Investment commentary - 31 July 2017

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
The recent trend of a weakening United States (US) dollar (USD) and rising commodity prices continued in July 2017.

As a consequence, emerging markets equities once again outperformed their developed counterparts. The MSCI Emerging Markets (UH) index rose 1.8% in Australian dollar (AUD) terms despite an appreciation of the AUD over the month. Asian emerging markets continued their positive run with the Shanghai Stock Exchange (SSE) Composite (+2.5%) and the Hang Seng (+6.6%) increasing while the S&P BSE 500 (India) (+5.5%) also increased, bouncing back from a poor June.

Domestically, the S&P/ASX 300 Index was flat over July, while the S&P/ASX MidCap 50 Index detracted 1.6%. The major banks experienced a reversal over July following a weak second quarter of 2017.  Another consequence of the weakening USD and rising commodity prices, particularly iron ore prices, has been a rising AUD, which detracted from unhedged Australian investor returns. This development has increased pressure on the target cash rate of the Reserve Bank of Australia (RBA), with RBA Governor, Philip Lowe, noting the ‘appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast’. Following recent movements, a persistently strong AUD is expected to create earnings headwinds for exporting sectors going forward.

US equities rose to new record highs as large information technology stocks including Apple, Facebook and Microsoft released solid earnings growth figures. Concurrently, the NASDAQ (+3.4%), Dow Jones Industrial Average (+2.7%) and the S&P 500 Composite (+2.1%) all experienced gains over the month. The US Federal Reserve (Fed) left rates unchanged in its July meeting, following the rate hike to 1.00% to 1.25% in June, again signalling a reduction of the $4.5 trillion balance sheet could begin soon.


  • The RBA decided to leave the cash rate unchanged again in its early August meeting at 1.50%, the cash rate has remained at this level since August 2016.  RBA Governor, Philip Lowe, noted that forecasts for economic growth in the global economy are improving while Labour markets are also experiencing a gradual tightening. Australia is nearing the end of its transition following the mining boom, with business investment picking up in the non-mining related sectors. Rising commodity prices and a weakening USD have put upward pressure on the AUD.  The RBA views the appreciating Aussie dollar as detrimental to Australia’s economic recovery through putting a hold on growth in domestic economic activity. Australian labour force conditions remain mixed but forward-looking indicators predict growth in employment over the longer term. Wage growth is expected to remain low for some time, and together with rising household debt, is putting a restraint on household consumption. Inflation is expected to continue to grow with the improving economy, although new entrants and increased competition in retail may counter increasing inflation. With the gradual improvements in the economy and view that low interest rates continue to support the Australian economy, the RBA believed it was appropriate to leave the rate unchanged.
  • Australian seasonally adjusted employment increased 14,000 in June, just below expectations for a 15,000 rise while May figures were revised down to 38,000. The unemployment rate decreased to 5.6%, in line with expectations. The participation rate increased to 65.0%, above the expected and previous monthly figure of 64.9%. Part time jobs decreased by 48,000 while full time jobs increased by 62,000.
  • Australian building approvals increased 10.9% month-on-month (MoM) to be down 2.3% for the year to June, and above previous levels of -5.6% and -19.7% for respective periods ending May.
  • US Non-Farm Payrolls increased by 209,000 in July, above expectations for 180,000 but below the previous 220,000 increase for June. The unemployment rate decreased to 4.3% in July from 4.4% in June.
  • The Institute for Supply Management (ISM) Manufacturing Index decreased to 56.3 in July, below consensus for 56.4, and below the 57.8 recorded in June. Plastics & Rubber Products, Electrical Equipment, Appliances & Components and Wood Products reported the largest growth while Apparel, Leather & Allied Products, Textile Mills and Petroleum & Coal Products contracted over the month. The ISM Non-Manufacturing Index decreased to 53.9 in July, below consensus for 56.9, and below the 57.4 for June. Accommodation & Food Services, Information and Educational Services were the most significant contributors while Management of Companies & Support Services and Agriculture, Forestry, Fishing & Hunting contracted over the period.
  • US gross domestic product (GDP) assumption was set for Q2 2017 to 2.6% quarter on quarter (QoQ) annualised, below expectations for 2.7%, but above the 1.4% growth recorded in Q1 2017.
  • The Caixin Manufacturing Purchasing Managers’ Index (PMI) in China increased to 51.1 in July from 50.4 in June, above expectations for 50.4. Continuing the reversal from the decline in May, due to stronger increases in production and new orders, which prompted companies to increase purchasing activities. The rate of expansion was the strongest since February as companies raised output to meet growing client demand.
  • European Core consumer price index (CPI) increased to 1.3% over the year to July, in line with expectations. The unemployment rate increased to 9.3% in June, from 9.2% (revised) in May, while MoM CPI increased from -0.1% in May to 0.0% in June.
  • The Eurozone composite PMI decreased to 55.7 in July, from 56.3 in June, signalling expansion throughout the last 49 months albeit slower growth with a six month low. Germany, France, Spain and Ireland experienced lower growth levels while Italy experienced a three month high.
  • Eurozone seasonally adjusted GDP estimate was 2.1% year-on-year and 0.6% QoQ for Q2 2017, from 1.9% and 0.6% respectively for Q1 2017.


The broad Australian equity market was subdued over July, with the S&P/ASX 300 Index remaining flat over the month. The highest positive performer was the S&P/ASX Small Ordinaries Index, increasing 0.3% for the month, while the S&P/ASX MidCap 50 Index was the sole negative performer, decreasing by 1.6% over the month.  The best performing sectors were Materials (+3.5%) and Financials (+1.3%). The weakest performing sectors were Healthcare (-7.5%) and Telecom Services (-4.2%). The largest positive contributors to the return of the index were BHP, Westpac and ANZ, with absolute returns of 11.3%, 4.8% and 3.6% respectively.  In contrast, the most significant detractors from performance were CSL, Telstra and Aristocrat Leisure with absolute returns of -8.6%, -4.1% and -10.1% respectively.

Global Equities

The broad MSCI World ex Australia (NR) Index was up 1.5% in hedged terms and down -1.7% in unhedged terms over the month, as the AUD appreciated against the major currencies. The strongest performing sectors were Materials (+0.5%) and Telecommunication Services (+0.5%), while Healthcare (-3.8%) and Consumer Staples (-3.4%) were the worst performers. In AUD terms, the Global Small Cap sector decreased by 1.7% while Emerging Markets increased by 1.8%.

Over July, the NASDAQ rose 3.4%, the S&P 500 Composite Index rose by 2.1% and the Dow Jones Industrial Average increased by 2.7%, all in US dollar terms. In local currency terms, major European equity markets experienced weaker returns as the CAC 40 (France) decreased 0.5%, the DAX 30 (Germany) decreased 1.7% while the FTSE 100 (UK) increased by 0.9%. In Asia, the Japanese TOPIX was up 0.4%, the SSE Composite (China) was up 2.5% and the Hang Seng Index was up 6.6%. The Indian BSE 500 also increased 5.5% over July.

Real Assets

The Real Assets sector experienced positive returns globally but mixed domestically over July. The FTSE Global Core Infrastructure index returned 1.5% while Global REITs increased 0.9% (both in AUD hedged terms). Domestic REITs posted a decrease of 0.2% in July, while Australian Direct Property (NAV) returned 2.0% on a lagged basis.

Fixed Interest

Global bond markets were steady over July as yields decreased across the duration spectrum. The Barclays Capital Global Aggregate Bond Index increased 0.4% while the Citigroup World Government Bond (ex-Australia) Index increased 0.3% over the month. Ten-year bond yields decreased for the US (-1bps to 2.29%), the UK (-7bps to 1.12%), Germany (-3bps to 0.44%) and Japan (-1bps to 0.08%). Two-year bond yields also decreased over the month. Yields dropped in the US (-2bps to 1.35%), in Germany (-10bps to -0.67%) and the UK (-9bps to 0.27%) while Japan remained flat (-0.11%) over July.

Domestically, Australian 10-year bond yields increased 3bps to 2.63% while five-year bond yields decreased (-1bps to 2.17%) and two-year bond yields increased (+7bps to 1.81%). Australian bond returns for existing holders were moderate over July.

The Bloomberg Ausbond Bank Credit Index produced the highest return of 0.6%, while the Australian Composite Bond Index returned 0.2% for the month.


The AUD appreciated against major currencies over June, finishing with an increased Trade Weighted Index of 67.3 on 31 July 2017. The AUD appreciated against the USD (+4.1%), the Euro (+1.0%), the Yen (+2.4%) and the Pound Sterling (+2.9%). On a trade-weighted basis, the local currency increased 2.7% over the month.


Following the descent of iron ore to $58 per metric tonne in May 2017, from its peak in February 2017 at US$92 per metric tonne, June’s upward trend continued through July, increasing 15.0%, to finish at US$73.0 per metric tonne on 31 July 2017. The S&P GSCI Commodity Total Return Index rose 0.5% for the month. Gold prices finished the month at US$1,268.85 per ounce, increasing 2.0% over the period, while the oil price increased by 9.8% to $52.49 per barrel over July.This information has been prepared by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. Any advice contained in this document is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek professional advice from a licensed, or appropriately authorised, financial adviser if you are unsure of what action to take. "MERCER" is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2015 Mercer LLC. All rights reserved.

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