Investment Commentary - 30 September 2017


Provided by Mercer.

Global developed equities, both large and small caps, were the key performers over September 2017, as consumer confidence bolstered following a subdued August. Strong gains in the energy sector as well as increased confidence in financials were the primary drivers of performance.

Despite suffering under Hurricanes Harvey and Irma, stocks in the United States of America (US) continued to rise to all-time highs, as the NASDAQ increased 1.0%, the S&P 500 Composite 2.1% and the Dow Jones Industrial Average increasing 2.2%. The US manufacturing sector was also a driver, with the Institute for Supply Management (ISM) Manufacturing Index rising to 60.8 for September, indicating the strongest expansion since mid-2004, with some upwards price pressure caused by the hurricanes. However, US employment figures experienced a shock, in part due to the destructive hurricanes, with US non-Farm payrolls decreasing by 33,000 in September, well below expectations for an 80,000 rise.

Bond yields increased across major markets over the month, after what appears to be a concerted effort by developed economies to reduce monetary stimulus. The US Federal Reserve (Fed) released an announcement indicating its intention to begin to unload its $4.5 trillion bond portfolio. In Europe, the European Central Bank continued its push to reduce quantitative easing measures while the Bank of England also increased conservative estimates pointing to a potential reversal of the post-Brexit rate cut in November.

Domestically, the market experienced mixed movements as the S&P/ASX 300 index remained broadly flat over the month while small caps seemed to follow the global trend, providing the strongest performance, rising 1.3% for the month. The Reserve Bank of Australia (RBA) released growth estimates for Q2 in its early October report, reporting 0.8% of growth over the June quarter. This growth, coupled with signs of a pick-up in non-mining sectors and an influx of infrastructure projects support a positive future outlook. Rising household debt and stinted wage growth continue to be the main barriers to this growth. To combat the threat of rising household debt, Australian Prudential and Regulatory Authority (APRA) recently introduced new supervisory measures centred on lending.

  • The RBA decided to leave the cash rate unchanged again in its early October 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, with above-trend growth now expected for certain economies, while labour markets are also experiencing a gradual tightening. In Australia, the economy experienced expansion of 0.8% over the June quarter. This growth, coupled with signs of a pick-up in non-mining sectors and an influx of infrastructure projects supports a future positive outlook. On the other hand, low wage growth and rising household debt continues to place restraint on household consumption. To combat the threat of rising household debt, APRA has introduced new supervisory measures, while house price movements continue to fluctuate across the country. Wage growth is expected to remain low for some time, but could improve with stronger conditions in the labour market. Australian labour force conditions remain mixed but forward-looking indicators predict growth in employment over the longer term. Inflation is currently low, but expected to grow. 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 54,200 in August, above expectations for a 20,000 rise while July figures were revised up to 29,300. The unemployment rate remained flat at 5.6% for August, in line with expectations. The participation rate increased to 65.3%, above the expected and previous monthly figure of 65.1%. Part time jobs increased by 14,100 while full time jobs increased by 40,100.
  • Australian building approvals increased 0.4% month-on-month (MoM) to be down 15.5% for the year to August, and below previous levels of -1.2% (revised) and -12.6% (revised) for respective periods ending July.
  • US Non-Farm Payrolls decreased by 33,000 in September, well below expectations for an 80,000 rise and below the previous 169,000 increase (revised) for August. The unemployment rate decreased to 4.2% in September from 4.4% in August.
  • The Institute for Supply Management (ISM) Manufacturing Index increased to 60.8 in September, above consensus for 58.1, and above the 58.8 recorded in August. Textile Mills, Machinery and Non-metallic Mineral Products reported the largest growth while Furniture & Related Products was the only sector that contracted over the month. The ISM Non-Manufacturing Index increased to 59.8 in September, above consensus for 55.5, and above the 55.3 for August. Retail Trade, Other Services and Management of Companies & Support Services were the most significant contributors while Arts, Entertainment & Recreation and Mining contracted over the period.
  • US gross domestic product (GDP) assumption was revised up for Q2 2017 to 3.1% quarter on quarter (QoQ) annualised, above expectations for 3.0%, and above the 1.2% (revised) growth recorded in Q1 2017.
  • The Caixin Manufacturing Purchasing Managers’ Index (PMI) in China decreased to 51.0 in September from 51.6 in August, below expectations for 51.5. Although a decrease from the month before, the 51.0 indicator is still above the neutral no-change point of 50, signalling marginal improvements. Key takeaways from the September data show weaker increases in output and new orders, a slight decline in employment and increasing input prices and output charges.
  • European Core consumer price index (CPI) decreased to 1.1% over the year to September, below expectations for 1.2%. The unemployment rate remained at 9.1% in August, above expectations for 9.0%, while MoM CPI increased from -0.5% in July to 0.3% in August.
  • The Eurozone composite PMI increased to 56.7 in September, in line with expectations, signalling further solid expansion, with the manufacturing sector rising at the quickest pace since April 2011 while the service sector improved with a four-month high. Germany, France and Spain led the output growth expansion, with Germany experiencing a 77-month high and France a 76-month high.
  • Eurozone seasonally adjusted GDP was kept at 2.3% year-on-year, 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 mixed over September, as the S&P/ASX 300 Index remained flat for the month. The highest positive performer was the S&P/ASX Small Ordinaries Index, increasing 1.3%, while the S&P/ASX 50 Index was the weakest performer, falling 0.2% over the month. The best performing sectors were Healthcare (+2.3%) and Real Estate (+1.2%). The weakest performing sectors were Telecom Services (-4.5%) and Utilities (-3.6%). The largest positive contributors to the return of the index were NAB, Westpac and CSL, with absolute returns of 4.9%, 2.6% and 4.3% respectively.  In contrast, the most significant detractors from performance were BHP, Telstra and Fortescue Metals with absolute returns of -5.6%, -4.2% and -13.9% respectively.

Global Equities

The broad MSCI World ex Australia (NR) Index was up 2.5% in hedged terms and 3.4% in unhedged terms over the month, as the Australian dollar (AUD) fell against the US dollar (USD). The strongest performing sectors were Energy (+10.1%) and Financials (+5.1%), while Utilities (-1.4%) and Real Estate (-0.1%) were the worst performers. In AUD terms, the Global Small Cap sector increased by 5.1% while Emerging Markets increased by 0.7%.

Over September, the NASDAQ increased 1.0%, the S&P 500 Composite Index rose by 2.1% and the Dow Jones Industrial Average increased by 2.2%, all in US dollar terms. In local currency terms, major European equity markets experienced mixed returns as the CAC 40 (France) increased 4.9% and the DAX 30 (Germany) increased 6.4%, while the FTSE 100 (United Kingdom (UK)) fell by 0.7%. In Asia, the Japanese TOPIX rose 4.3% over September, while the SSE Composite (China) was down 0.4% and the Hang Seng Index decreased 1.2%. The Indian BSE 500 decreased 1.1% over September.

Real Assets

The Real Assets sector experienced mixed returns over September. The FTSE Global Core Infrastructure index returned -1.5% while Global REITs remained flat over the period (both in AUD hedged terms). Domestic REITs posted an increase of 0.6% in September, while Australian Direct Property (NAV) returned 0.4% on a two-month lagged basis.

Fixed Interest

Global bond markets were negative over September as yields rose across the duration spectrum. The Barclays Capital Global Aggregate Bond Index decreased 0.4% while the Citigroup World Government Bond (ex-Australia) Index decreased 0.6% over the month. Ten-year bond yields increased for the US (+20 basis points (bps) to 2.33%), the UK (+32bps to 1.40%), Germany (+21bps to 0.46%) and Japan (+6bps to 0.06%). Two-year bond yields also increased over the month. Yields rose in the US (+17bps to 1.49%), in Germany (+2bps to -0.74%), the UK (+27bps to 0.45%) and Japan (+4bps to -0.11%) over September.

Domestically, Australian 10-year bond yields increased 18bps to 2.84% while five-year bond yields increased (+13bps to 2.38%) and two-year bond yields increased (+6bps to 1.96%). As a result, Australian bond returns for existing holders were weak over September. The Bloomberg Ausbond Bank Bill Index produced the highest return of 0.4%, while the Australian Composite Bond Index return was -0.3% over the month.


The AUD movement was mixed over September, finishing with a decreased Trade Weighted Index of 66.2 on 30 September 2017. The AUD depreciated against the USD (-1.1%) and the Pound Sterling (-4.4%) but appreciated against the Euro (+0.1%) and the Yen (+1.2%). On a trade-weighted basis, the local currency decreased 0.2% over the month.


Iron Ore experienced a significant drop over September, falling 20.0% to $61.5 per metric tonne. The S&P GSCI Commodity Total Return Index increased 4.0% over the month. Gold prices finished the month at US$1,283.83 per ounce, decreasing 2.0% over the period, while the oil price increased 10.0% to $57.57 per barrel over September.

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