Investment commentary – 31 August 2017

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

Heightened geopolitical risks, brought on by weapons testing in North Korea and the accompanying political rhetoric, wove a cautious atmosphere for August 2017.

The volatility caused some flight to quality as bond yields decreased across global markets and gold prices increased by 5.0%. The United States (US) Federal Reserve (Fed) was quiet over August, uncertain around the lower levels of inflation than expected, despite positive movements from other indicators. Meanwhile, President Trump upped his rhetoric on pro-growth agendas, with commitment to tax reform and infrastructure spending. Over these developments, the US gross domestic product (GDP) assumption was revised up to 3.0% for Q2 2017, while unemployment increased slightly to 4.4%.

Emboldened by a depreciated US dollar (USD) and stabilising commodity prices, Emerging Markets continued to outperform Domestic and Global Developed Equities over August. The MSCI Emerging Markets (UH) index increased 2.9% for the month, bringing it to 18% for the year to August 2017. Despite the recently implemented sanctions by the US, Russia was at the forefront; with stocks outperforming expectations given pricing of the sanctions had occurred earlier in the year. Brazil also experienced positive activity following implementation of a number of expansionary reforms by the government. Plans to privatise state-run enterprises, reform the social security system and a loosening of monetary policy have put the economy in better stead following the past two presidential corruption scandals. China’s tightening financial and housing reforms and accommodating monetary policy also allowed stocks to rally. The International Monetary Fund (IMF) improved growth forecasts for the Chinese economy over the month, admittedly at the expense of increased private and public debt levels.

Domestically, the market experienced some positive movement with the S&P/ASX 300 index rising 0.7% over the month and employment figures expressing positive movements for the economy. However, the high Australian dollar (AUD) remains a concern for the Reserve Bank of Australia (RBA), despite some depreciation over the month, it seems to have broken out of the USD0.72 to USD0.78 range, to sit at USD0.79 at the end of August. Australian bond yields continued to rise over August in conjunction with the high AUD. This predicament may worsen the speculated fragile housing situation in Australia, and along with low inflation is likely to hold the RBA from increasing interest rates for some time.


  • ?The RBA decided to leave the cash rate unchanged again in its early September 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 wellbeing 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, but could improve with stronger conditions in the labour market. Low wage growth coupled with rising household debt is putting a restraint on household consumption. Inflation is currently low, but expected to continue to grow with the improving economy. 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 27,900 in July, above expectations for a 20,000 rise while June figures were revised up to 20,000. The unemployment rate decreased to 5.6% for July, in line with expectations, while June’s figure was revised up to 5.7%. The participation rate increased to 65.1%, above the expected and previous monthly figure of 65.0%. Part time jobs increased by 48,200 while full time jobs decreased by 20,300.
  • ?Australian building approvals decreased 1.7% month-on-month (MoM) to be down 13.9% for the year to July, and below previous levels of 10.9% and -2.3% for respective periods ending June.
  • ?US Non-Farm Payrolls increased by 156,000 in August, below expectations for 180,000 and below the previous 209,000 increase for July. The unemployment rate increased to 4.4% in August from 4.3% in July.
  • ?The Institute for Supply Management (ISM) Manufacturing Index increased to 58.8 in August, above consensus for 56.5, and above the 56.3 recorded in July. Textile Mills, Petroleum & Coal Products and Machinery reported the largest growth while Apparel, Leather & Allied Products, Primary Metals and Furniture & Related Products contracted over the month. The ISM Non-Manufacturing Index increased to 55.3 in August, below consensus for 55.6, but above the 53.9 for July. Retail Trade, Information and Management of Companies & Support Services were the most significant contributors while Agriculture, Forestry, Fishing & Hunting and Transportation & Warehousing contracted over the period.
  • ?US GDP assumption was revised up for Q2 2017 to 3.0% quarter on quarter (QoQ) annualised, above expectations for 2.7%, and above the 1.2% (revised) growth recorded in Q1 2017.
  • ?The Caixin Manufacturing Purchasing Managers’ Index (PMI) in China increased to 51.6 in August from 51.1 in July, above expectations for 51.0. Production levels continued to expand as export sales increased at their quickest rate since 2010. The movement is a healthy signal for China’s manufacturing sector, experiencing an increased rate of growth for the third month in a row. Conversely, the rate at which vendor performance deteriorated was the most aggressive since January, attributed to stricter environmental policies delaying lead times.
  • ?European Core consumer price index (CPI) remained at 1.2% over the year to August, in line with expectations. The unemployment rate remained at 9.1% in July, after June was revised to 9.1%, while MoM CPI decreased from 0.0% in June to -0.5% in July.
  • ?The Eurozone composite PMI remained at 55.7 in August, slightly below expectations of 55.8, signalling further solid expansion, with the manufacturing sector picking up momentum while the service sector eased slightly, albeit still enjoying a long term growth trend. Ireland and Germany were the only nations to see their output growth expand, with Ireland experiencing a three-month high and Germany a two-month high.
  • ?Eurozone seasonally adjusted GDP estimate was revised up to 2.3% year-on-year, from 2.2% and kept at 0.6% QoQ for Q2 2017, from 1.9% and 0.6% respectively for Q1 2017.


The broad Australian equity market was positive over August, with the S&P/ASX 300 Index returning 0.7% over the month. The highest positive performer was the S&P/ASX Small Ordinaries Index, increasing 2.7% for the month, while the S&P/ASX 100 and S&P/ASX MidCap 50 Index were the weakest performers, returning 0.5% over the month. The best performing sectors were Energy (+5.2%) and Consumer Staples (+5.2%). The weakest performing sectors were Telecom Services (-7.2%) and Financials (-2.1%). The largest positive contributors to the return of the index were BHP, Wesfarmers and Newcrest Mining, with absolute returns of 6.3%, 5.1% and 13.2% respectively. In contrast, the most significant detractors from performance were CBA, Telstra and QBE with absolute returns of -6.9%, -9.9% and -11.5% respectively.


The broad MSCI World ex Australia (NR) Index was up 1.8% in hedged terms and 2.8% in unhedged terms over the month, as the Australian dollar depreciated against the major currencies. The strongest performing sectors were Utilities (+6.5%) and Information Technology (+5.3%), while Energy (-0.9%) and Financials (+0.2%) were the worst performers. In Australian dollar terms, the Global Small Cap sector increased by 1.2% while Emerging Markets increased 3.4% in unhedged Australian dollar terms.

Over August, the NASDAQ rose 1.3%, the S&P 500 Composite Index rose by 0.3% and the Dow Jones Industrial Average increased by 0.7%, all in US dollar terms. In local currency terms, major European equity markets experienced mixed returns as the CAC 40 (France) decreased 0.2%, the DAX 30 (Germany) decreased 0.5% while the FTSE 100 (United Kingdom (UK)) increased by 1.6%. In Asia, the Japanese TOPIX was flat over August, while the SSE Composite (China) was up 2.7% and the Hang Seng Index was up 3.1%. The Indian BSE 500 decreased 1.0% over August.


The Real Assets sector experienced positive returns globally over August. The FTSE Global Core Infrastructure index returned 2.1% while Global REITs increased 0.3% (both in AUD hedged terms). Domestic REITs posted an increase of 1.5% in August, while Australian Direct Property (NAV) returned 0.4% on a lagged basis.


Global bond markets were positive over August as yields decreased across the duration spectrum. The Barclays Capital Global Aggregate Bond Index increased 1.0% while the Citigroup World Government Bond (ex-Australia) Index increased 1.1% over the month. Ten-year bond yields decreased for the US (-17 basis points (bps) to 2.12%), the UK (-3bps to 1.08%), Germany (-18bps to 0.26%) and Japan (-7bps to 0.01%). Two-year bond yields also decreased over the month. Yields dropped in the US (-3bps to 1.32%), in Germany (-9bps to -0.76%), the UK (-9bps to 0.18%) and Japan (-4bps to -0.15%) over August.
Domestically, Australian 10-year bond yields increased 4bps to 2.66% while five-year bond yields increased (+9bps to 2.25%) and two-year bond yields increased (+9bps to 1.90%). As a result, Australian bond returns for existing holders were subdued over August. The Bloomberg Ausbond Inflation Index produced the highest return of 0.4%, while the Australian Composite Bond Index return was flat over the month.


The AUD depreciated against the majority of major currencies over August, finishing with a decreased Trade Weighted Index of 66.3 on 31 August 2017. The AUD depreciated against the USD (-0.7%), the Euro (-2.2%) and the Yen (-1.1%) but appreciated against the Pound Sterling (+0.5%). On a trade-weighted basis, the local currency decreased 1.5% over the month.


Iron Ore continued to rise over August, increasing 5.0% to $76.5 per metric tonne. The S&P GSCI Commodity Total Return Index was flat for the month. Gold prices finished the month at US$1,316.02 per ounce, increasing 4.0% over the period, while the oil price move marginally down to $52.31 per barrel over August.


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