Monthly market review

How the different asset classes have fared:

(As at 31st August 2018)

Asset Class10 Yr
% p.a.
5 Yr
% p.a.
3 Yr
% p.a.
1 Yr
%
YTD
%
6 Mo
%
3 Mo
%
1 Mo
%
Cash13.22.21.91.91.310.50.2
Australian Bonds25.84.53.13.82.72.71.50.8
International Bonds36.64.93.50.80.41.30.50.3
Australian Shares46.69.211.8167.17.361.7
Int. Shares Unhedged59.115.211.324.313.512.19.24.1
Int. Shares Hedged69.713.513.4156.26.25.11.5
Emerging Markets Unhedged75.29.110.18.40.1-3.5-0.4-0.1
Listed Infrastructure Unhedged813.388.97.613.77.41.4
Australian Listed Property9613.210.815.76.713.95.92.6
Int. Listed Pty Unhedged1012.46.515.310.719.99.34.1

1Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3Bloomberg Barclays Global Aggregate TR Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6Vanguard Intl Shares Index Hdg AUD TR, 7MSCI EM NR AUD, 8FTSE Developed Core Infrastructure 50/50 NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global REITs NR AUD

Financial markets continued to perform strongly in August, with most equity markets recording positive gains. Concern about the effects of rising trade tensions between China and the United States are weighing down emerging-market equities. However, following a period of underperformance, valuations are now looking much more attractive in emerging markets than in many developed equity markets. It is important to recognise that in a diversified portfolio there will be winners and losers at different times. We see little to be concerned about from a fundamental perspective with respect to continuing to maintain an exposure to some emerging market investments.

Australian shares had another good month shrugging off concerns about the Royal Commission. There is a widening divergence in valuations within the Australian share market. Industrial stocks are trading at extremely high valuations while banks look relatively cheap. Investors are clearly factoring in ongoing issues for the banks as the property market cools. We have also seen a number of the banks undertake an out-of-cycle interest-rate increase designed to offset higher funding costs. Banks are acting to preserve bank profit margins but at the expense of potentially alienating many of their customers.

The weaker Australian dollar has boosted returns for investing offshore with unhedged international shares outperforming hedged shares. We expect this trend for a weaker A$ to continue over the coming year as Australian interest rates continue to slip below US rates. The US share market was one of the best performers despite being one of the most expensive equity markets. We continue to favour non-US share markets, many of which are much more attractively priced.

Fixed-interest markets continued to trade sideways. Given that interest rates are so low across the globe, it’s very hard for investors to get reasonable returns in this sector without taking high risks. Cash rates in Australia have also remained unchanged for some time and we believe that it is highly likely that the Reserve Bank will keep interest rates at current levels for at least another year.

 

How the different asset classes have fared:

(As at 31st July 2018)

Asset Class10 Yr
% p.a.
5 Yr
% p.a.
3 Yr
% p.a.
1 Yr
%
YTD
%
6 Mo
%
3 Mo
%
1 Mo
%
Cash13.32.221.81.110.50.2
Australian Bonds25.94.2331.92.11.30.2
International Bonds36.84.83.41.50.10.80.60
Australian Shares46.99.48.414.95.35.75.71.2
Int. Shares Unhedged59.712.810.313.64.70.853.3
Int. Shares Hedged612.47.110.46.19.95.21.2
Emerging Markets Unhedged73.35.2-0.6-4.6-6.1-6.6-5.63
Listed Infrastructure Unhedged86.712.68.314.547.56.31
Australian Listed Property910.34.211.16.311.87.10.2
Int. Listed Pty Unhedged109.5148.620.49.17.25.42.6

1Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3Bloomberg Barclays Global Aggregate TR Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6Vanguard Intl Shares Index Hdg AUD TR, 7MSCI EM NR AUD, 8FTSE Developed Core Infrastructure 50/50 NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global REITs NR AUD

 

International Shares

International shares (unhedged) was the strongest performer last month as a weakening Australian dollar added substantially to a moderately well performing asset class. US shares outperformed European stocks, which retraced their fall in June.  Major U.S. companies reported their second quarter earnings in July. Internet stocks were a mixed bag as Apple and Amazon emerged stronger but Facebook and Netflix sustained major losses after poorer than expected results.

Cash

The RBA once again left its benchmark cash rate unchanged at 1.5% for the twenty-fourth month in a row. Markets now price in the central bank remaining on hold well into next year. The RBA maintains that inflation is likely to return as unemployment falls and when that happens, it will increase rates. However, Australia’s unemployment rate is still well above 5% and many other countries like the US, Germany and UK have barely met inflation targets even as their unemployment rates have fallen below 4%. An indebted consumer also makes the Australian economy vulnerable to interest rate increases so the RBA is unlikely to move any time soon even though interest rates have now stayed flat for two years.

Bonds

U.S. Treasury securities sold-off in late July as trade tensions and high-profile earnings misses drove an increase in risk aversion. Nevertheless, U.S., investment-grade credit mostly traded sideways as strong macroeconomic numbers increased investor confidence in Wall Street so the spread between U.S. Treasuries and the yield on investment-grade corporate debt narrowed. The US central bank, the Federal Reserve, looks set to hike interest rates at least once in the second half of the year. All else equal, this means bonds that are not supported by central banks (i.e. outside of Europe and Japan) should fall in price. On the flipside, bouts of risk aversion driven by rising global tensions have pushed up demand for bonds. The net result of these opposing forces has been largely flat performance year to date. Australian bonds have done performed better than their international equivalents mostly because Australia is at a different point in the economic cycle. The RBA is on hold and moderate falls in unemployment and increases in GDP have sustained investor faith in local credit. Pressure on bank equities has yet to translate into a rise in local bond prices mostly because ongoing strength in the mining sector is pushing up demand for credit and therefore subduing yields.

Australian Shares 

Australian shares were pulled up in July by a rebound in bank stocks. Materials traded sideways and industrial tracked the overall performance of the index quite closely. Nevertheless, the Financials ex-REIT sector is still down year-to-date. Banks have been pulled down by scandals and negative exposure in the Royal Commission but investors were pleased by bank earnings in July that showed fewer losses than analysts’ feared. The outlook for domestically exposed industrial companies and banks continues to remain somewhat subdued as high levels of consumer debt and slow or negative housing price growth diminishes the likelihood of a strong rebound in consumer purchases and demand for credit.

Emerging Markets

Emerging markets rebounded this month after a very poor performance over the last year. Rising US rates and trade tensions have spurred a broad sell-off across the EM complex, which accelerated over the last six months. Select EM countries like Argentina and Turkey have come unstuck as rising US rates have exposed the large U.S. dollar debt accumulated by emerging market corporations. Other countries like Brazil and Mexico have faced headwinds from political uncertainty as well as rising trade tensions. The rebound in July came as investors took a breather from recent selling and appetite for high-yielding, emerging market stocks returned somewhat. It remains to be seen whether the EM complex will be rewarded for its cheap valuation and long-term growth potential or whether investors will continue selling as U.S. protectionism hinders export-exposed countries in the Asian region and a rising dollar pushes up inflation and borrowing costs elsewhere in the developing world.

 

How the different asset classes have fared:

(As at 30th June 2018)

Asset Class10 Yr
% p.a.
5 Yr
% p.a.
3 Yr
% p.a.
1 Yr
%
YTD
%
6 Mo
%
3 Mo
%
1 Mo
%
Cash13.32.21.91.80.90.90.50.2
Australian Bonds26.14.43.43.11.71.70.80.5
International Bonds36.953.81.90.10.10.10.2
Australian Shares46.210.39.513.74482.9
Int. Shares Unhedged59.21510.115.46.36.35.62.2
Int. Shares Hedged69.213.110.111.71.41.43.80.3
Emerging Markets Unhedged74.99.36.612.2-1.1-1.1-4.1-1.6
Listed Infrastructure Unhedged8N/A13.39.47.34.84.87.84.7
Australian Listed Property96.112.21013.2339.82.3
Int. Listed Pty Unhedged10N/A10.97.18.46.16.110.24.8

1Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3Bloomberg Barclays Global Aggregate TR Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6Vanguard Intl Shares Index Hdg AUD TR, 7MSCI EM NR AUD, 8FTSE Developed Core Infrastructure 50/50 NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global REITs NR AUD

 

Last year we saw synchronised global economic growth for the first time since the global financial crisis (GFC). However, while the US economy is still growing strongly, a range of leading economic indicators point to a slower pace of growth in other regions. A stronger Euro and weaker Chinese demand have slowed down the pace of growth in Europe. However, the US economy is likely to keep growing at an above-trend pace, driven by President Trump’s fiscal stimulus of tax cuts and increased government spending.

After a number of strong years for share market returns, share markets have shifted gear since the end of 2017; moving into a more volatile, sideways trading range. We believe we are now stuck in a period of consolidation that may well continue through the balance of 2018. Emerging markets have been the laggard, underperforming most developed share markets. Australian shares have performed strongly over the prior 12 months but there are risks on the horizon, especially if the banking sector tightens credit conditions in the aftermath of the Royal Commission.

Cash

The RBA once again left its benchmark cash rate unchanged at 1.5% for the twenty-third month in a row. Markets now price in the central bank remaining on hold well into next year. The RBA does not want to cut rates for fear of reigniting a cooling housing market. However, an indebted consumer makes the economy vulnerable to interest rate increases. With inflation subdued, the RBA can afford to continue to sit on its hands.

Bonds

An increase in risk aversion in the second half of June pushed up demand for bonds, which rose moderately. This has been the pattern so far this year. The US central bank, the Federal Reserve, continues to withdraw the liquidity it had injected into the system in response to the GFC and hike interest rates. This is negative for bonds. On the flipside, bouts of risk aversion driven by rising global tensions have pushed up demand for bonds. The net result of these opposing forces has been largely flat performance year to date.

Australian bonds have done better than those offshore in 2018 for a few reasons. Firstly, Australia is at a different point in the economic cycle with a central bank resolutely on hold. Secondly, short term interest rates in Australia are now below those in the US. International bond investments are (almost always) currency hedged. The negative interest rate differential means what used to be a hedging yield pickup is now a detractor.

Australian Shares

Australian stocks had a good June. Investors saw value in the banks causing them to bounce by 4% after a period of sustained stock price weakness. Ongoing bank scandals, culminating in the Royal Commission; regulatory pressures on residential lending standards; and high starting valuations relative to their peers offshore; have combined to see the sector out of favour this year. The Financials ex-REITS index is down -2.1% for the year to the end of June.

In contrast, mining companies haven’t missed a beat. June was another positive month with the sector appreciating by just over 3%. So far this year they’re up by 11%, and a whopping 41% over the last 12 months. Australia’s world class lowest on the cost curve miners were oversold following the end of the mining boom. Chinese stimulus then led to renewed demand for iron ore. This, combined with operational cost efficiency programs and the end of large capital expenditure outlays (i.e. the mines are built), has seen the miners throwing off enormous amounts of free cash flow. Investors have cheered and the stocks have rerated accordingly.

International Shares

The continuing easing in the Australian dollar meant currency unhedged international equities did better than hedged. This has also been the case year to date.

With European macroeconomic indicators disappointing, and renewed fears of Itexit; European stocks underperformed other developed economy share markets in June. US shares did the best with the Japanese share market taking out the silver medal position. This has also been the pattern for the year to date. US shares have added 9% this year, Japanese 7% and European 2% (all in local currency terms).

European stock markets have a heavy tilt to banks whereas US share markets are dominated by technology companies. Facebook, Amazon, Netflix, Google, et al. continue to be priced on very high multiples by investors. In contrast, financials are not. Flat yield curves (long term interest rates are not much more than short term) mean banks’ net interest margins are compressed. This is because a bank essentially borrows short term (in the form of the interest they pay on deposits) and lends long term (in the form of mortgages). The dominant sectors in each stock market is a big reason for the diverging fortunes.

Emerging Markets

Emerging markets continue to struggle for several reasons. Increasing US interest rates make emerging market assets relatively less attractive, leading to investors pulling their funds out. Some emerging market governments and corporates have borrowed in US dollars. Increasing US interest rates and dollar make these loans and bonds harder to repay. The higher oil price creates additional pressure, with many governments weaning their populations off fuel subsidies; and being forced to reverse course. This adds to the pressure on government finances. Finally, to cap things off, we now have an incipient trade war between the US and China. This caused Chinese shares, which had been relatively stable compared to the rest of the emerging markets, to sell off at the end of June and into July. Due to extended and complex global supply chains this impacted not just China, but much of emerging Asia.

 

How the different asset classes have fared:

(As at 31st May 2018)

Asset Class10 Yr
% p.a.
5 Yr
% p.a.
3 Yr
% p.a.
1 Yr
%
YTD
%
6 Mo
%
3 Mo
%
1 Mo
%
Cash13.42.221.80.80.90.50.2
Australian Bonds26.14.12.91.71.20.71.20.7
International Bonds36.94.73.41.5-0.10.10.80.4
Australian Shares45.19.16.410.81.13.11.21.4
Int. Shares Unhedged57.914.98.19.83.92.22.60.4
Int. Shares Hedged68.312.5911.51.12.21.11.4
Emerging Markts Unhedged749.66.612.20.71.2-2.9-3.8
Listed Infrastructure Unhedged8n/a136-1.30.1-4.55.8-0.8
Australian Listed Property94.611.57.75.70.70.97.53
Int. Listed PtyUnhedged10n/a10.23.91.31.3-0.59.72

1Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3Bloomberg Barclays Global Aggregate TR Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6Vanguard Intl Shares Index Hdg AUD TR, 7MSCI EM NR AUD, 8FTSE Developed Core Infrastructure 50/50 NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global REITs NR AUD

 

Cash

Surprising no one, the RBA once again left its benchmark cash rate unchanged at 1.5%. Markets see the central bank remaining on hold well into next year. The RBA does not want to cut rates for fear of reigniting a cooling housing market. Yet an indebted consumer makes the economy vulnerable to interest rate increases. With inflation subdued, the RBA can afford to continue to sit on its hands.

Bonds

Bonds had a positive month benefitting from some increase in risk aversion. Italian political turmoil and ongoing concern that the Trump administration is determined to start a trade war saw some rotation into safe haven assets like developed market government bonds. The US Federal Reserve also helped bonds get a bid. The minutes from its most recent meeting made it clear the Fed was happy to see inflation overshoot its target, given that it had undershot for some time; so rate increases would be gradual. Finally, disappointing 1st quarter economic data also contributed to bond yields retreating (and bond prices, which move in the opposite direction to yields, rallying).

Australian Shares

Australian Shares had a reasonable May, with listed property leading the way. Property was heavily sold off last year and into earlier this year. Listed property in Australia is dominated by the retail sector, i.e. shopping malls. The selloff was driven, at least partly, by fears Amazon’s impending launch in Australia would decimate retail here. It turned out Amazon’s entry was underwhelming and did not lead to shopping malls being abandoned en masse. A reduction in the perceived “Amazon risk” combined with reasonable valuations have led to the bounce back in share prices.

Elsewhere, resources continued to be one of the better performing sectors with 2.6% for the month. World economic growth continues to be on an upward path, so commodity producers are in favour. With the Royal Commission rumbling on, financials are underperforming. The sector gave up 0.15% over the month and has declined 6% so far this year.

International Shares

Developed market international equities also had a positive month. Some appreciation of the Australian dollar meant currency hedged did better than unhedged. US shares outperformed those in Europe and Japan. After surpassing expectations last year, European economic data so far this year has disappointed. Combined with the ructions in Italy, this saw European shares give up 6% for the month (in local currency). In contrast, US shares were up by 2%.

Emerging Markets

Emerging markets had a tough month, losing near to -4%. A strengthening US dollar has brought attention to those countries with significant US dollar denominated debt. So far, Argentina and Turkey have been the centre of the turmoil. However, other EM countries have also come under some pressure. The flood of money into emerging markets attracted by the stellar returns last year is now rapidly reversing. Brazilian shares gave up 17% (in US dollar terms) as investors feared the government, in an election year, didn’t have the stomach for needed reforms to get its fiscal house in order. Indian stocks also went backward over the month, giving up 4% (also in US dollar terms). India imports 80% of its fuel needs, so has the added pressure of a surging oil price. Chinese shares managed to put in a positive performance, gaining 1.6% (in US dollars). Only a small proportion of China’s total debt is to foreigners, the country has ample foreign exchange reserves and runs a current account surplus.

 

How the different asset classes have fared:

(As at 30th April 2018)

Asset Class10 Yr
% p.a.
5 Yr
% p.a.
3 Yr
% p.a.
1 Yr
%
YTD
%
6 Mo
%
3 Mo
%
1 Mo
%
Cash13.42.321.80.60.90.40.2
Australian Bonds263.92.72.20.50.90.8-0.3
International Bonds36.84.33.21.7-0.500.2-0.4
Australian Shares45.27.86.26.4-0.33.603.5
Int. Shares Unhedged57.916.89.212.43.65.11.82.8
Int. Shares Hedged68.412.7912-0.32.6-42
Emerging Markets Unhedged74.511.67.620.64.66.501.2
Listed Infrastructure Unhedged813.66.940.9-0.54.53.8
Australian Listed Property93.3107.61.6-2.23.11.14.3
Int. Listed Pty Unhedged109.93.8-0.2-0.71.54.43.1

1Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3Bloomberg Barclays Global Aggregate TR Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6Vanguard Intl Shares Index Hdg AUD TR, 7MSCI EM NR AUD, 8FTSE Developed Core Infrastructure 50/50 NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global REITs NR AUD

 

Cash

The RBA has once again held rates on hold. Australian consumer price inflation (  CPI) came in slightly under expectations at 1.9%, which is below the RBA’s official target of 2-3% so it’s difficult to see how the central bank will increase rates any time soon. Moreover, as long as real wage gains remain minimal and household debt remains high, the RBA is likely to keep rates on hold to maintain financial stability.

Bonds

Australian and international bonds fell this month as Federal Reserve rate hikes (and the expectation of more to come) pushed up US bond yields, which dragged Australian yields up as well. Bond yields look set to rally further although the jury is out on the terminal (i.e. peak) rate that U.S. interest rates will rise to before the cycle ends and the Federal Reserve starts easing monetary policy again. Given that yields move inversely with bond prices, forecasters who see the terminal rate not far above 3% (like Goldman Sachs) are likely to start buying bonds if rates move much higher. Those who see a risk of inflation or further potential for cyclical growth are likely to sell or at least hold off buying bonds for the meantime. High yield pared its losses to end the month slightly higher while investment-grade credit and U.S. Treasuries were slightly negative.

International Shares

International equities had a positive month in April. Strong earnings growth in the United States surprised analysts and gave stock prices another leg up. Other developed markets outperformed the S&P 500 this month with Europe rising more than 5% and Japan up by more than 3%. Overall, the month’s performance appeared to confirm the view that Europe and Japan are likely to rally further than the U.S. because starting valuations are more attractive and the ECB/ BOJ still have much more accommodative monetary policy (i.e. negative interest rates along and central bank asset purchases) than the United States.

Emerging Markets

EM performed well this month, dragged up by India and China, which more than offset losses in Brazil. EM infrastructure outperformed EM equities by more than 50% (1.73% vs 1.17%). If the U.S. dollar strengthens, EM returns will likely be subdued. Recently, Argentina’s frantic efforts to prevent a rapid devaluation of the peso by rapidly raising interest rates are an early warning sign that EM dollar debt is likely to underperform in a strong-dollar environment.

Australian Shares

Australian shares performed very strongly in April, pulled up by industrials and the mining sector. Financials were flat for the month as investors demanded a higher risk premium from institutions now subject to scrutiny at the Royal Commission into misconduct in the financial services industry. For this reason, AREITs impressive performance is possibly due to a rotation of funds from the banks to other sectors.

 

How the different asset classes have fared:

(As at 31st March 2018)

Asset Class10 Yr
% p.a.
5 Yr
% p.a.
3 Yr
% p.a.
1 Yr
%
YTD
%
6 Mo
%
3 Mo
%
1 Mo
%
Cash13.52.32.01.70.40.90.40.1
Australian Bonds26.04.32.43.30.92.30.90.8
International Bonds36.84.73.22.9-0.10.8-0.10.8
Australian Shares45.37.94.43.6-3.74.2-3.7-3.5
Int. Shares Unhedged57.817.08.013.30.86.60.8-0.5
Int. Shares Hedged68.914.19.514.90.08.31.1-3.7
Emerging Markets Unhedged74.811.68.724.23.411.53.4-0.3
Listed Infrastructure Unhedged814.25.44.0-2.8-0.5-2.82.8
Australian Listed Property93.310.85.8-0.1-6.21.1-6.20.1
Int. Listed Pty Unhedged1010.70.6-0.7-3.7-0.4-3.74.4

1Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3Bloomberg Barclays Global Aggregate TR Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6Vanguard Intl Shares Index Hdg AUD TR, 7MSCI EM NR AUD, 8FTSE Developed Core Infrastructure 50/50 NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global REITs NR AUD

 

Share market volatility returned in March and looks set to remain. Market enthusiasm for rising earnings and U.S. tax cuts largely faded by the end of the month as rising trade tensions between the U.S. and China buffeted capital markets.

Cash

The RBA continued its policy of “masterful inaction” in March by keeping cash rates unchanged at 1.5%. Australia’s central bank remains concerned about the lack of wage growth but is unwilling to lower interest rates because of fears of encouraging more speculative borrowing in the property market. With no end in sight to wage stagnation and high household debt, cash returns are likely to remain stable in the near term.

Bonds

International bonds ended the month slightly higher as investors see-sawed between viewing U.S. and European economic strength as an indicator of rising yields and looking for safety from volatile stock markets. In fact, an increase in US bond yields led to turmoil on equity markets, which encouraged investors to crowd back into the bond market. Consequently, international fixed interest was positive for the month (bond prices move in the opposite direction to yields). In contrast, Australian yields barely shifted.

International Shares

Uncertainty generated by rising interest rates and a sequence of increasingly robust U.S. tariffs on mainly Chinese imports led to rising volatility in international equity markets. The Australian dollar acted as a reasonably good hedge for Australian investors in international shares (i.e. the AUD fell as equity market volatility picked up). As a result unhedged international shares significantly outperformed hedged portfolios although both asset classes were down this month.

Emerging Markets

Emerging markets were not immune to the broad sell-off in international shares that gathered pace in March. Fears that U.S. trade action would undermine export-oriented growth in EM economies sent many emerging market currencies tumbling and led to negative returns in EM equities – particularly those that are sensitive to disruptions in the global supply chain caused by the U.S. President’s tariffs. A falling Australian dollar offered some local investors some protection from falling returns in emerging markets.

Australian Shares

Australian equities turned sharply negative this month, recording one of the most significant monthly declines since the GFC. The index was dragged down by financials, which faced the pressure of increased scrutiny at a royal commission. Mining and materials also fell in absolute terms but nevertheless outperformed the index. Given that the financial sector dominates the Australian share market (representing roughly 40% of the index), public inquiries like the Royal Commission and regulatory efforts to tighten bank lending are likely to depress returns in 2018.

Infrastructure and Property

Infrastructure and property consistently lagged rising markets in 2017 and early 2018. However, both asset classes outperformed equities during the recent period of volatility as robust appetite for growth faded and investors opted for more reliable and consistent returns. Given that the Federal Reserve is now raising interest rates and selling off its bond portfolio, though, the relative attractiveness of property and infrastructure may fade. This is because investors sought out the dependable yield that listed property and infrastructure assets offer after central banks pushed interest rates to zero (and in some cases, negative). Now that rates are rising, both asset classes could lose their appeal unless continuing volatility or falling returns scares investors away from more speculative sectors of international share markets.

 

How the different asset classes have fared:

(As at 28th February 2018)

Asset Class10 Yr
% p.a.
5 Yr
% p.a.
3 Yr
% p.a.
1 Yr
%
YTD
%
6 Mo
%
3 Mo
%
1 Mo
%
Cash13.52.321.70.30.90.40.1
Australian Bonds26.14.12.42.901.2-0.50.3
International Bonds36.84.63.22.1-0.9-0.5-0.7-0.2
Australian Shares45.28.15.710.8-0.28.11.90.2
Int. Shares Unhedged58.117.28.5161.310.9-0.4-0.4
Int. Shares Hedged68.914.19.514.908.31.1-3.7
Emerging Markets Unhedged74.510.99.128.83.712.64.3-0.9
Listed Infrastructure Unhedged8N/A13.94.84.5-5.4-4.2-9.8-2
Australian Listed Property93.310.250.5-6.31.6-6.2-3.2
Int. Listed Pty Unhedged10N/A100-5.8-7.7-3.9-9.3-3

1Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3Bloomberg Barclays Global Aggregate TR Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6Vanguard Intl Shares Index Hdg AUD TR, 7MSCI EM NR AUD, 8FTSE Developed Core Infrastructure 50/50 NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global REITs NR AUD

 

February was marked by a sharp jump in share market volatility at the start of the month. These markets have subsequently recovered around half of their initial losses.

Cash

In contrast with all the excitement over the US central bank increasing interest rates, our central bank, the RBA, continues to keep cash rates unchanged at 1.5%. Philip Lowe, the RBA Governor, is as exasperated as most other observers with the lack of wage growth despite continuing growth in employment. A key risk for the economy from the RBA’s perspective is the heavy debt burden Australian households carry (only Swiss households have greater). Wage growth is not helping to pay down this debt. Consequently, the RBA doesn’t want to increase interest rates and add to the burden on households. It also doesn’t want to cut interest rates for fear of firing up the property market once again; high house prices are, of course, the reason why Australian households became so indebted in the first place.

Bonds

An increase in US bond yields led the turmoil on equity markets. Consequently, international fixed interest was negative for the month (bond prices move in the opposite direction to yields). In contrast, Australian yields barely budged. Very unusually, Australian yields are now lower than those in the US right along the yield curve. Because of this, investors in Australian bonds saw a small positive return in February.

International Shares

Most international equity sectors including emerging markets and listed infrastructure experienced modestly negative monthly returns. The Australian dollar acted as a natural hedge for Australian investors in international shares and fell as equity market volatility picked up. This made overseas shares worth more when translated back into Australian dollars. As a result unhedged international shares outperformed hedged.

Emerging Markets

Emerging markets also got caught up in the selloff earlier in the month. However, these markets proved to be surprisingly resilient. Brazilian shares managed a positive return for the month, as the Brazilian economy emerges from its worst recession since the Great Depression. Chinese stocks gave up ground in February. This follows a near to 50% gain in 2017, so some consolidation was not unexpected.

Australian Shares

Australian equities managed a small positive return for the month. Big caps outperformed small, as one would expect given the risk off tone to markets over the month. Over the last 12 months the reverse is true: the S&P/ASX Small Ordinaries returned 21% while the S&P/ASX 20 appreciated by 6%. Sector wise, financials ex property did the best with 0.7% for the month. Resources were the worst, with -0.7%. Again, this reversed the pattern over the prior 12 months: resources were up 24% for the year ending 28th February, while financials ex property were up just 3%.

Infrastructure and Property

So called real assets continued to have a tough time of it. One of the aims of the unorthodox monetary policy of Quantitative Easing (QE: buying bonds) which the big central banks around the world had in place since the GFC was to force investors out of relatively safe investments like bonds and take on more risk. This “reach for yield” meant investors sought out stocks paying a steady dependable dividend. Property and utility stocks fitted the bill, and so saw their prices bid up. With the US Federal Reserve now winding back QE and debate on when the European Central Bank follows suit; bond yields have moved up such that alternative sources of yield are not quite as sought after: so share prices of property and utility stocks have softened.

 

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The information contained in this material is current as at date of publication unless otherwise specified and is provided by ClearView Financial Advice Pty Ltd ABN 89 133 593 012, AFS Licence No. 331367 (ClearView) and Matrix Planning Solutions Limited ABN 45 087 470 200, AFS Licence No. 238 256 (Matrix). Any advice contained in this material is general advice only and has been prepared without taking account of any person’s objectives, financial situation or needs.  Before acting on any such information, a person should consider its appropriateness, having regard to their objectives, financial situation and needs. In preparing this material, ClearView and Matrix have relied on publicly available information and sources believed to be reliable.  Except as otherwise stated, the information has not been independently verified by ClearView or Matrix. While due care and attention has been exercised in the preparation of the material, ClearView and Matrix give no representation, warranty (express or implied) as to the accuracy, completeness or reliability of the information. The information in this document is also not intended to be a complete statement or summary of the industry, markets, securities or developments referred to in the material. Any opinions expressed in this material, including as to future matters, may be subject to change. Opinions as to future matters are predictive in nature and may be affected by inaccurate assumptions or by known or unknown risks and uncertainties and may differ materially from results ultimately achieved. Past performance is not an indicator of future performance.

 

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