For quarter ended 30 September 2018
A global overview
Most equity markets posted positive third quarter returns, driven by continued robust economic growth emanating from the US. This was despite continued global trade tensions and some European and emerging markets facing economic headwinds. The Trump Administration's 10% tariff on a further US$200 billion worth of Chinese imports came into effect with China's Finance Ministry retaliating, announcing tariffs on US$60 billion of US imports ranging from liquefied natural gas to agricultural and energy products.
China moved to align more closely with Europe and Japan, implementing some modest tariff cuts on imports from these regions. Meanwhile, the US and Canada entered into a new trade agreement, joining Mexico in a revision of North American Free Trade Agreement (NAFTA).
In Europe, concerns around the Italian government’s fiscal outlook played on sentiment, while in the UK, Brexit continued to dominate headlines as the March 2019 deadline nears with no formal agreement in sight.
The Middle East
In the Middle East, geopolitical tension between the US and Iran intensified, as President Trump continued to threaten countries who accept Iranian oil exports and the EU enacted an updated Blocking Statute to nullify US sanctions on countries trading with Iran.
Turkey faced its own political challenges as tensions with the US escalated, with Trump introducing a 25% tariff on steel imports which he subsequently doubled. This resulted in a sharp depreciation in the Turkish Lira.
The US economy
Investors responded positively to US corporate earnings, driving US equities higher over the quarter. Economic data continued to underpin the view of a strong US economy as consumer confidence hit its highest level since 2000, wage growth experienced its highest level in nine years, and small business optimism reached new highs. US headline inflation stood at 2.7% (year on year) in August, well above the Federal Reserve's target of 2%, although this is partly due to the transient impact of elevated oil prices.
The September quarter was positive for Australian equities as investors ignored the political turmoil associated with the change of Prime Minister. The Telecommunications sector led the Australian market higher as the announcement of a merger between Vodafone and TPG was viewed positively by the market.
The Financial Services Royal Commission continued to weigh on the Financial Services sector, with the Interim Report being released at quarter end. The RBA's decision to leave the official rate at 1.5% for the 23rd consecutive meeting was followed by the release of GDP data for the year-to-June which came in at 3.4%, above the RBA's forecast of 3%.
Weakness in the housing market continued with dwelling values down 2.2% from their peak in September last year.
Global equity markets
The MSCI World ex-Australia Index (hedged into AUD) rose 5.7% over the quarter. Across developed markets, the US (7.5%) and Norway (6.8%) outperformed, while Greece (-17.2) and Ireland (-4.8%) were among the weakest performing countries in local currency terms.
The MSCI Emerging Markets Index (1.1%) underperformed unhedged developed markets (7.5%). The S&P/ASX300 Accumulation Index (1.5%) underperformed hedged overseas equities for the quarter but outperformed over the one-year period. Small cap stocks underperformed large cap stocks, with the ASX Small Ordinaries Accumulation Index returning 1.1% and the S&P/ASX50 Accumulation Index returning 1.2%.
Australian property trusts (2.0%) outperformed the broader Australian market over the quarter, and outpaced global listed property (0.4%). Australian bonds returned 0.5% over the quarter, outperforming hedged international bonds (-0.1%).
The Australian dollar (AUD) depreciated against the USD (-2.1%), the Euro (-1.6%) and Pound (-0.9%), was flat against the New Zealand dollar and appreciated against the Japanese Yen (0.4%)