January was the worst month for US equities in a year. The S&P 500 sank 3.1% and the Dow Jones fell over 3.5%. Headwinds included 4Q 2014 GDP growth forecasts being below expectations, slowing growth overseas, lower than expected retail sales and a strong USD eroding corporate profits. Despite this, many investors are backing the U.S. due to seven-year high consumer confidence, lower fuel prices and fewer jobless claims.
In Europe, Mario Draghi led the European Central Bank (ECB) into a new era unveiling a €1.1trn Quantitative Easing (QE) program to combat deflation. The announcement of the stimulus helped to push the MSCI Europe (hedged in AUD) up 3.9% in January. However, the ECB’s QE program has been met with investor concern that the outcome will be modest, and may not be enough to fully insulate the Euro-region from deflationary pressures.
In Australia, there was also speculation on the likelihood of an interest rate cut as policy makers become increasingly concerned that economic growth in Australia has slowed while unemployment has stayed high against a backdrop of subdued inflation, a rapidly declining resources sector and slowing Chinese economic growth.
The investment returns of the major markets for one and three months to 31 January 2015 are summarised below.
*Estimate at 5/2/2015
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
The MSCI World ex-Australia Index (hedged into AUD) fell 0.5% over the month as the significant fall in US equities was mostly offset by gains from other regions. The Australian Dollar depreciated against most major developed world currencies and this resulted in a positive return of 3.2% (in AUD) on an unhedged basis. Across developed markets, the strongest performing share markets in local currency terms were Belgium, Germany, and Denmark. The weakest performing regions in local currency terms were Greece and Switzerland, but for vastly different reasons. Greek equities have continued to plummet following the election of Syriza, whereas Swiss stocks were exposed to the extreme appreciation in the Swiss Franc.
The Australian shares market as measured by the S&P/ASX300 Index was up 3.2% over the month. Performance was positive across the board, but Large Caps (3.4%) strongly outperformed Small Caps return (0.9%). Resources stocks suffered again due to market concerns in relation to Chinese economic growth and the consequent impact on Oil and Iron Ore prices. From a sector perspective, Telecommunications and Property Trusts led the way while Energy lagged considerably.
Australian and overseas bonds performed strongly over the month and quarter.