Investment update for August 2019
US and overseas markets
August was a volatile month, with headlines once again driven by trade tensions and the risk of an economic downturn.
The tone of the month was set on the first day when President Trump announced a plan to impose 10% tariffs on US$300 billion-worth of Chinese imports, which was contradictory to the more positive tone from both parties after the G20 summit earlier in the year. China retaliated by announcing it would also increase tariffs on US$75 billion of US imports, including agriculture, oil and cars. Consequently, Trump announced a further 5% increase on all existing and planned tariff rates.
Market sentiment was further dampened by the US labelling China a ‘currency manipulator’. US economic data showed that the US is not immune to global tensions, registering the weakest manufacturing Purchasing Managers Index (PMI) (49.9) since September 2009 and a fall in consumer confidence.
Further, the markets experienced a brief inversion of the 2-year/10-year US and UK yield curves for the first time since the GFC, perceived by many as the recession predictor. Investors searched for ‘safe haven’ assets and opted for bonds and precious metals, such as gold and silver. The escalation in trade tensions and general market unrest triggered profit taking in global equity markets, which fell in August.
The energy sector led the market lower driven by falling oil prices on growing concerns that US-China tensions would weaken demand for crude oil. The UK and European markets also fell sharply on the back of global developments but also on increased fears of a no-deal Brexit, as new Prime Minister Boris Johnson brought in a tougher negotiating stance.
The MSCI World ex-Australia Index (hedged into AUD) returned -2.0% for the month. Emerging markets were negatively impacted by a strong US dollar and under-performed developed markets (-2.7%). Argentina experienced major turbulence in August, with its equity market dropping by over 50% after the national primary election outcome. This suggested the current government could lose power in October, raising concerns over a potential sovereign default.
Over the past year, central banks and policy makers around the globe have become increasingly dovish (i.e. looking to provide more support), and this trend continued in August. After the US Fed cut rates at the end of July, Chairman Powell pledged to 'act as appropriate' to support the economy during his speech at Jackson Hole, suggesting further stimulus is likely. German Finance Minister Scholz put a number on possible fiscal stimulus for the first time, suggesting EUR$50 billion of extra spending.
The RBA left the cash rate unchanged at 1.0% at its meeting in August.
Australian economic readings continued to be mixed, with softer than expected construction data, sluggish business investment and falling private capex. On the upside, the labour market continues to be robust. The Australian equity market ended August 2.3% lower, with Materials (-7.3%) and Energy (-5.6%) posting the largest losses, on the back of sharply falling iron ore (-24.3%) and oil prices. Small caps fell 3.9%, under-performing large caps. Australian Property Trusts (1.3%) under-performed Global Property Trusts (2.0%) for the month.
The Australian Dollar fell against the major developed market currencies over the month, depreciating against the Japanese Yen (-4.4%), USD (-2.2%), Sterling (-1.7%) and Euro (-1.2%). The moves in the Australian dollar were just enough to offset the fall in global equities, with unhedged global equities delivering 0.3%.
The bond market posted strong returns with yields in many countries reaching record lows in August. The US 10-year ended the month at 1.50%, the Australian 10-year at 0.89% and the UK 10-year at 0.46%. For the first time, all German Government bonds had a negative yield.
Over the last year, the Australian and global bond markets returned 11.2% and 10.0% respectively, with most of the performance coming from capital gains as bond yields fell.