Investment commentary - 31 March 2017

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

Australian equities continued their strong run over March 2017, spured on by a solid February reporting season and favourable global conditions. The S&P/ASX 300 increased 3.3%, outperforming international developed markets as the MSCI World ex Aus index gained 1.8% (unhedged AUD). Utilities and Healthcare were the key contributors to Australia’s performance while Materials and Telecom Services detracted. The Reserve Bank of Australia (RBA) maintained its stance on monetary policy, keeping the rate at 1.5%. Housing conditions have caught the RBA in a rut as it attempts to juggle fears of a potential housing bubble against continued support of the economy through lower rates.

Markets in the United States (US) were relatively subdued over the month as the ‘Trump Rally’ appears to have tapered out for the time being. Over the month, Trump’s focus was on healthcare, his bid to repeal Obamacare was held up in passing by Congress. This result may have stalled the expected tax cuts and infrastructure boost which is believed to be next on the agenda for the Trump administration. The US Federal Reserve (Fed) hiked rates as anticipated in its March meeting, to a range of 0.75% to 1.0%. The second hike in three months was made in a bid to head off rising headline inflation. Another two rate hikes are expected over 2017. How markets react to rate normalisation will be key to results over the next 12 months.

Across to Europe, in politics, there was a surprise result in the Dutch election as far right Dutch candidate, Geert Wilders, was defeated by the Conservative Prime Minister, Mark Rutte, after a three decade record voter turnout of 81%. The result signals that anti-European Union (EU) and anti-immigration dispositions may not be as strong as they appear in Europe, shifting future outlooks for European markets. Concurrently, the Eurozone composite Purchasing Managers’ Index (PMI) increased to 56.4 in March reaching a six year high and capping off the most successful quarter for the region’s economy since second quarter of 2011. Brexit returned to the fore in March; as Article 50 of the Lisbon Treaty was enacted, commencing the first rounds of negotiations between the United Kingdom (UK) and the EU. The development signals the two year countdown to the UK’s full split from the EU.



  • The RBA decided to leave the cash rate unchanged in its early April meeting at 1.50%. RBA Governor, Philip Lowe, noted that the global economy is experiencing continued gradual economic growth alongside global uncertainties. Australia is continuing its transition away from commodities following the end of the mining boom, with non-mining business investment rising over the past 12 months. A depreciating exchange rate since 2013 has aided this transition, with an appreciating Australian dollar viewed as most likely to be detrimental to the cause. Higher spending on infrastructure in China pushed commodity prices up, which have led to an improvement for Australia’s National Income, however, medium-term risks to the Chinese economy remain. Support from low interest rates continues, although lenders have increased mortgage rates in the wake of a housing bubble risk. This move comes off the back of growth in household borrowing outpacing growth in household income. Recently announced supervisory measures are intended to curb the risks of this rising household debt, while the housing market situation continues to vary across the nation, with attention focused on the uptick of apartments scheduled to flood eastern seaboard capital cities in the next few years. A change in rates in either direction could add unwanted pressure on the housing debacle and coupled with inflation expected to pick up over 2017, the RBA believed it was appropriate to leave the rate unchanged.
  • Australian seasonally adjusted employment decreased 6,400 in February, well below expectations for a 16,000 rise while January figures remained at 13,500. The unemployment rate increased to 5.9%, above market expectations for 5.7%. The participation rate remained at 64.6%, in line with expectations. Part time jobs decreased by 33,500 while full time jobs increased by 27,100.
  • Australian building approvals increased 8.3% month-on-month (MoM) to be down 4.9% for the year to February, and above revised previous levels of 2.2% and -11.6% for respective periods ending January.
  • US Non-Farm Payrolls increased by 98,000 in March, below expectations for 180,000. There was a downwards revision to 219,000 for February (from 235,000). The unemployment rate fell down to 4.5% in March from 4.7% in February.
  • The Institute for Supply Management (ISM) Manufacturing Index decreased slightly to 57.2 in March, matching consensus, and below the 57.7 recorded in February. Electrical Equipment, Appliances & Components, Printing & Related Support Activities and Furniture & Related Products reported the largest growth while Beverage & Tobacco Products, Fabricated Metal Products and Petroleum & Coal Products reported the smallest growth; no industry experienced a decline during the month. The ISM Non-Manufacturing Index decreased to 55.2 in March, below consensus, and below the 57.6 for February. Management of Companies & Support Services, Utilities and Wholesale Trade were the most significant contributors while Information, Educational Services and Professional, Scientific & Technical Services were the largest detractors.
  • US GDP for Q4 2016 was revised to have grown 2.1% quarter on quarter (QoQ) annualised, above expectations of 2.0%, and below the 3.5% growth recorded in Q3 2016.
  • The Caixin Manufacturing PMI in China decreased to 51.2 in March from 51.7 in February, below expectations for 51.7. Signalling confidence for the 12-month position, growth was linked to new product releases and favourable forecasts of market demand while the decrease was influenced by job shedding and additional signs of capacity pressures.
  • European Core consumer price index (CPI) decreased to 0.7% over the year to March, below expectations for 0.8%. The unemployment rate decreased to 9.5% in February, in line with expectations, while MoM CPI increased from -0.8% to 0.4% in February.
  • The Eurozone composite PMI increased to 56.4 in March, from 56.0 in February. Growth continued over March, reaching a six year high and capping off the most successful quarter for the region’s economy since second quarter of 2011. Majority of the major European economies experienced growth over the month, with Germany leading the pack, with France, Spain and Ireland keeping track to remain within 0.3 points of the leader. Although Italy recorded a two-month low. Output growth, employment, input cost inflation and the transferred higher costs to clients pushed business optimism to record levels.
  • Eurozone seasonally adjusted GDP was given a downwards revision estimate of 1.7% year-on-year and 0.4% QoQ for Q4.



The broad Australian equity market expanded over March, with the S&P/ASX 300 Accumulation Index increasing 3.3% for the month. Returns were positive across the market spectrum, with the best relative performer being the S&P/ASX 50 Accum, increasing 3.7% for the month. The worst performer was the S&P/ASX Small Ordinaries, increasing by 2.7% over the month. The best performing sectors were Utilities (+6.3%) and Healthcare (+5.6%). The weakest performing sectors were Materials (+0.2%) and Telecom Services (+0.3%). The largest positive contributors to the return of the index were CBA, Westpac and NAB, with absolute returns of 4.4%, 4.5% and 4.5% respectively. In contrast, the most significant detractors from performance were BHP, Telstra and Fortescue Metals with absolute returns of -3.6%, -2.8% and -5.6% respectively.



The broad MSCI World ex Australia Index was up 1.0% in hedged terms and 1.8% in unhedged terms over the month, as the Australian dollar depreciated against the major currencies over March. The strongest performing sectors were Information Technology (+3.4%) and Consumer Discretionary (+3.3%), while Real Estate (+0.2%) and Financials (+0.8%) were the worst performers. In Australian dollar terms, the Global Small Cap sector increased by 1.6% while Emerging Markets increased 3.3% in unhedged Australian dollar terms.

Over March, the NASDAQ returned 1.5%, the S&P 500 Composite Index rose slightly by 0.1% and the Dow Jones Industrial Average decreased -0.6%, all in US dollar terms. Major European equity markets also experienced positive returns as the FTSE 100 (UK) increased 1.1%, the CAC 40 (France) increased 5.6% and the DAX 30 (Germany) increased 4.0%. In Asia, the Indian BSE 500 was up 3.7% and the Hang Seng Index was up 1.7% while the SSE Composite (China) decreased -0.6% and the Japanese TOPIX also decreased -0.6% over March.



The Real Assets sector experienced mixed returns globally and domestically over March. The FTSE Global Core Infrastructure index returned 2.4% while Global REITs decreased -1.4% (both in Australian dollar hedged terms). Domestic REITs posted an increase of 0.7% in March, while Australian Direct Property (NAV) returned 0.6% on a lagged basis.



Global bond markets were generally weak over March as US yields continued to tick upwards following their retreat in February. The Barclays Capital Global Aggregate Bond Index was flat and the Citigroup World Government Bond (ex-Australia) Index fell by -0.1% over the month. Ten-year bond yields increased for the US (+4bps to 2.40%), Japan (+2bps to 0.07%) and Germany (+30bps to 0.33%) while the UK remained flat (1.07%). Two-year bond yields also saw positive movement across the globe. Yields rose in the US (+3bps to 1.24%), Germany (+16bps to -0.76%), Japan (+8bps to -0.19%) and the UK (+3bps to 0.13%) over March.

Domestically, Australian 10-year bond yields fell -3bps to 2.70% while five-year (-1bps to 2.21%) and two-year (-5bps to 1.77%) bond yields also decreased. As a result, Australian bond returns were slightly more active than their international counterparts over March. The Australian Ausbond Inflation Index produced the highest return of 0.7% as the Australian Composite Bond Index returned 0.4% for the month.



The Australian dollar experienced negative movement over March, depreciating against all the major currencies and finishing with a decreased Trade Weighted Index of 66.2 on 31 March 2017. The Australian dollar depreciated against the US dollar (-0.8%), the Pound Sterling (-0.9%), the Euro (-1.4%) and the Yen (-1.0%). On a trade-weighted basis, the local currency decreased -0.7% over the month.



Following the rise in iron ore prices beginning in September 2016, iron ore reached its peak in February before falling 12% over March to finish at US$81.0 per metric tonne. The S&P GSCI Commodity Total Return Index decreased -3.2% for the month. Gold prices finished the month at US$1,247.25 per ounce for a -0.7% decrease over the period. The oil price decreased, by -4.7% to $52.62 per barrel.

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