Market update - August 2018

Global equities posted a positive return in the month of August  primarily driven by continued robust economic growth emanating from the US.  This was despite continued global trade tensions and deteriorating conditions in a handful of emerging market countries.  Against this backdrop, it was unsurprising the month of August saw wide dispersion in performance around the world, with some European and Emerging Markets facing headwinds despite the positive global trend.

In the US, economic data continued to underpin the view of a strong economy as the unemployment rate dropped to 3.9% and GDP growth for the second quarter was revised upwards to 4.2%. To complement this strong economic data, strong second quarter earnings resulted in the S&P500 rising 3.2% in August.   While the Fed signaled further rate hikes are likely to continue in the medium term, there was no indication they would be more aggressive than forecast which buoyed market sentiment.  Offsetting this was trade concerns which remain elevated as the rhetoric around more tariffs continued.  In this regard, the United States and China trade war escalated at the margin as the latter implemented a further 25% tariff on selected US imports, including coal and petroleum. In contrast, substantial steps appear to have been taken in renegotiating the North American Free Trade Agreement (NAFTA), with the US and Mexico having struck a trade deal in late August. 

In contrast, European markets underperformed primarily due to concerns of a hard Brexit and spillover from the challenges facing Turkey. The government in the UK started preparations for the possibility of a hard exit from the European Union which weighed on equities (-4.1%). Turkey on the other hand, faced their own political challenges as tensions between Turkey and the US escalated. The introduction of a 25% tariff on steel exports to the US caused a sharp depreciation in the Turkish Lira, losing almost half its value against the USD.   

The investment returns of the major markets for one and three months, financial year (2 months), and one year to 31 August 2018 are summarised below.

Market Performance - 31 August 2018

Month

Quarter

FYTD

1YR

Australian Equities

1.4%

6.0%

2.7%

15.4%

Overseas Equities (Hedged into AUD)

1.5%

5.2%

4.8%

15.4%

Overseas Equities (Unhedged into AUD)

4.2%

9.4%

6.8%

25.0%

Emerging Markets (Unhedged into AUD)

0.0%

-0.1%

1.7%

9.3%

Australian Property (Unlisted)

0.5%

2.8%

0.8%

12.0%

Australian Property (Listed)

2.6%

5.9%

3.6%

15.7%

Global Listed Property (Hedged into AUD)

1.3%

4.5%

2.3%

8.6%

Australian Bonds

0.8%

1.5%

1.0%

3.8%

Overseas Bonds (Hedged into AUD)

0.3%

0.5%

0.3%

0.8%

Cash

0.2%

0.5%

0.4%

1.9%

Australian Dollar vs. US Dollar

-2.7%

-4.4%

-2.1%

-8.8%

Source –JANA, FactSet

The month of August was positive for Australian equities as investors ignored the political turmoil associated with the change of Prime Minister. The Telecommunications sector led the Australian market higher as the announcement of a merger between Vodafone and TPG was viewed positively by the market. In terms of monetary policy, the RBA left the cash rate on hold at 1.50% for the 22nd meeting as it looks to balance concerns of international trade policy uncertainty, a continued easing in housing markets in Sydney and Melbourne and ongoing weak wage growth.

The S&P/ASX300 Accumulation Index rose 1.4% over the month.  Small cap stocks (2.5%) outperformed the broader market, while large caps (1.0%) underperformed. Telecommunications and Information Technology were the top performing sectors, returning 13.0% and 12.2% respectively, whilst the Materials sector was the weakest (-4.9%).

Global equities as measured by the MSCI World Index rose by 1.5% in local currency terms, over the month. NZ (7.8%) and the US (3.3%) were the strong performers while Greece (-9.5%) and Italy (-9.0%) detracted from performance.  The Australian dollar continued its weak trend against the USD (-2.7%). It also depreciated against the Yen (-3.6%), the Pound (-1.8%) and the Euro (-2.2%). In aggregate, this depreciation resulted in unhedged global equities returning 4.2% compared to the hedged return of 1.5%. 

Australian and Overseas bonds delivered positive returns over the month.