in the corporate tax rate to 21%. While the market reaction to the passing of the bill was muted, expectations of tax cuts have been one of the key drivers of US equity market strength since Trump’s election in November 2016.

December also saw continued improvement in the US economy, enabling the US Federal Reserve (Fed) to progress with a 25-basis point increase in interest rates (to 1.5%). The Fed raised its 2018 GDP estimate from 2.1% to 2.5%, whilst also increasing its inflation estimate from 1.6% to 1.7%. Tightening labour markets, rising household consumption and growth in business fixed investment were cited as key reasons for the upwardly revised estimates. With such supportive conditions in the US, investors are broadly anticipating that the central bank will look to raise rates at least three times throughout 2018. This further reaffirms the Fed’s plan to reverse Quantitative Easing (QE) and normalise interest rates.

December saw Brexit remain in the headlines, with the conclusion of the first phase of negotiations in mid-December. While the final terms of the exit are yet to be agreed, the completion of the first phase indicates that there is sufficient common understanding on the terms of exit to allow the second phase of negotiations, which will finalise the terms of the transition period and exit, to commence. Pressure on negotiations remain high, with agreement required by October 2018 in order to meet the deadline for ratification by the European Parliament in March 2019.

In Australia, the Reserve Bank of Australia (RBA) left the official cash rate on hold at 1.5%, with the bank citing low inflation and low wage growth as reasons for holding rates steady. Housing prices showed further signs of cooling, with the Australian Bureau of Statistics (ABS) National House Price Index dipping 0.2%. Amazon made its long-awaited entry into the domestic market, having little impact on local competition and alleviating fears of margin compression for retailers, at least for now. The ASX Consumer Discretionary Index rose 3% during the month, despite Myer falling 20% due to weaker than expected retail sales during the Christmas period. Commodities rallied, with Copper, Iron Ore and Coal spot prices all rising between 4% and 6%. As a result, the ASX300 Commodities index leapt 7.1% during the month, primarily driven by the smaller commodities companies in the index.

The MSCI World Index ex-Australia (hedged into AUD) rose 1.2% over the month. The Australian dollar appreciated against most developed market currencies in December, which resulted in a return for unhedged overseas equities of -1.7% (in AUD). In developed markets, the UK (5.0%) and Japan (1.4%) outperformed the broader market, while France (-0.9%) and Germany (-0.7%) underperformed. The MSCI Emerging Markets Index (0.6%) underperformed unhedged developed markets.

The S&P/ASX300 Accumulation Index rose 1.9% over the month. Small Cap (3.2%) stocks strongly outperformed the broader market, while Large Cap (2%) performed in line. Energy (6.5%) and Materials (6.1%) were the strongest performing sectors in Australia, whilst Utilities (-4.5%) and Industrials (-1.0%) were the weakest performers.

The yield on 10-year Australian Government bonds rose to 2.7% over the month. Elsewhere in the world, bond yields rose across most developed nations. In Australia, short dated bonds outperformed the broader market, while inflation-linked bonds underperformed.
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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