Investment Commentary - 31 January 2018

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

Emerging markets remained strong over January 2018, increasing 4.6% over the month to be up 32.2% for the 12-month period while global equities also continued their upwards climb.

Confidence in China, following strong economic activity and increased emphasis placed on achieving sustainable growth continues to support emerging markets performance. Brazil also renewed confidence through the shrinking of its current account deficit to a decade low, coupled with decreased interest rates in response to low inflation levels. The Australian equity market faltered, as the S&P/ASX 300 Index fell 0.4%, ending a streak of seven consecutive months of positive growth.

The United States (US) dollar (USD) experienced significant depreciation fears as it fell 3.0% in relation to the Australian dollar (AUD) over the month, further spurred downwards by US Treasury Secretary, Steve Mnuchin’s comments advocating for a softer dollar to stimulate increased global trading competitiveness. As a result, the MSCI World ex Australia (NR) Index was up 3.8% in hedged terms and 1.8% in unhedged terms.  US stocks experienced a strong rally following the implementation of the government’s new tax bill, decreasing the corporate tax rate from 35% to 21%, and eliminating tax on foreign profits brought in to domestic shores. Off this stimulus, the NASDAQ increased 7.4%, the S&P 500 Composite Index rose by 5.7% and the Dow Jones Industrial Average increased by 5.9%, all in US dollar terms.

While the effects of synchronised global growth steadied over January, a tightening of monetary policies across central banks globally caused bond yields to rise across the majority of developed economies. This movement is also influenced by continued expected tightening into the future, with three rate hikes expected by the US Federal Reserve (Fed) in 2018. Fixed income investors suffered as a result, posting negative returns across global and domestic bond indices, despite the rates of the Reserve Bank of Australia (RBA) remaining steady since the end of 2016.

  • The RBA decided to leave the cash rate unchanged again in its early February meeting at 1.50%, the cash rate has remained at this level since August 2016. RBA Governor, Philip Lowe, noted that economic growth in the global economy has picked up over 2017, with above-trend growth experienced in most major economies. Asian economies continue to grow, aided by international trade, highlighting China’s key role in the region, while Chinese authorities place more emphasis on sustainable growth. Oil and commodities prices have experienced a rise alongside the global economic growth, although a decline is expected for Australia’s terms of trade, despite this growth. Wage growth and core inflation remains low in most countries, although tighter labour markets and higher commodities prices are expected to support increasing inflation. In Australia, the economy is expected to average growth of 3.0% over the next couple of years. Improvements in non-mining sectors and an influx of infrastructure projects support this outlook. On the other hand, low wage growth and rising household debt remain a concern, restraining household consumption. To combat the threat of rising household debt, the Australian Prudential and Regulatory Authority (APRA) has introduced new supervisory measures, and credit standards have been tightened to reduce the risk profile of borrowers. House price fluctuations have settled down in the past six months. Wage growth is expected to remain low for some time, but could improve with stronger conditions in the labour market. Australian employment growth has been strong over 2017. Underlying inflation is currently low, and expected to remain low as long as slow wage growth continues. With the gradual improvements in the economy and a view that low interest rates will continue to support the Australian economy, the RBA believed it was appropriate to leave the rate unchanged. Australian seasonally adjusted employment increased 34,700 in December, significantly above expectations for a 15,000 rise while November figures were revised up to 63,600. The unemployment rate increased to 5.5% for December, above expectations for 5.4%. The participation rate increased to 65.7%, above expectations to remain at 65.5%. Part time jobs increased by 19,500 while full time jobs increased by 15,100.
  • Australian building approvals decreased 20.0% month-on-month (MoM) to be down 5.5% for the year to December, compared to previous levels of +12.6% (revised) and +18.1% (revised) for respective periods ending November.
  • US Non-Farm Payrolls increased by 200,000 in January, above the previous 160,000 increase (revised) for December. The unemployment rate was unchanged at 4.1% in January.
  • The Institute for Supply Management (ISM) Manufacturing Index recorded 59.1 in January, above consensus for 58.6, but below the 59.3 recorded in December. Of the 18 manufacturing industries, Textile Mills, Fabricated Metal Products and Plastics & Rubber Products were the top contributors while Printing & Related Support Activities, Wood Products, Furniture & Related Products and Non-metallic Mineral Products reported a contraction in growth during January. The ISM Non-Manufacturing Index increased to 59.9 in January, above consensus for 56.7, and the 55.9 for December. The top performers were Management of Companies & Support Services, Arts and Entertainment & Recreation with Information, Other Services, and Professional, Scientific & Technical Services being the only industries to report contractions during January.
  • US gross domestic product (GDP) assumption for Q4 2017 was 2.6% quarter on quarter (QoQ) annualised, below expectations for 3.0%, and below the 3.2% growth recorded in Q3 2017.
  • The Caixin Manufacturing purchasing managers’ index (PMI) in China increased to 51.5 in January, in line with expectations. The indicator continues to show positive improvements in China’s manufacturing industry.
  • European Core consumer price index (CPI) estimate increased to 1.0% over the year to January, in line with expectations. The unemployment rate remained at 8.7% in December, while MoM CPI increased to 0.4% in December, from 0.1% in November.
  • The Eurozone composite PMI increased to 58.8 in January, above expectations for 58.6, signalling expansion for the fifty-fifth month in a row.
  • Eurozone seasonally adjusted GDP estimate increased to 2.7% year-on-year, and remained constant at 0.6% QoQ for Q4 2017, from 2.6% and 0.6% respectively for Q3 2017.


The Australian equity market underperformed its hedged international developed counterpart index over the month, as the S&P/ASX 300 Index fell 0.4%, ending a streak of seven consecutive positive months. The S&P/ASX mid 50 Index was the strongest relative performer, falling 0.1%, while the S&P/ASX Small Ordinaries was the weakest, falling by 0.5% for the month.

The best performing sectors were Healthcare (+3.1%) and IT (+2.5%). The weakest performing sectors were Utilities (-4.4%) and Real Estate (-3.2%). The largest positive contributors to the return of the index were CSL, BHP and South32, with absolute returns of 3.7%, 2.4% and 9.6% respectively. In contrast, the most significant detractors from performance were CBA, Amcor and Tabcorp with absolute returns of -1.8%, -5.3% and -7.4% respectively.


The broad MSCI World ex Australia (NR) Index was up 3.8% in hedged terms and 1.8% in unhedged terms over the month, as the AUD appreciated against the USD. The strongest performing sectors were Consumer Discretionary (+4.3%) and IT (+3.8%), while Utilities (-4.4%) and Real Estate (-2.9%) were the worst performers. In AUD terms, the Global Small Cap sector was flat (0.0%) while Emerging Markets rose by 4.6%.

Over January, the NASDAQ increased 7.4%, the S&P 500 Composite Index rose by 5.7% and the Dow Jones Industrial Average increased by 5.9%, all in USD terms. In local currency terms, major European equity markets experienced mixed returns as the FTSE 100 (United Kingdom (UK)) decreased 2.0% while the DAX 30 (Germany) increased by 2.1% and the CAC 40 (France) increased by 3.2%. In Asia, the Japanese TOPIX (1.1%), Hang Seng (9.9%), SSE Composite (5.3%) and Indian S&P BSE 500 (2.3%) all rose over January.


The Real Assets sector was broadly negative over January. The FTSE Global Core Infrastructure index fell 1.3% while Global REITs also fell 1.3% over the month (both in AUD hedged terms). Domestic REITs posted a decrease of 3.2% over January, while Australian Direct Property (NAV) returned 2.6% on a one-month lagged basis.


Global bond markets were broadly weak over January with negative movements from the major government bond indices. The Barclays Capital Global Aggregate Bond Index fell 0.7% while the Citigroup World Government Bond (ex-Australia) Index also fell 0.7% over the month. Ten-year bond yields increased in Germany (+21bps to 0.64%), Japan (+4bps to 0.08%), the US (+30bps to 2.71%) and the UK (+27bps to 1.50%). Two-year bond yields also saw mostly increases over the month as US yields rose (+26bps to 2.15%) along with Germany (+9bps to -0.57%) and the UK (+22bps to 0.66%) while Japan (-0.13%) remained flat.

Returns for existing domestic bond holders were also weak over January, as 10-year (+19bps to 2.82%), five-year (+6bps to 2.41%) and two-year (+5bps to 2.04%) yields all increased. Of the Bloomberg Ausbond indices, the Credit Index produced the highest relative return, remaining flat over the month, while the Australian Composite Bond Index return was -0.3% over the month.


The AUD appreciated strongly against the US but depreciated against the remaining major currencies over January, ultimately finishing with an increased Trade Weighted Index of 65.6 on 31 January 2018. The AUD appreciated against the USD (+3.5%) but depreciated against the Pound Sterling (-1.7%), the Euro (-0.5%) and the Yen (-0.1%). On a trade-weighted basis, the local currency increased 1.1% over the month.


Iron Ore decreased 1.4% over January, finishing the month at $73.0 per metric tonne. The S&P GSCI Commodity Total Return Index decreased 0.1% over the month. Gold prices finished the month at US$1,341.67 per ounce, increasing 2.9% over the period, while the oil price rose 3.0% to $68.6 per barrel over January.

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