Investment commentary - 31 January 2017


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

Following a period of equity market momentum fuelled by expected fiscal stimulus at the hands of President Trump, risk sentiment tapered towards the end of January 2017 as uncertainty surrounding political promises gathered.

As such, equity markets gave back some of the November and December 2016 gains and bond markets were able to benefit late in the month following a particularly weak 2016 Q4.

Major central banks fell quiet in January as the European Central Bank (ECB) made no significant changes to policy, and Bank of Japan (BOJ) revised its economic growth forecasts whilst also making no change. As expected following the December raise, the United States (US) Federal Reserve (Fed) did not adjust interest rates in its 1 February 2017 decision. The minutes did note, however, that “almost all” officials saw potential for expansionary fiscal policy in the period ahead. Domestically, the Reserve Bank of Australia (RBA) also kept interest rates stable, noting that while inflation was low in December, it is expected to pick up through 2017.
Over the last 12 months, growth assets remain to be the significant driver of returns in Australian investors’ diversified portfolios with the majority of growth assets achieving double digit returns.

Significant developments

  • The RBA decided to leave the cash rate unchanged in its February meeting, at 1.50%. RBA Governor, Philip Lowe, noted that the global economy is picking up pace. Growth in China improved over the second half of 2016, and combined with the positive global environment, have led to increasing commodity prices which have led to an improvement for Australia’s National Income. 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. The RBA reiterated expectations for economic growth to be around 3% over the next couple of years. Inflation over December was low, but 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 December, above expectations for a 10,000 rise while November was revised down from 39,100 to 37,100. The unemployment rate rose to 5.8%, above market expectations for 5.7%. The participation rate increased to 64.7%, above the November figure of 64.6%. Part time jobs increased by 4,200 while full time jobs increased by 9,300.
  • Australian building approvals decreased 1.2% month-on-month (MoM) to be down 11.4% for the year to December, and below revised previous levels of 7.5% and -4.4% for respective periods ending November.
  • US Non-Farm Payrolls increased by 227,000 in January, above expectations for 180,000. There was a slight upwards revision to 157,000 for the prior month. The unemployment rate increased to 4.8% from 4.7% in the previous month, while the participation rate increased to 62.9%.
  • The Institute for Supply Management (ISM) Manufacturing Index increased to 56 in January, above consensus for 55, and the 54.5 (revised) recorded in December. Plastics & Rubber Products and Miscellaneous Manufacturing reported the largest growth while Nonmetallic Mineral Products and Wood Products were the most significant declines. The ISM Non-Manufacturing Index decreased to 56.5 in January, although this was a slight decrease from the revised figure for December of 56.6. Mining and Other Services were the most significant contributors while Real Estate and Rental & Leasing were the largest detractors.
  • US GDP for Q4 2016 was estimated to have grown 1.9% quarter on quarter (QoQ) annualised, below expectations of 2.2%, and below the 3.5% growth recorded in Q3 2016.
  • US Headline consumer price index (CPI) increased to 0.3% MoM and 2.1% YoY to December, in line with expectations and above the 0.2% MoM and 1.7% YoY figures from November. Core CPI remained flat at 0.2% MoM, in line with expectations and increased to 2.2% YoY, also in line with expectations.
  • The Caixin Manufacturing purchasing managers’ index (PMI) in China decreased to 51 in January 2017 from 51.9 in December, below expectations for  51.8. Although a decrease, the figure indicates further improvement in the health of the sector.
  • European Core CPI remained flat at 0.9% over the year to January, in line with expectations. The unemployment rate fell to 9.6% in December, below expectations, while MoM CPI increased from -0.1% to 0.5% in December.
  • The Eurozone composite PMI remained at 54.4 in January. This output level has indicated a contraction-free period of 43 consecutive months, with Ireland experiencing the strongest growth over January with a 10-month high.
  • Eurozone seasonally adjusted GDP was given an estimate of 1.8% YoY and 0.5% QoQ for Q4.

Australian equities

The Australian equity market contracted over January, with the S&P/ASX 300 Accumulation Index decreasing 0.8% for the month. Returns were negative across the majority of the market spectrum, with the best relative performer being the S&P/ASX mid 50 Accum, increasing 0.1% for the month. The worst performer was the S&P/ASX Small Ordinaries, decreasing by 2.4% over the month. The best performing sectors were Materials (+4.8%) and Healthcare (+4.6%). The weakest performing sectors were Real Estate (-4.6%) and Industrials (-4.4%). The largest positive contributors to the return of the index were CSL, BHP and Rio Tinto, with absolute returns of 12.0%, 6.4% and 11.8% respectively. In contrast, the most significant detractors from performance were Brambles, ANZ and Westpac with absolute returns of -15.9%, -3.3% and -2.3% respectively

Global equities

The broad MSCI World ex Australia Index was up 1.4% in hedged terms and down 2.4% in unhedged terms over the month, as the Australian dollar appreciated against the major currencies over January. The strongest performing sectors were Materials (+1.8%) and Information Technology (-0.3%), while Energy (-7.5%) and Telecommunication Services (-4.1%) were the worst performers. In Australian dollar terms, the Global Small Cap sector contracted 2.4% while Emerging Markets increased 0.6% in unhedged Australian dollar terms.

Over January, the NASDAQ returned 4.3%, the S&P 500 Composite Index rose by 1.9% and the Dow Jones Industrial Average increased 0.6%, all in US dollar terms. Major European equity markets experienced mixed returns as the FTSE 100 (UK) decreased 0.6%, the CAC 40 (France) decreased 2.3% while the DAX 30 (Germany) increased 0.5%. In Asia, the Indian BSE 500 was up 5.6%, the Hang Seng Index up 6.2%, the SSE Composite (China) up 1.8% and the Japanese TOPIX was also up 0.2% over January.

Real Assets

The Real Assets sector experienced mixed returns globally and domestically over January. The FTSE Global Core Infrastructure index returned 0.6%, and Global REITs returned -0.5% (both in Australian dollar hedged terms). Domestic REITs posted a drop of 4.7% in January, while Australian Direct Property (NAV) returned 2.1% on a lagged basis.

Fixed interest

Global sovereign bonds were mostly negative over January for hedged Australian investors.  Ten-year bond yields rose for the US (+2bps to 2.47%), Japan (+4bps to 0.09%), Germany (+17bps to 0.27%) and the UK (+18bps to 1.42%). Two-year bond yields saw mostly upward movements across the globe. Yields rose in the US (+3bps to 1.20%), UK (+5bps to 0.13%), and Germany (+8bps to -0.72%) while Japan’s (-2bps to -0.20%) bond yields decreased over January. Global Bond indices were negative for hedged investors, with the Barclays Capital Global Aggregate Bond Index decreasing 0.3% and the Citigroup World Government Bond (ex-Australia) Index decreasing, by 0.7% over the month.

Domestically, Australian 10-year bond yields dropped 4bps to 2.72% while five-year (-9bps to 2.15%) and two-year (-12bps to 1.80%) bond yields also decreased. As a result, Australian bond returns were stronger than their international counterparts for the month. The Australia Treasury Bond Index and the Australian Composite Bond Index both returned 0.6% for the month.

Currency Markets

The Australian dollar experienced positive movement over January, appreciating against all the major currencies and finishing with an increased Trade Weighted Index of 65.6 on 31 January 2017. The Australian dollar appreciated against the US dollar (+4.8%), the Pound Sterling (+2.6%), the Euro (+3.0%) and the Yen (+1.7%). On a trade-weighted basis, the local currency increased 2.7% over the month.


Commodity prices saw mixed movements over January, with oil decreasing marginally while iron ore and gold prices grew moderately. The S&P GSCI Commodity Total Return Index decreased 6.0% for the month. Gold prices finished the month at US$1,211.49 per ounce for a 4.7% increase over the period. The oil price decreased slightly, by 1.0% to $56.15 per barrel. Iron ore prices increased again over the month, by 4.4% to US$83.5 per metric tonne.

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