Investment commentary – 31 October 2016

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

October 2016 saw a turnaround from recent market trends as expectations rose for a rate climb in the United States (US) and inflation showed signs of firming.

Global bond returns were weak, and growth markets failed to pick up the slack; instead displaying signs of investor timidity and uncertainty.

The first release of Q3 US gross domestic product (GDP) growth was encouraging for the US economy as it grew 2.9% for the period after a slower start to the calendar year. This was followed by an encouraging 161,000 increase in nonfarm payrolls for October and a drop in the unemployment rate to 4.9%. Inflationary expectations adjusted accordingly, and US Federal Reserve (Fed) Chair, Janet Yellen, also noted that higher rates were warranted “fairly soon”. Investors had priced in a higher probability of the Fed’s next hike being delivered in the December meeting. This, together with increased expectations that the European Central Bank (ECB) will begin tapering bond purchases, led to developed sovereign yields moving higher through the month.

US voters went to the polls on 8 November 2016 and elected Donald Trump as the next president. Voters also delivered Republicans control of both houses of Congress. In a reprise of the Brexit vote in the United Kingdom (UK), Trump’s election shocked most pundits and pollsters. Similarly, markets plunged, with the S&P 500 futures down more than 5% as results rolled in, although, they subsequently rebounded on the back of expectations for ‘business-friendly’ changes in policy. The market expected gridlock from a Clinton administration and a Republican House, but the Republican sweep results in more potential for these policy changes. With the lack of clarity surrounding policy details, markets must wrestle with the uncertainty of what a Trump administration will look like.

  • The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged in its November meeting, at 1.50%. RBA Governor, Philip Lowe, noted that Australia’s major trading partners continue to grow at a bit below average pace. The rise in commodity prices this year has resulted in an increase in Australia’s terms of trade. Accommodative monetary policy continues in major advanced economies and further improvements in labour market conditions are supporting economic activity. September quarter inflation data was in line with expectations, with headline inflation remaining around 1.25%. The Board 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 dropped 9,800 in September, well below expectations for a 15,000 rise while August was revised downwards from -3,900 to -8,600. The unemployment rate was stable at 5.6%, below market expectations for 5.7%. However, the participation rate decreased to from 64.7% to 64.5%. Part time jobs increased by 43,200 while full time jobs fell by 53,000.
  • Australian Retail Sales increased 0.6% month on month (MoM) in seasonally adjusted terms over September, above expectations for 0.4%, following a 0.4% increase in August. The strongest gains were in Cafes, restaurants and takeaway food services (+0.9%) and the weakest was Department stores (-0.3%). In trend terms, retail sales rose 2.8% year on year (YoY), up from 2.6% over the year to August.
  • Australian building approvals fell 8.7% month on month to be down -6.4% for the year to September, well below previous levels of -1.8% and 10.1% for respective periods ending August.
  • US Non-Farm Payrolls increased by 161,000 in October, whilst expectations were for 173,000, while there was an upwards revision to 191,000 for the prior month. The unemployment rate fell back to 4.9% after rising to 5.0% the previous month, while the participation rate fell marginally to 62.8% from 62.9%.
  • The Institute for Supply Management (ISM) Manufacturing Index increased to 51.9 in October, above consensus for 51.7, and 51.1 in September. Textile Mills and Miscellaneous Manufacturing reported the largest growth while Wood Products and Apparel were the most significant declines. The ISM Non-Manufacturing Index decreased to 54.8 in October from 57.1 in September.  Transportation & Warehousing and Construction were the most significant contributors while Educational Services and Mining were the largest detractors.
  • The estimate of Q3 2016 US GDP was projected to have grown 2.9% quarter on quarter (QoQ) annualised, above expectations of 2.6%, and above the 1.4% growth recorded in Q2 2016.
  • US Headline consumer price index (CPI) increased to 0.3% MoM and 1.5% YoY to September, in line with expectations and above the 0.2% movement in August. Core CPI decreased to 0.1% MoM below expectations for 0.2% and 2.2% YoY below expectations for 2.3% for the month.
  • The Caixin Manufacturing purchasing managers’ index (PMI) in China rose to 51.2 in October of 2016 from 50.1 in September, above expectations of 50.2. It was the fourth straight month of expansion and the highest reading since July 2014, as output rose the most since March 2011 while new orders rebounded. However, new export orders fell slightly while companies cut their staff numbers at the slowest pace in 17 months.
  • Chinese GDP remained at 6.7% YoY to Q3, in line with expectations and holding at 6.7% recorded over the year to Q2. In Q3, seasonally adjusted, China’s GDP grew 1.8% QoQ.
  • European Core CPI estimates held steady at 0.8% over the year to September, from 0.9% in August, in line with estimates for 0.8%. The unemployment rate remained at 10.1% in September, above expectations, however MoM CPI picked up from 0.1% to 0.4% in September.
  • The Eurozone composite PMI decreased further to 52.6 in September, down from 52.9 in August. Reaching a 20-month low, decreased growth in Germany, Italy, Spain and Ireland has offset the brief acceleration in France.
  • Eurozone seasonally adjusted GDP was estimated at 1.6% YoY and 0.3% QoQ for Q3.


The Australian equity market contracted over October, with the S&P/ASX 300 Accumulation Index falling 2.2% for the month. There were negative returns across the majority of the market spectrum, the best relative performer being the S&P/ASX 50 Accum, returning -1.5% for the month. The best performing sectors were Materials (+1.2%) and Financials Ex Prop (+0.7%). The weakest performing sectors were Healthcare (-8.1%) and Real Estate (-7.4%). The largest positive contributors to the return of the index were Westpac, BHP and CBA, with absolute returns of 3.8%, 3.2% and 1.4% respectively. In contrast, the most significant detractors from performance were Wesfarmers, CSL and Scentre Group with absolute returns of -6.7%, -5.9% and -10.1% respectively.


The broad MSCI World ex Australia Index was down 0.5% in hedged terms and 1.4% in unhedged terms over the month, as the Australian dollar appreciated against most major currencies with exception of the US dollar over October. The strongest performing sectors were Financials (+2.8%) and Information Technology (-0.1%), while Healthcare (-6.4%) and Telecommunication Services (-4.0%) were the worst performers. In Australian dollar terms, the Global Small Cap sector fell 3.1% while Emerging Markets rose 0.8% in unhedged Australian dollar terms.

Over October, the NASDAQ returned -2.3%, the S&P 500 Composite Index fell by 1.8% and the Dow Jones Industrial Average fell 0.8%, all in US dollar terms. Major European equity markets experienced positive returns as the FTSE 100 (UK) grew 1.0%, the DAX 30 (Germany) grew 1.5% and the CAC 40 (France) also grew 1.5%. In Asia, the Indian BSE 500 was up 1.3%, the Hang Seng Index down 1.4%, the SSE Composite (China) up 3.2% and the Japanese TOPIX up a strong 5.3% over October.


The Real Assets sector saw a significant change in direction in October. The FTSE Global Core Infrastructure index returned -0.9%, and Global REITs returned -4.5% (both in Australian dollar hedged terms). Domestic REITs posted a return of -7.7% in September, while Australian Direct Property (NAV) returned 1.7% on a lagged basis.


Global sovereign bonds were generally weak over October for hedged Australian investors. Ten-year bond yields rose for the US (+23 basis points (bps) to 1.83%) and the UK (+48bps to 1.24%) while Germany (+27bps to 0.08%) and Japan (+3bp to -0.05%) also experienced rises. Two-year international bond yields saw smaller increases across the market with the UK (+16bps to 0.27%), the US (+10bps to 0.86%), Japan (+4bps to -0.24%) and Germany (+7bps to -0.62%) all increasing as yield curves broadly steepened over October. Global Bond indices were negative for hedged investors, with the Barclays Capital Global Aggregate Bond Index falling 0.9% and the Citigroup World Government Bond (ex-Australia) Index returning -1.2% over the month, both on a fully hedged basis.

Domestically, Australian 10-year bond yields rose 40bps to 2.31% while five-year (+25bps to 1.87%) and two-year (+10bps to 1.65%) bond yields also rose. As a result, Australian bond returns were relatively weak for the month. Australia Treasury Bond Index returned -1.8% while the Australian Composite Bond Index returned -1.3% for the month.


The Australian dollar rose against most currencies over October, but fell against a rising US dollar, finishing at US$0.761 with a Trade Weighted Index of 65.0 on 31 October 2016. The Australian dollar depreciated against the US dollar (-0.6%), but rose against the Euro (+2.0%), the Pound Sterling (+6.1%) and the Yen (+3.4%). On a trade-weighted basis, the local currency increased 1.7% over the month.


In commodities, the S&P GSCI Commodity Total Return Index fell 0.9% for the month. Gold prices finished the month at US$1,273.88 per ounce for a 3.6% decrease over the period. The oil price also fell, by 2.7% to $47.63 per barrel. Iron ore prices rose sharply over the month, by 14.0% to US$65.0 per metric tonne.

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