Investment commentary - 30 April 2017

15/05/2017
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
Global equity markets continued to drift higher in April 2017, led by growth and small cap stocks.

The global economy has strengthened, reflecting the strongest and most synchronised growth since 2010 among developed and emerging markets. The International Monetary Fund (IMF) revised its 2017 growth forecast for the world economy to 3.5% from 3.4%. Headline inflation rates have increased while long-term bond yields are also higher than last year. These conditions have lowered expectations of additional monetary easing policies from major economies across the globe.
 
A strong start to first quarter earnings season and hopes that potential US tax reforms or cuts can pass in August drove near-term momentum. Volatility temporarily rose and then fell due to tensions in North Korea and South Africa, as well as the terror attacks in St Petersburg and Paris. Political risks remain elevated with the United Kingdom (UK) Prime Minister Theresa May calling for an early general election on 8 June 2017 to strengthen the Brexit negotiating position. Analysts also paid close attention to the decisive second round of the French election on 7 May 2017 between the centrist candidate Emmanuel Macron and the populist candidate Marine Le Pen.
 
Meanwhile, the equity market rally pushed valuations ever higher. The Shiller P/E ratio on United States (US) equities is at its highest level since the tech bubble. While Trump’s tax agenda has been delayed, corporate tax cuts still appear likely in the next year, which should give a boost to earnings. It is still unclear what a final tax package might look like, but it is more likely to favour small-caps over large-caps.
 
Emerging markets benefitted from improved sentiment and stronger macro-economic conditions. A softer US dollar and signs of a more dovish Federal Reserve (Fed) rate policy stimulated investors’ sentiments. Emerging markets performance was led by China after stronger than expected gross domestic product (GDP) growth of 6.9% was recorded for Q1 2017.
  
Domestically, support from low interest rates continues, although lenders have increased mortgage rates in its wake, particularly focused on investors and interest-only loans. Growth in household borrowing is still outpacing growth in household income. The new recent supervisory measures are expected to curb the risks of this rising household debt. 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.


SIGNIFICANT DEVELOPMENTS
 
  • The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged again in its early May 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 continuing to adapt following the end of the mining boom, and has enjoyed a recent increase in exports of resources following greater spending on infrastructure in China. A depreciating exchange rate since 2013 has aided this transition, with an appreciating Australian dollar viewed as most likely to be detrimental to a positive transformation. The increased demand in China, along with improving conditions in the global economy overall have seen commodity prices rise in Australia’s favour. As a result, Australia’s national income and Terms of Trade have improved; however, this trend is starting to see a reversal while medium-term risks involving the high level of debt in the Chinese economy also remain. Australian labour force conditions remain mixed to stagnant. Wage growth remains slow, and expected to stay this way for some time, meanwhile the unemployment rate is expected to decline gradually over time. Inflation has picked up, around 2% in the March quarter, with gradual inflation 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 60,900 in March, well above expectations for a 20,000 rise while January figures were revised up to 2,800. The unemployment rate remained flat at 5.9%, in line with market expectations. The participation rate increased to 64.8%, above expectations for 64.6%. Part time jobs decreased by 13,600 while full time jobs increased by 74,500.
  • Australian building approvals decreased 13.4% month-on-month (MoM) to be down 19.9% for the year to March, and below previous levels of 8.3% and -4.9% for respective periods ending February.
  • US Non-Farm Payrolls increased by 211,000 in April and there was a downwards revision to 79,000 increase for March (from 98,000). The unemployment rate fell down to 4.4% in April from 4.5% in March.
  • The Institute for Supply Management (ISM) Manufacturing Index decreased to 54.8 in April, below consensus for 56.5, and below the 57.2 recorded in March. Electrical Equipment, Appliances & Components, Appliances & Components and Textile Mills reported the largest growth while Petroleum & Coal Products and Transportation Equipment reported the smallest growth; Apparel, Leather & Allied Products experienced a decline during the month. The ISM Non-Manufacturing Index increased to 57.5 in April, above consensus for 55.8, and above the 55.2 for March. Wholesale Trade, Utilities and Arts, Entertainment & Recreation were the most significant contributors while Accommodation & Food Services. Transportation & Warehousing and Agriculture, Forestry, Fishing & Hunting were the largest detractors.
  • US GDP estimate for Q1 2017 was forecast at 0.7% quarter on quarter (QoQ) annualised, below expectations of 1.0%, and below the 2.1% growth recorded in Q4 2016.
  • The Caixin Manufacturing purchasing managers’ index (PMI) in China decreased to 50.3 in April from 51.2 in March, below expectations for 51.3. Signalling the weakest improvement in manufacturing operating conditions for seven months, influenced by slower increases in output coupled with softer growth in total new orders.
  • European Core consumer price index (CPI) increased to 1.2% over the year to April, above expectations for 1.0%. The unemployment rate remained flat at 9.5% in March, above expectations for 9.4%, while MoM CPI increased from 0.4% to 0.8% in March.
  • The Eurozone composite PMI increased to 56.8 in April, from 56.4 in March. This growth signified activity expansion for 46 months in row. Italy reached a 117-month high in output growth, while Ireland and Spain also experienced positive movement. Germany and France detracted slightly, reaching two-month lows.
  • Eurozone seasonally adjusted GDP was given an estimate of 1.7% year-on-year and 0.5% QoQ for Q1 2017.


AUSTRALIAN EQUITIES

The broad Australian equity market grew modestly over April, as the S&P/ASX 300 Accumulation Index increased 1.0% for the month. Returns were positive across most of the market spectrum, with the best relative performer being the S&P/ASX mid 50 Accum, increasing 1.7% for the month. The worst performer was the S&P/ASX Small Ordinaries, decreasing by 0.3% over the month. The best performing sectors were Industrials (+4.1%) and IT (+3.5%). The weakest performing sectors were Telecom Services (-9.5%) and Consumer Staples (-2.5%). The largest positive contributors to the return of the index were CSL, ANZ and CBA, with absolute returns of 5.9%, 3.4% and 1.7% respectively. In contrast, the most significant detractors from performance were Telstra, Wesfarmers and Fortescue Metals with absolute returns of -8.9%, -4.3% and -14.4% respectively.
 

GLOBAL EQUITIES

The broad MSCI World ex Australia (NR) Index was up 1.3% in hedged terms and 3.6% in unhedged terms over the month, as the Australian dollar depreciated against the major currencies. The strongest performing sectors were Consumer Discretionary (+4.9%) and Industrials (+4.9%), while Energy (-0.3%) and Telecommunication Services (+0.6%) were the worst performers. In Australian dollar terms, the Global Small Cap sector increased by 4.1% while Emerging Markets increased 4.2% in unhedged Australian dollar terms. 

Over April, the NASDAQ returned 2.3%, the S&P 500 Composite Index rose by 1.0% and the Dow Jones Industrial Average increased by 1.4%, all in US dollar terms. Major European equity markets also experienced mostly positive returns as the CAC 40 (France) increased 3.1% and the DAX 30 (Germany) increased 1.0%.The FTSE 100 (UK) retreated by 1.3% however. In Asia, the Japanese TOPIX was up 1.3%, the Indian BSE 500 was up 2.7% and the Hang Seng Index was up 2.1%. The SSE Composite (China) decreased 2.1% over April.
 

REAL ASSETS

The Real Assets sector experienced positive returns globally and domestically over April. The FTSE Global Core Infrastructure index returned 1.8% while Global REITs increased 1.1% (both in Australian dollar hedged terms). Domestic REITs posted an increase of 2.6% in April, while Australian Direct Property (NAV) returned 2.0% on a lagged basis.
 

FIXED INTEREST

Global bond markets were modest over April as US yields fell marginally. The Barclays Capital Global Aggregate Bond Index and the Citigroup World Government Bond (ex-Australia) Index both rose by 0.7% over the month. Ten-year bond yields decreased for the US (-11bps to 2.28%), Japan (-6bps to 0.02%), the UK (-5bps to 1.02%) and Germany (-1bp to 0.32%). Two-year bond yield movements were relatively flat over the month. Yields rose in the US (+2bps to 1.26%) and fell in Germany (-1bp to -0.77%), Japan (-1bps to -0.20%) and the UK (-5bps to 0.08%) over April.

Domestically, Australian 10-year bond yields fell 12bps to 2.58% while five-year (-12bps to 2.09%) and two-year (-10bps to 1.67%) bond yields also decreased. As a result, Australian bond returns were slightly more fruitful than their international counterparts over April. The Australian Ausbond Inflation Index produced the highest return of 1.2% as the Australian Composite Bond Index returned 0.8% for the month.
 

CURRENCY MARKETS
The Australian dollar depreciated against all major currencies over April, finishing with a decreased Trade Weighted Index of 64.5 on 30 April 2017. The Australian dollar depreciated against the US dollar (-2.0%), the Pound Sterling (-5.5%), the Euro (-3.9%) and the Yen (-3.0%). On a trade-weighted basis, the local currency decreased 2.6% over the month.
 

COMMODITIES
Following the rise in iron ore prices beginning in September 2016, iron ore reached its peak in February before falling 12% over March and 16.7% over April to finish at US$67.5 per metric tonne on 30 April 2017. The S&P GSCI Commodity Total Return Index decreased 0.1% for the month. Gold prices finished the month at US$1,267.86 per ounce for a 1.7% increase over the period. The oil price decreased marginally, by 2.0% to $51.56 per barrel.
 

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