Investment commentary - 28 February 2017

16/03/2017
Provided by Mercer.The information in this article does not necessarily reflect the views of the Trustee.
Following the late January 2017 waver in sentiment, it was back to good news for growth market investors over February, as markets continued along the now labelled ‘Trump rally’.

Health Care and Information Technology (IT) were large contributors to the performance of global markets, while Energy and Materials contracted over the month following a period of strong growth.

Expectations for economic growth remained heightened in February, as Donald Trump continued to push his agenda of tax cuts, less regulation and higher domestic spending. The Dow Jones hit the historic 20,000 mark on 25 January 2017, and continued well into February, opening on 1 March 2017 at over 21,000.  United States (US) labour markets are certainly producing momentum, with the Non-Farm Payrolls increasing by 235,000 in February following a 238,000 increase in January. Unsurprisingly it is widely expected that the Federal Reserve (Fed) will hike its target rate to 0.75% to 1.0% in its mid-March meeting.

The Reserve Bank of Australia (RBA) kept the cash rate stagnate on 1.5% in its March meeting. The RBA is contending with the ‘catch 22’ of wanting further economic growth, but not wanting to put further pressure on housing prices through lower interest rates (encouraging further borrowing).  Gross domestic product (GDP) did surprise on the upside, however, growing 1.1% in the December quarter to be up 2.4% for the year. The terms of trade rose for the third consecutive quarter as net exports contributed to the result, primarily through mining and farming sectors.

SIGNIFICANT DEVELOPMENTS
 
  • As stated, the RBA decided to leave the cash rate unchanged in its March meeting, at 1.50%. RBA Governor, Philip Lowe, noted that the global economy is experiencing continued gradual economic growth alongside global uncertainties. Australia is still focused on managing its transition away from commodites following the end of the mining boom, achieveing 2.4% expansion in 2016. A depreciating exchange rate since 2013 has aided this transition, with an appreciating Australian dollar viewed as most likely to be detrimental to the cause. Higher spending on infrastructure in China pushed commodity prices up, which have led to an improvement for Australia’s National Income, however, medium-term risks to the Chinese economy remain. Unemployment has been held steady at 5.7% to 5.8% over the past year, with the majority of growth due to part-time jobs.
    Meanwhile, the housing market continues to vary across the nation, with attention focused on the uptick of apartments scheduled to flood the markets in eastern seaboard capital cities in the next few years. Inflation is expected to pick up over 2017, hence, the RBA believed it was appropriate to leave the rate unchanged.
  • Australian seasonally adjusted employment increased 13,500 in January, above expectations for a 10,000 rise while December was revised up from 13,500 to 16,300. The unemployment rate decreased to 5.7%, above market expectations for 5.8%. The participation rate decreased to 64.6%, compared to the December figure of 64.7%. Part time jobs increased by 58,300 while full time jobs decreased by 44,800.
  • Australian building approvals increased 1.8% month-on-month (MoM) to be down 12.0% for the year to January, and below revised previous levels of -2.5% and -11.7% for respective periods ending December.
  • US Non-Farm Payrolls increased by 235,000 in February, ahead of expectations for 190,000. There was a slight upwards revision to 238,000 for January (from 227,000). The unemployment rate fell back down to 4.7% in February.
  • The Institute for Supply Management (ISM) Manufacturing Index increased to 57.7 in February, above consensus for 56.2, and the 56 recorded in January. Textile Mills, Apparel, Leather & Allied Products and Machinery reported the largest growth while Furniture & Related Products was the only industry to experience a decline. The ISM Non-Manufacturing Index increased to 57.6 in February, above 56.5 for January. Utilities, Mining and Management of Companies & Support Services were the most significant contributors while Real Estate, Rental & Leasing and Information were the largest detractors.
  • US GDP for Q4 2016 was estimated to have grown 1.9% quarter on quarter (QoQ) annualised, below expectations of 2.1%, and below the 3.5% growth recorded in Q3 2016.
  • The Caixin Manufacturing purchasing managers’ index (PMI) in China increased to 51.7 in February from 51 in January, above expectations for  50.8. Signalling further improvement, and tying second for the strongest level over the past four years.
  • European Core consumer price index (CPI) remained flat at 0.9% over the year to February, in line with expectations. The unemployment rate remained steady at 9.6% in January, in line with expectations, while MoM CPI decreased from 0.5% to -0.8% in January.
  • The Eurozone composite PMI rose to 56 in February, from 54.4 in January. Rising to a 70-month high. All four major economies experienced growth over the month, with Spain hitting an 18-month high, Germany reaching a 34-month high, a 69-month high in France and Italy experiencing the sharpest increase since December 2015.
  • Eurozone seasonally adjusted GDP was given a downwards revision estimate of 1.7% YoY and 0.4% QoQ for Q4.

AUSTRALIAN EQUITIES

The broad Australian equity market expanded over February, with the S&P/ASX 300 Accumulation Index increasing 2.2% for the month. Returns were positive across the market spectrum, with the best relative performer being the S&P/ASX 50 Accum, increasing 2.4% for the month. The worst performer was the S&P/ASX Small Ordinaries, increasing by 1.3% over the month. The best performing sectors were Consumer Staples (+6.0%) and Real Estate (+4.3%). The weakest performing sectors were Materials (-3.2%) and Telecom Services (-3.1%). The largest positive contributors to the return of the index were Westpac, ANZ and NAB, with absolute returns of 6.7%, 5.9% and 6.0% respectively. In contrast, the most significant detractors from performance were BHP, Rio Tinto and Telstra with absolute returns of -6.0%, -6.8% and -3.1% respectively.

GLOBAL EQUITIES

The broad MSCI World ex Australia Index was up 3.2% in hedged terms and 1.5% in unhedged terms over the month, as the Australian dollar appreciated against the major currencies over February. The strongest performing sectors were Healthcare (+4.4%) and Information Technology (+3.4%), while Energy (-3.4%) and Materials (-2.0%) were the worst performers. In Australian dollar terms, the Global Small Cap sector increased by 0.9% while Emerging Markets increased 1.8% in unhedged Australian dollar terms.
 
Over February, the NASDAQ returned 3.8%, the S&P 500 Composite Index rose by 4.0% and the Dow Jones Industrial Average increased 5.2%, all in US dollar terms. Major European equity markets also experienced positive returns as the FTSE 100 (UK) increased 3.1%, the CAC 40 (France) increased 2.3% and the DAX 30 (Germany) increased 2.6%. In Asia, the Indian BSE 500 was up 4.4%, the Hang Seng Index up 2.0%, the SSE Composite (China) up 2.6% and the Japanese TOPIX was also up 0.9% over February.

REAL ASSETS

The Real Assets sector experienced positive returns globally and domestically over February. The FTSE Global Core Infrastructure index returned 3.9%, and Global REITs returned 3.3% (both in Australian dollar hedged terms). Domestic REITs posted an increase of 4.1% in February, while Australian Direct Property (NAV) returned 0.3% on a lagged basis.

FIXED INTEREST

Global sovereign bonds were mostly positive over February for hedged Australian investors. Ten-year bond yields decreased for the US (-11bps to 2.36%), Japan (-3bps to 0.05%), Germany (-25bps to 0.03%) and the UK (-35bps to 1.07%). Two-year bond yields saw mostly negative movement across the globe. Yields rose slightly in the US (+1bps to 1.21%), while Germany’s (-20bps to -0.92%), Japan’s (-7bps to -0.27%) and the UK’s (-3bps to 0.10%) bond yields decreased over February. Global Bond indices were positive for hedged investors, with the Barclays Capital Global Aggregate Bond Index increasing 0.9% and the Citigroup World Government Bond (ex-Australia) Index increasing, by 1.0% over the month. 

Domestically, Australian 10-year bond yields remained at 2.72% while five-year (+6bps to 2.22%) and two-year (+3bps to 1.83%) bond yields increased slightly. As a result, Australian bond returns were more subdued than their international counterparts for the month. The Australian Treasury Bond Index returned 0.1% and the Australian Composite Bond Index returned 0.2% for the month.

CURRENCY MARKETS

The Australian dollar experienced positive movement over February, appreciating against all the major currencies for the second consecutive month and finishing with an increased Trade Weighted Index of 66.7 on 28 February 2017. The Australian dollar appreciated against the US dollar (+1.3%), the Pound Sterling (+2.2%), the Euro (+2.6%) and the Yen (+0.7%). On a trade-weighted basis, the local currency increased 1.7% over the month.

COMMODITIES

Commodity prices saw mixed movements over February, with oil decreasing while iron ore and gold prices saw strong growth. The S&P GSCI Commodity Total Return Index decreased 1.0% for the month. Gold prices finished the month at US$1,256.64 per ounce for a 3.7% increase over the period. The oil price decreased, by 1.7% to $55.22 per barrel. Iron ore prices increased again over the month, by 10.2% to US$92.0 per metric tonne.



 

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