Investment commentary – 31 May 2017

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

Global equities continued their run over May 2017, as the MSCI World ex Australia experienced its seventh consecutive month of positive returns for hedged Australian investors.

Emerging Markets also performed well, rising 3.4% as measured by the MSCI Emerging Markets Index. Australian equities retraced 2.7% over the month, driven by a weak Financials sector (-7.7%).

In the US, the economy continued to improve with Non-Farm Payrolls increasing by 138,000 and the unemployment rate falling to 4.3%. Gross domestic product (GDP) for Q1 2017 was revised up to 1.7% and the NASDAQ, S&P 500 and the Dow Jones Industrial Average all saw positive movement over the period. Meanwhile, United States (US) President Donald Trump was inevitably influential in the headlines for firing the Director of the Federal Bureau of Investigation (FBI), James Comey, who was leading an investigation of the President’s speculated links with Russia. Investors continue to monitor the controversy surrounding the President as well as anticipating the drop of the President’s long awaited tax cut and infrastructure stimulus plan.

Across to Europe, while attention was fixed on the approaching results of the French election, the period would inevitably be dominated by the tragic events of the Manchester bombing. This shock highlighted the swinging pendulum which has dominated the region over the past year and a half as sentiment shifts from fear to resilience. The Manchester bombing brought attention to the early election called on by Theresa May, with support appearing to waver for the Conservative Party. In France, centrist candidate Emmanuel Macron was successful over populist backed Marine Le Pen. The result in France reflects generally positive market momentum of pro-European sentiment, in contrast to the United Kingdom (UK).

In China, Moody’s downgraded its sovereign debt rating from Aa3 to A1, following concerns over rising debt and slow economic growth. Against this background, the Caixin Manufacturing purchasing managers’ index (PMI) decreased to 49.6; the first detraction from the 50 base level in 11 months. Following this weakening sentiment, a drop in demand caused a sharp reversal in iron ore prices, seeing the price drop to US$58 per metric tonne following the peak of US$92 per metric tonne in February.
Early May saw the arrival of the 2017 Australian Federal Budget, with the key focus on increased taxes for banks and businesses. The new $6.2bn levy will only hit larger banks – operating with at least $100 billion in licensed entity liabilities, while businesses will pay an extra levy for using foreign workers. The government also addressed the housing situation, implementing a new tax on foreign owners of unoccupied properties, allowing the withdrawal of voluntary super for first home buyers and increasing the capital gains tax discount from 50% to 60% for affordable housing.

The Reserve Bank of Australia (RBA) kept the cash rate at 1.5%, while Australia’s Terms of Trade weakened following the continued downward movement of iron ore prices; however, the strength in non-mining sales and profits is consistent with higher levels of business confidence, and the RBA noted an increase in investment in the non-mining sector. Australian seasonally adjusted employment increased 37,400 in April while the unemployment rate decreased to 5.7%.


  • The RBA decided to leave the cash rate unchanged again in its early June 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 have risen while Labour markets are also experiencing a gradual tightening. Australia is nearing the end of its transition following the end of the mining boom, with business investment picking up in the non-mining related sectors. A depreciating exchange rate since 2013 has aided this transition. The increased demand in China, along with improving conditions in the global economy overall have seen commodity prices rise to higher levels than a year previously. As a result, Australia’s national income and Terms of Trade have improved; however, the prices of iron ore and coal have seen a sharp reversal of this growth recently, while medium-term risks involving the high level of debt in the Chinese economy also remain. Australian labour force conditions remain mixed but forward-looking indicators predict growth in employment over the longer term. Wage growth remains slow, putting a restraint on household consumption; meanwhile the unemployment rate is expected to decline gradually over time. Inflation is expected to continue to grow with the improving economy. With the gradual improvements in the economy and rising level of inflation, the RBA believed it was appropriate to leave the rate unchanged.
  • Australian seasonally adjusted employment increased 37,400 in April, well above expectations for a 5,000 rise while March figures were revised down to 60,000. The unemployment rate decreased to 5.7%, below market expectations of 5.9%. The participation rate remained flat at 64.8%, above expectations for 64.7%. Part time jobs increased by 49,000 while full time jobs decreased by 11,600.
  • Australian building approvals increased 4.4% month-on-month (MoM) to be down 17.2% for the year to April, and above previous levels of -13.4% and -19.9% for respective periods ending March.
  • US Non-Farm Payrolls increased by 138,000 in May and there was a downwards revision to 174,000 increase for April (from 211,000). The unemployment rate fell down to 4.3% in May from 4.4% in April.
  • The Institute for Supply Management (ISM) Manufacturing Index increased to 54.9 in May, above consensus for 54.8, and above the 54.8 recorded in April. Non-metallic Mineral Products, Furniture & Related Products and Plastics & Rubber Products reported the largest growth while Petroleum & Coal Products and Printing & Related Support Activities reported the smallest growth; Apparel, Leather & Allied Products and Textile Mills experienced a decline during the month. The ISM Non-Manufacturing Index decreased to 56.9 in May, below consensus for 57.1, and below the 57.5 for April. Real Estate, Rental & Leasing, Construction and Accommodation & Food Services were the most significant contributors while Information and Other Services reported smallest growth and Educational Services contracted over the period.
  • US GDP was revised for Q1 2017 to 1.7% quarter on quarter (QoQ) annualised, above expectations for 0.9%, and below the 2.1% growth recorded in Q4 2016.
  • The Caixin Manufacturing PMI in China decreased to 49.6 in May from 50.3 in April, below expectations for 50.1. Signalling the first decline in the sector for 11 months, due to slight rises in production and new orders, quickening decline in employment levels and renewed falls in input prices and output charges.
  • European Core consumer price index (CPI) decreased to 0.9% over the year to May, below expectations for 1.0%. The unemployment rate decreased to 9.3% in May, below expectations for 9.4%, while MoM CPI decreased from 0.8% to 0.4% in April.
  • The Eurozone composite PMI remained flat at 56.8 in May steadying the rapid economic growth from the previous period, as Germany and France experienced their fastest rate of growth in six years.
  • Eurozone seasonally adjusted GDP was held at the estimate of 1.7% year-on-year and 0.5% QoQ for Q1 2017.


The broad Australian equity market decreased over May, as the S&P/ASX 300 Accumulation Index fell -2.7% for the month. Returns were negative across majority of the market spectrum, with the only positive performer being the S&P/ASX mid 50 Accum, increasing 0.9% for the month. The worst performer was the S&P/ASX 50 Accum, decreasing by 3.3% over the month. The best performing sectors were Industrials (+4.7%) and Telecom Services (+3.4%). The weakest performing sectors were Financials (-7.7%) and Healthcare (-2.4%). The largest positive contributors to the return of the index were Telstra, Qantas and Aristocrat Leisure, with absolute returns of 4.9%, 18.3% and 11.1% respectively. In contrast, the most significant detractors from performance were Westpac, ANZ and CBA with absolute returns of -12.6%, -14.1% and -8.9% 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 May, the NASDAQ returned 2.5%, the S&P 500 Composite Index rose by 1.4% and the Dow Jones Industrial Average increased by 0.7%, all in US dollar terms. Major European equity markets also experienced positive returns as the CAC 40 (France) increased 2.0%, the DAX 30 (Germany) increased 1.4% and the FTSE 100 (UK) increased by 4.9%. In Asia, the Japanese TOPIX was up 2.4%, the Indian BSE 500 was up 1.7% and the Hang Seng Index was up 4.8%. The SSE Composite (China) decreased 1.2% over May.


The Real Assets sector experienced positive returns globally but negative domestically over May. The FTSE Global Core Infrastructure index returned 3.1% while Global REITs increased 0.6% (both in Australian dollar hedged terms). Domestic REITs posted a decrease of 1.0% in May, while Australian Direct Property (NAV) returned 0.4% on a lagged basis.


Global bond markets were modest over May as 10 year yields fell while shorter term yields rose. The Barclays Capital Global Aggregate Bond Index and the Citigroup World Government Bond (ex-Australia) Index both rose by 0.6% over the month. Ten-year bond yields decreased for the US (-9bps to 2.20%), the UK (-5bps to 0.97%) and Germany (-2bps to 0.30%) but rose in Japan (+3bps to 0.05%). Two-year bond yield movements were more subdued over the month. Yields rose in the US (+1bps to 1.27%), in Germany (+2bps to -0.75%), Japan (+4bps to -0.16%) and the UK (+5bps to 0.13%) over May.
Domestically, Australian 10-year bond yields fell 19bps to 2.39% while five-year (-20bps to 1.90%) and two-year (-11bps to 1.56%) bond yields also decreased. As a result, Australian bond returns were slightly more fruitful than their international counterparts over May. The Australian Ausbond Treasury Index produced the highest return of 1.3% as the Australian Composite Bond Index returned 1.2% for the month.


The Australian dollar depreciated against majority of major currencies over May, finishing with a decreased Trade Weighted Index of 63.8 on 31 May 2017. The Australian dollar depreciated against the US dollar (-0.5%), the Euro (-3.1%) and the Yen (-0.6%) but appreciated against the Pound Sterling (+0.5%). On a trade-weighted basis, the local currency decreased 1.1% over the month.


Following the peak in iron ore prices in February 2017 at US$92 per metric tonne, iron ore continued its descent over May, decreasing 14.1%, to finish at US$58 per metric tonne on 31 May 2017. The S&P GSCI Commodity Total Return Index decreased 1.1% for the month. Gold prices finished the month at US$1,267.97 per ounce, with marginally positive movement over the period, while the oil price decreased by 3.0% to $50.01 per barrel over May.


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