Market update - April 2018

Global markets rebounded over the month of April, following elevated volatility and risk off sentiment over February and March.  With a macroeconomic environment that is beginning to appear more inflationary, bond prices were under pressure with global bond markets declining 0.4% on an AUD hedged basis and US 10 Year Treasury yields touching 3% for the first time since 2014.

The political environment was mixed, with China responding firmly to US tariffs, and escalating tensions in Syria resulting in the oil price rising over 5%.  This contrasted with the easing of tensions on the Korean peninsula.

In the US, corporate reporting season took place which saw over three quarters of companies beat earnings expectations, with an average of 23% growth in earnings.  Despite the strong corporate results, the equity market reaction was muted; the S&P500 returned 0.4% for the month.

In Australia the second round of hearings for the Royal Commission into the financial sector uncovered a slew of compliance failings across the industry. As such, markets became concerned regarding the regulatory constraints this may place on financial institutions going forward. As noted below, the financial sector was a detractor from Australian shares for the month of April.

The investment returns of the major markets for one and three months, financial year, and one year to 30 April 2018 are summarised below.

 

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

The Australian market outperformed global peers, with the ASX300 posting a monthly return of 3.8% compared to 2.0% return from global equity on an AUD hedged basis.  Aside from Financials, all sectors saw positive performance, with Energy (10.7%), Materials (7.4%) and Health Care (7.2%) the standouts. Diversified Financials (-2.6%) and Telecommunications (1.9%) underperformed the domestic market. Small Cap stocks (2.8%) underperformed the broader market, while Large Caps (4.1%) outperformed.

The MSCI World Index ex-Australia (hedged into AUD) rose 2.0% over the month.  The Australian dollar depreciated against the USD as the market responded to higher US interest rates, however it appreciated against the Yen (1.3%), the Pound (0.2%) and the Euro (0.2%). In aggregate, the depreciation in the AUD saw superior unhedged returns in the MSCI World Index during the month (2.8%).  The UK (6.8%) and France (6.7%) were the top performing markets, while the US (0.4%) and Canada (1.9%) underperformed. Emerging Markets underperformed Developed Markets, returning 1.2% in April, however over the rolling 12-months returns remain strong at 21.0%.

Australian and overseas bonds delivered slight negative returns over the month.