Investment commentary - 30 November 2016

19/12/2016
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

Against many expectations, Republican Party candidate, Donald Trump, won the United States (US) election.

Following an initial bout of sell-offs, many developed share markets calmed after the election as Mr Trump’s victory speech of unity instilled confidence ahead of his induction in the New Year. Equity markets and commodities rallied on the back of expectations for expansionary policies whereas bond markets, concerned about the prospect of inflation, experienced a sharp sell-off.

The US Federal Reserve (Fed) left rates unchanged, again stating that a case for a rate hike has continued to strengthen. Markets now fully price in a December hike. Both gross domestic product (GDP) and core inflation increased in the US across quarter three, with economic outlook remaining encouraging. The US unemployment rate fell significantly over November; from 4.9% to 4.6%.

Across the Eurozone, the impact of ‘Brexit’ has been negligible thus far, with the recent purchasing managers’ index (PMI) proving to be resilient across the core countries. Quarter four (Q4) growth rate is expected to accelerate to 0.4% from 0.3% in quarter three (Q3).

Elsewhere, the Japanese economy experienced higher than expected growth of 0.5%, taking the annual rate up to 0.8%. However, household spending fell 2.1% and core inflation is running at -0.5% highlighting the economy’s struggles with deflation and consumer spending trends. The Chinese economy continued its positive momentum through November with official government and private sector PMI’s remaining close to the two-year highs experienced in October.

Commodity prices continued to rise over November, reflecting both stronger demand and reductions in supply in some countries. The Organisation of Petroleum Exporting Countries (OPEC) agreed to cut production to 32.5 million barrels per day, starting January 2017.

Significant developments

  • The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged in its December meeting, at 1.50%. RBA Governor, Philip Lowe, noted that some slowing in the domestic economy’s year-ended growth rate is likely, before it picks up again. Globally, the pace of growth remains lower than average, however, labour market conditions appeared to have improved over the past year. The rise in commodity prices this year has resulted in an increase in Australia’s terms of trade. The RBA judged that there were reasonable prospects for achieving sustainable growth with inflation returning to target over time, and hence it was appropriate to leave the rate unchanged.
  • Australian seasonally adjusted employment increased 9,800 in October, below expectations for a 16,000 rise while September was revised further downwards from -9,800 to -29,000. The unemployment rate was stable at 5.6%, below market expectations for 5.7%. The participation rate remained steady at 64.5%, in line with the revised September figure of 64.5%. Part time jobs decreased by 31,700 while full time jobs increased by 41,500.
  • Australian Retail Sales increased 0.5% month on month (MoM) in seasonally adjusted terms over October, above expectations for a 0.3% increase, this follows the 0.6% increase in September. The strongest gains were in food retailing (+0.4%) and the weakest was Department stores (-0.2%). In trend terms, retail sales rose 3.3% year on year (YoY), up from 2.8% over the year to August.
  • Australian building approvals fell 12.6% month on month to be down 24.9% for the year to October, and below previous levels of -8.7% and -6.4% for respective periods ending September.
  • US Non-Farm Payrolls increased by 178,000 in November, whilst expectations were for 180,000. There was a downwards revision to 142,000 for the prior month. The unemployment rate fell to 4.6% after falling to 4.9% the previous month, while the participation rate fell marginally to 62.7% from 62.8%.
  • The Institute for Supply Management (ISM) Manufacturing Index increased to 53.2 in November, above consensus for 52.5, and 51.9 in October. Miscellaneous Manufacturing and Petroleum & Coal Products reported the largest growth while Printing & Related Support Activities and Wood Products were the most significant declines. The ISM Non-Manufacturing Index increased to 57.2 in November from 54.8 in October. Agriculture and Forestry were the most significant contributors while Real Estate, Rental & Leasing and Public Administration were the largest detractors.
  • Estimate US GDP for Q3 2016 was projected to have grown 3.2% quarter on quarter (QoQ) annualised, above expectations of 3.0%, and above the 1.4% growth recorded in Q2 2016.
  • US Headline consumer price index (CPI) increased to 0.4% MoM and 1.6% YoY to October, in line with expectations and above the 0.3% movement in September. Core CPI remained at 0.1% MoM below expectations for 0.2% and fell to 2.1% YoY below expectations for 2.2% for the month.
  • The Caixin Manufacturing (PMI) in China fell to 50.9 in November 2016 and from 51.2 in October, below expectations of 51.0.This is a drop from the 27-month high of 51.2 in October, signalling marginal improvement in operating conditions. Employment continued to decrease over November, although markedly at the slowest pace seen in past 18 months, while inflationary pressures intensified as a result of rising prices for raw materials.
  • European Core CPI estimates held steady at 0.8% over the year to October in line with estimates for 0.8%. The unemployment rate fell to 9.8% in October, below expectations, while MoM CPI decreased from 0.4% to 0.2% in October.
  • The Eurozone composite PMI further increased to 53.9 in November, up from 53.3 in October. Reaching an 11-month high, led by continued robust growth in Germany and following three-month, five-month and nine-month growth-rate highs in Ireland, Spain and Italy respectively. However, a slowdown in its manufacturing sector saw France descend to its weakest month of economic growth since July.
  • Eurozone seasonally adjusted GDP was estimated at 1.7% YoY and 0.3% QoQ for Q3.

 

Australian equities

The Australian equity market experienced strong growth over November, with the S&P/ASX 300 Accumulation Index increasing 2.8% for the month. There were positive returns across the majority of the market spectrum, with the best relative performer being the S&P/ASX 50 Accum, returning 3.6% for the month, while the worst and sole contractionary performer was the S&P/ASX Small Ordinaries, decreasing by 1.2% over the month. The best performing sectors were Financials (+6.0%) and Energy (+3.3%). The weakest performing sectors were Healthcare (-1.6%) and Telecom Services (-0.4%). The largest positive contributors to the return of the index were CBA, BHP and Westpac, with absolute returns of 7.2%, 6.0% and 3.2% respectively. In contrast, the most significant detractors from performance were Newcrest Mining, CSL and Woolworths with absolute returns of -13.4%, -2.4% and -3.2% respectively.

Global equities

The broad MSCI World ex Australia Index was up 2.8% in hedged terms and 4.5% in unhedged terms over the month, as the Australian dollar depreciated against the US dollar and Pound Sterling over November. The strongest performing sectors were Financials (+11.0%) and Energy (8.8%), while Utilities (-3.4%) and Consumer Staples (-2.3%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 7.3% while Emerging Markets decreased 1.7% in unhedged Australian dollar terms.

Over November, the NASDAQ returned 2.6%, the S&P 500 Composite Index rose by 3.7% and the Dow Jones Industrial Average increased 2.6%, all in US dollar terms. Major European equity markets experienced negative returns as the FTSE 100 (UK) decreased 2.0%, the DAX 30 (Germany) decreased 0.2% while the CAC 40 (France) grew 1.6%. In Asia, the Indian BSE 500 was down 5.6%, the Hang Seng Index down 0.5%, the SSE Composite (China) down 4.8% while the Japanese TOPIX experienced another solid month with a strong 5.5% growth over November.

Real Assets

The Real Assets sector experienced a significant decrease globally and slight increase domestically over November. The FTSE Global Core Infrastructure index returned -2.9%, and Global REITs returned -1.3% (both in Australian dollar hedged terms). Domestic REITs posted a return of 0.7% in November, while Australian Direct Property (NAV) returned 0.5% on a lagged basis.

Fixed interest

Most bond markets were weak over November as expectations for inflation and central bank rate movements rose, along with expectations for contractions to current quantitative easing programs.

Global sovereign bonds weakened further over November for hedged Australian investors. Ten-year bond yields rose for the US (+53 basis points (bps) to 2.37%) and the UK (+18bps to 1.42%) while Germany (+11bps to 0.20%) and Japan (+7bp to 0.02%) also experienced rises. Two-year international bond yields saw mixed movements across the globe with the UK (-13bps to 0.14%) and Germany’s (-14bps to -0.77%) yields decreasing while the US (+26bps to 1.12%) and Japan’s (+8bps to -0.16%) yields increased over November. Global Bond indices were negative for hedged investors, with the Barclays Capital Global Aggregate Bond Index falling 1.6% and the Citigroup World Government Bond (ex-Australia) Index also returning -1.6% over the month, both on a fully hedged basis.


Domestically, Australian 10-year bond yields rose 37bps to 2.67% while five-year (+29bps to 2.16%) and two-year (+19bps to 1.85%) bond yields also rose. As a result, Australian bond returns were weak for the month. The Australia Treasury Bond Index returned -1.9% while the Australian Composite Bond Index returned -1.4% for the month.

 

Currency Markets

The Australian dollar experienced mixed movements over November, falling against a rising US dollar, finishing at US$0.739 but with a slightly increased Trade Weighted Index of 65.3 on 30 November 2016. The Australian dollar depreciated against the US dollar (-2.0%) and the Pound Sterling (-4.1%), but rose against the Euro (+1.3%) and the Yen (+5.6%). On a trade-weighted basis, the local currency increased 0.5% over the month.

Commodities

In commodities, the S&P GSCI Commodity Total Return Index increased 5.6% for the month. Gold prices finished the month at US$1,173.76 per ounce for a 7.9% decrease over the period. The oil price increased, by 5.2% to $50.10 per barrel. Iron ore prices rose sharply again over the month, by 14.6% to US$74.5 per metric tonne.


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