Market update - August 2017

Geopolitical risks escalated throughout the month of August as North Korea continued to defy UN restrictions by firing a missile across Japan. With this backdrop, it was unsurprising that investors took a more risk-off stance, reducing investments in equities and buying into “safe haven” assets such as the Japanese Yen and gold, with the latter rising by 3.9% over the month.

August also saw the majority of US companies report quarterly earnings that were better than analyst expectations. The US economy continues to observe strong jobs growth and a historically low unemployment rate of 4.3%.  GDP also rebounded from a weak March quarter, to record 3% annualised growth for the June quarter. Despite these, subdued inflation continues to be a concern, with the latest figure of 1.7% p.a. as at July continuing to miss their 2% p.a. target. As a result, a growing number of US Federal Reserve members expressed a desire to postpone the interest rate normalisation plans until a clear inflation trend can be observed.

The Reserve Bank of Australia (RBA) left interest rates unchanged over the month despite the fact that Australian economic conditions remain broadly on track. The RBA highlighted that uncertainties of a rising Australian Dollar, rising house prices and changes in China’s economic policies might be significant headwinds for the current growth path.

From a half yearly corporate reporting perspective, Australian companies delivered mixed earnings results, however, there was an increase in the number of companies failing to meet expectations. The Resource sector was a strong positive over the reporting season, benefitting from high commodity prices as a result of China’s supply side reforms.

The investment returns of the major markets for one month, one quarter, financial year to date (2 months) and one year to 31 August 2017 are summarised below.

Market Performance - 31 August 2017 Month Quarter FYTD 1 Year

Australian Equities

0.7% 1.0% 0.8% 9.5%

Australian Property (Unlisted)*

0.5% 2.9% 0.9% 12.1%

Australian Property (Listed)

1.5% -3.2% 1.4% -6.1%

Overseas Equities (Hedged into AUD)

0.3% 2.0% 1.8% 17.7%

Overseas Equities (Unhedged into AUD)

0.9% -3.4% -0.8% 10.7%

Emerging Markets (Unhedged into AUD)

2.9% 2.9% 4.9% 18.4%

Australian Bonds

0.0% -0.7% 0.2% -0.7%

Overseas Bonds (Hedged into AUD)

1.0% 1.1% 1.3%

1.0%

Cash

0.1% 0.4% 0.3% 1.8%

Australian Dollar vs. US Dollar

-0.7% 6.5% 3.4% 5.5%

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays
*Estimate at 12/09/2017

Australian shares as measured by the S&P/ASX300 Accumulation Index rose 0.7% over the month. Small Cap (2.7%) stocks strongly outperformed the broader market over the month, while Large Cap (-0.8%) stocks underperformed. Energy (5.2%), Consumer Staples (5.2%) and Industrials (4.6%) outperformed, while Telecommunication Services (-7.2%) and Financials (-2.1%) were the worst performing sectors.

The MSCI World Index ex-Australia (hedged into AUD) rose 0.3% over the month. The Australian dollar depreciated against most developed market currencies in August, which resulted in a return for unhedged overseas equities of 0.9% (in AUD). In developed markets, the UK (1.5%) outperformed the broader market, while Switzerland (-1.2%) and Germany (-0.6%) underperformed. The MSCI Emerging Markets Index (2.9%) outperformed unhedged developed markets.

The returns of Australian and global bonds over the year have been relatively flat.