Investment commentary - December 2018

Provided by EISS.
Weakness in global markets accelerated in December as concerns over rising US interest rates, continued geopolitical concerns and less synchronised global growth weighed heavily on investor sentiment. Hopes of a “Santa Rally” were short-lived, as December registered its worst monthly performance since 1970. This period of weakness was also combined with a material spike in market volatility. From a fundamental perspective, while some economic data points were weaker than expected, in aggregate economic data remained positive, with US growth expectations holding steady and global growth expectations only declining modestly.  

The US equity market fell in December for the second consecutive month, with the S&P 500 declining 9.1%. Increased uncertainty around monetary policy contributed to the sharp market decline. During the month, the Fed raised its benchmark interest rate by 0.25% to a range of 2.25% to 2.5%.  While this was the fourth increase in 2018 and widely expected by investors, the Fed did lower its projections for future hikes in 2019. From a geopolitical perspective, ongoing trade concerns between the US and China thawed, with both countries commenting on the ongoing positive dialogue.  Notably, the US announced a deferral in the 1st January 2019 tariff increases (from 10% to 25% on selected Chinese good) and China announced they would purchase a substantial amount of agricultural, energy and other goods from the US.   Somewhat offsetting this positive tone was the arrest of a senior executive of Chinese company Huawei in Canada, at the request of the US.  The European Central Bank announced it would stop its quantitative easing programme in January despite the slowdown in growth, instead focusing on the firming wage growth across Europe. Oil prices crude continued to selloff in December amid concerns of a supply glut and a global economic slowdown. 

The Australian economy grew a meagre 0.3% over the third quarter, which was the weakest growth in two years. The slowing pace of expansion was largely driven by a sharp pull-back in household spending and non-residential construction. The ASX 300 fell 0.2% over the month, significantly outperforming global markets. The Telecommunications (-5.1%) and IT (-4.1%) sectors drove this decline over the month, while Materials (5.1%), Utilities (2.8%) and Health Care (2.4%) were the strongest performing sectors. Australian large caps (0.6%) outperformed, while small caps stocks (4.2%) underperformed. 

The Australian dollar depreciated against all major currencies during December, falling to its weakest level since February 2016, on the back of weak China manufacturing data. The AUD fell against the USD (-3.6%), Yen (-6.9%), Pound (-3.4%), and Euro (-4.5%). In aggregate, the depreciation in the AUD resulted in MSCI World Index unhedged returns (-4.2%) outperforming hedged returns (-8.3%).

Bond yields fell across most developed markets over the month, with the US 10-year falling to 2.7% to conclude the year only fractionally higher than the beginning of the year. In Australia, the 10-year yield fell to 2.3%, while yields in in the UK, Japan and Eurozone declined modestly.

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