The geopolitical backdrop
Geopolitical risks escalated in August as North Korea defied UN restrictions by firing a missile across Japan. With this backdrop, unsurprisingly Investors reduced investments in equities and bought ‘safe haven’ assets such as gold.
Many US companies reported quarterly earnings in August, with most S&P 500 firms beating expectations. The US unemployment rate was historically low at 4.3%, but inflation remained a concern.
The MSCI World Index ex-Australia (hedged into AUD) rose 0.3% over August. The AUD depreciated against most developed market currencies. The UK (1.5%) outperformed, while Switzerland (-1.2%) and Germany (-0.6%) underperformed. The MSCI Emerging Markets Index (2.9%) outperformed unhedged developed markets.
Australian economic conditions
The RBA left interest rates unchanged in August. Due to the ‘dampening effect’ a rising AUD has on inflation, growth and employment, the RBA lowered the growth forecast. Wage growth stayed low, at 0.5% over the June quarter. Australian companies delivered mixed earnings results, with an increase in those failing to meet expectations.
The Australian share market
The S&P/ASX300 Accumulation Index rose 0.7% over August. Small Caps (2.7%) outperformed, while Large Caps (-0.8%) underperformed. Energy (5.2%), Consumer Staples (5.2%) and Industrials (4.6%) outperformed. Telecommunications (-7.2%) and Financials (-2.1%) performed worst.
The yield on 10-year Australian Government bonds was unchanged. Short-dated and inflation-linked bonds both outperformed the broader market. US, UK, Japanese, Euro and NZ 10-year bond yields fell.
Source - JANA
Global markets were broadly positive over July.
In the US, the Federal Reserve kept interest rates unchanged as inflation remained below the 2% target. Towards the end of the month, most US companies reported strong earnings results.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.5%. The Australian dollar appreciated against most developed market currencies, driven by stronger-than-expected economic growth in China, a sharp increase in commodity prices and a corresponding weakness of the US dollar.
In developed markets, the US and Switzerland outperformed the broader market, while Germany and France underperformed.
The Australian market
The Australian share market (S&P/ASX300 Accumulation Index) ended the month unchanged. Large Cap (0.2%) and Small Cap (0.3%) stocks marginally outperformed the broader market, while Mid Cap (-1.6%) stocks underperformed. Materials (3.5%), Financials (1.2%) and Consumer Staples (1.0%) outperformed, while Health Care (-7.5%) and Utilities (-5.3%) were the worst-performing sectors.
The yield on 10-year Australian Government bonds rose to 2.7%.
The US, UK and Japanese 10-year government bond yields fell, while the Euro and New Zealand 10-year government bond yields rose. In Australia, long-dated bonds and inflation-linked bonds underperformed the broader market, reflecting the greater interest rate sensitivity of these sectors.
Source - JANA
Geopolitical events continued to dominate headlines in June, with terror attacks in Europe, more North Korean missile tests and ongoing tensions in the Middle East. British Prime Minister Theresa May’s snap general election resulted in a hung parliament where no party won an absolute majority. In the US, the Federal Reserve raised interest rates by 0.25% and approved plans for 34 of the largest banks to use some of their extra capital for share buybacks and dividends.
Household debt risk in Australia
In Australia, credit rating agency Moody's downgraded 12 banks, citing increased risk from indebted households. The Reserve Bank of Australia is focused on the implications the current low interest rate environment and how it could lead to greater financial risks, which could pose further risk for the economy.
Equity market movements
The S&P/ASX300 Accumulation Index rose 0.2% in June. Small Cap stocks rose 2.0% for the month, while Large Cap stocks (-0.1%) underperformed the broader market. Healthcare (6.1%), IT (1.9%) and Financials (1.7%) outperformed, while Energy (-6.8%) and Utilities (-2.7%) were the worst performing sectors.
The MSCI World Index ex-Australia (hedged into AUD) rose 0.2% in June. The AUD appreciated against most developed-market currencies, resulting in a return for unhedged overseas equities of -2.6%. In developed markets, Japan and the US outperformed the broader market, while France and the UK underperformed. The MSCI Emerging Markets Index outperformed unhedged developed markets.
The yield on 10-year Australian Government bonds rose to 2.6% over the month. US, UK, Japanese, Euro and New Zealand 10-year Government bond yields all rose. In Australia, long-dated bonds and inflation-linked bonds underperformed, reflecting the greater interest rate sensitivity of these sectors.
Source - JANA
Markets were dominated by political and geopolitical events throughout May. While centrist Emmanuel Macron’s victory in France boosted confidence, concerns about the Middle East and North Korea remained. In the US, concerns grew over the possibility the President could be impeached, although his party passed its healthcare reforms, comforting investors worried about the government's ability to pass tax reform. The US Federal Reserve left interest rates unchanged.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.9% in May. The AUD depreciated against most developed market currencies. The UK and Japan outperformed, while Canada and the US underperformed. The MSCI Emerging Markets Index outperformed unhedged developed markets.
The RBA revised their inflation and growth forecasts upwards, with first quarter GDP weakness attributed to the impact of Cyclone Debbie on coal exports. Australian equities trended lower, led by weak performance from the banking sector following the Federal Budget, which proposed a new levy on major banks. The broader Financials sector was also weighed down toward the end of May, when Standard & Poor downgraded the credit ratings of 23 Australian financial institutions.
The S&P/ASX300 Accumulation Index fell 2.7% in May. Small Cap stocks fell 2.1%, while Large Cap stocks (-3.3%) underperformed. Industrials (4.7%), Telecommunication Services (3.4%) and Energy (1.5%) outperformed, while Financials (-7.7%) and Healthcare (-2.4%) performed worst.
Australian and global bond yields
The yield on 10-year Australian Government bonds fell to 2.4% over May. The US, UK and New Zealand 10-year Government bond yields also fell, while Japanese and Euro 10-year Government bond yields were flat. In Australia, long-dated bonds and inflation-linked bonds outperformed the broader market.
Source - JANA
Overview of world markets
The MSCI World Index ex-Australia (hedged into AUD) rose 1.3% over the month. The Australian dollar depreciated against most developed market currencies in April, which resulted in a return for unhedged overseas equities of 3.6% (in AUD). In developed markets, France (3.6%) and Switzerland (3.3%) outperformed the broader market, while the UK (-1.3%) and Canada (0.4%) underperformed. The MSCI Emerging Markets Index (4.3%) outperformed unhedged developed markets.
Business sentiment strengthens in Australia
In Australia, business sentiment strengthened. Annual headline inflation increased to 2.1%, falling within the RBA’s 2-3% target range for the first time in two years. The S&P/ASX300 Accumulation Index rose 1.0% in April. Small Cap stocks fell 0.3% for the month, while Large Cap stocks (1.0%) performed in line with the broader market. Industrials (4.1%), IT (3.5%) and Healthcare (3.4%) outperformed, while Telecommunication Services (-9.5%) and Consumer Staples (-2.5%) were the worst performing sectors.
The yield on 10-year Australian Government bonds fell to 2.6% over the month, while long-dated bonds and inflation-linked bonds both outperformed the broader market. US, Japanese and New Zealand 10-year Government bond yields fell, while the UK and Euro 10-year Government bond yields were flat.
Source - JANA
Economic conditions improve
Economic conditions continued to improve throughout March across much of the developed world.
In mid-March, Managing Director of the International Monetary Fund (IMF), Christine Lagarde expressed the belief that the world economy has reached a turning point and may “snap out of its multi-year convalescence” so long as the policy environment continues to be supportive.
European politics and the economy
Global uncertainty remained high in March, as British Prime Minister Theresa May triggered Article 50 and formally began the negotiations for Britain to leave the European Union. Despite concerns about the rise of populism across Europe, in the Netherlands, the Party of Freedom failed to win the general election.
The United States
Over the month, the US Federal Reserve raised interest rates by 0.25%, a convincing step on their path towards interest rate normalisation. Despite a continued improvement in the US economic strength and sentiment, the Federal Reserve signaled a slower path of interest rate rises than markets had expected, indicating that they expect two further rate hikes over 2017.
In response, some emerging market economies, including China, responded to minimise capital outflows and currency depreciation. Despite the ‘dovish hike’ providing further support for the US equities, investors became increasingly cautious regarding US President Donald Trump’s ability to deliver on his proposed pro-growth reforms, with critical policy details still lacking and following his first legislative setback where he failed an attempt to repeal the current US healthcare system.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.1% over March. The AUD depreciated against most developed market currencies. In developed markets, France and Germany outperformed the broader market, while Japan and the US underperformed.
The MSCI Emerging Markets Index outperformed unhedged developed markets.
Australia continued to display strong economic conditions, with the rapid expansion of the domestic manufacturing sector, an increase in domestic consumption and rising export income.
Despite this, the Reserve Bank kept interest rates unchanged in March, highlighting the heightened risks within the Australian property market due to increased household debt, low income growth, and low inflation.
The S&P/ASX300 Accumulation Index rose 3.3% in March. Small Cap stocks rose 2.7% for the month, while Large Cap stocks (3.3%) performed in line with the broader market. Utilities (6.3%), Healthcare (5.6%) and Consumer Staples (5.5%) outperformed, while Materials (0.2%) and Telecommunication Services (0.3%) were the worst performing sectors.
The yield on 10-year Australian Government bonds remained flat at 2.7% over the month. Elsewhere in the world, the US, Japanese and New Zealand 10-year Government bond yields were flat, while the UK and Euro 10-year Government bond yields rose. In Australia, long dated bonds and inflation-linked bonds both outperformed the broader market.
Source - JANA
Gains amid political uncertainty
Sentiment improved during February, with most markets performing well. While markets rose, macroeconomic and political risks remained high, with lack of clarity around the details of US President Donald Trump’s policies and the upcoming French presidential elections. In Asia, tensions with North Korea continued to rise following a ballistic missile test and the alleged assassination of Kim Jong-nam.
China's economy continued to show signs of stabilisation through January and February.
China reported a strong increase in producer (6.9%) and consumer (2.5%) inflation for January, driven mainly by higher commodities and food prices. This reflects the Chinese government's efforts to support the economy through infrastructure spending.
The People’s Bank of China lifted short-term interest rates by 0.1% in early February, a sign that the bank is tightening monetary policy.
The Australian dollar appreciated against most developed market currencies in February, which resulted in a return for unhedged overseas equities of 1.5%.
In developed markets, the US (3.9%) outperformed the broader market, while Canada (0.0%) and Japan (0.5%) underperformed.
The MSCI Emerging Markets Index (1.8%) outperformed unhedged developed markets.
US, Euro, UK, New Zealand, and Japanese 10-year Government bond yields fell.
Australia recorded its largest trade surplus of $3.5bn for December 2016, along with a sharp contraction of their current account deficit to $3.9bn for the quarter ended 31 December 2016.
Driven by a surge in commodity prices and a rise in export volumes led by an increase in Chinese demand, these economic indicators suggest positive support to GDP growth in Australia. The Reserve Bank of Australia kept interest rates unchanged through to February.
Australian shares ended February higher as the reporting season delivered stronger than expected earnings results:
- The ASX300 Accumulation Index rose 2.2%
- Small Cap stocks rose 1.3%
- Large Cap stocks (2.4%) outperformed the broader market
The yield on 10-year Australian Government bonds remained flat at 2.7% over February.
Source - JANA
Why 2016 was unusual
Overall, 2016 was an unusual year for investors. At a time of minimal earnings growth for companies, widespread monetary stimulus by central banks helped support share markets.
Britain's unexpected decision to leave the EU in June 2016 and Donald Trump's success in the Republican Party primaries and the US Presidential Election in November 2016 caused considerable concern and volatility in financial markets.
The initial negative response to the Brexit vote saw a flight to "safe haven" assets but UK equity markets recovered quickly. In fact, post-Brexit weakness of the UK pound may benefit UK companies in a range of sectors where most of their earnings come from operations outside the UK.
US President Donald Trump's proposed assertive expansionary fiscal program policies, such as spending heavily on infrastructure while lowering taxes, could be good for the US economy. But such a stimulus program could see the US Federal Reserve raise interest rates more aggressively than they did in 2016, resulting in a larger US deficit.
Global share markets
Global share market returns varied greatly in 2016, with very modest signs of economic recovery in Europe tempered by heightened concern over regional politics. German and French markets were up 6.9% and 4.9% in the calendar year. The weak Italian economy saw their market fall 10.2% with fresh concerns about political instability following Prime Minister Matteo Renzi's resignation after his plan to reform Italy's constitution was overwhelmingly rejected on 4 December 2016.
Japan's Nikkei 225 Index rose by just 0.4% in the 12 months to 31 December 2016 as the yen rose and investors began to lose faith in both monetary policy and economic reforms. China's share market fell 12.3% over the same period while in contrast, growth in the US economy helped push the US share market up 9.5%.
Australia outperformed most of the world's major share markets, returning 11.8% for 2016. Mining companies delivered better returns to investors in 2016 due to stronger spot prices for bulk commodities in the second half of the year.
The US Federal Reserve raised the official cash rate from 0.5% to 0.75%. It is the first time in a year that the interest rate has been raised, and only the second time since the GFC of 2007-08.
Here in Australia, the RBA sent the cash rate to a historic low of 1.50%, having reduced it by 0.25% in May and by another 0.25% in August 2016.
Interest rates in Europe and Japan remained at or near historic lows.
The Aussie dollar
There was a mixed performance of the Australian dollar against the world's major currencies.
2016 began poorly as concerns the economic slowdown in China would be worse than expected forced the AUD down to around 68.6 US cents. However, our dollar then rose over the year, particularly due to the recovery of iron ore prices. As the year progressed, evidence that China's economy had stabilised benefitted the AUD. Over 2016, the AUD fell 1.20% against the US dollar.
The AUD rose 18% against the UK pound over 2016 - the majority of this rise is attributable to the weakness of the pound following the Brexit vote.
Past performance is not necessary indicative of future performance.
2015/16 investment returns
TWUSUPER has declared its annual investment returns for the financial year to 30 June 2016. Chief Investment Officer Andrew Killen has described the results as very solid despite tough investment markets.
"Investment markets during the year were some of the toughest we’ve seen since the GFC,” said Mr Killen. “Despite this, TWUSUPER’s investment performance has been highly competitive, particularly when compared to a range of well-known industry and retail super funds.”
Period to 30 June 2016
members % pa
Retirement (Pension) members % pa Cash
1 year 1.81 3.05 3.13 2.17 3.45 3.59 3 years 2.03 8.16 9.70 2.45 9.13 10.91 5 years 2.71 8.17 9.35 3.20 9.24 10.65 10 years 3.71 5.17 5.16 4.40 5.99 6.05
The figures shown are net of fees, investment expenses and (for super members) taxes. Past performance is not a guarantee of future performance.