Market update - August 2019

August was a volatile month for financial markets, driven by trade tensions and the risk of an economic downturn. The tone of the month was set on the first day when President Trump announced a plan to impose 10% tariffs on all remaining US$300bn worth of Chinese imports, which was contradictory to the more positive tone from both parties after the G20 summit earlier in the year. China retaliated by announcing it would also increase tariffs on US$75bn of US imports, including agriculture, oil and cars, and consequently, Trump announced a further 5% increase on all existing and planned tariff rates. Market sentiment was further dampened by the US labelling China a ‘currency manipulator’ after China let its currency break through USD/CNY 7.0 and fall to its lowest level in 11 years. 

US economic data showed the weakest manufacturing index since September 2009 as well as a fall in consumer confidence.

The global trend from the past year for looser monetary and fiscal policies continued in August. After the US Fed cut rates at the end of July, Chairman Powell pledged to “act as appropriate” to support the economy, suggesting further stimulus is likely. German Finance Minister Scholz put a number on possible fiscal stimulus for the first time, suggesting EUR$50bn of extra spending. Domestically, the RBA left the cash rate unchanged at 1.0% at its meeting in August.

Australian economic readings continued to be mixed, with softer than expected construction data, sluggish business investment and falling private capital expenditure. On the upside, the labor market continues to be robust.

The investment returns of the major markets for one and three months, financial year (two months), and one year to 31 August 2019 are summarised below.

Market Performance - 31 August 2019

Month

Quarter

FYTD

1YR

Australian Equities

-2.3%

4.3%

0.6%

9.1%

Overseas Equities (Hedged into AUD)

-2.0%

5.0%

-0.9%

1.1%

Overseas Equities (Unhedged into AUD)

0.3%

8.1%

2.7%

8.2%

Emerging Markets (Unhedged into AUD)

-2.7%

2.9%

-2.0%

3.1%

Australian Property (Unlisted)

0.5%

1.7%

0.8%

7.3%

Australian Property (Listed)

1.3%

8.3%

4.0%

19.8%

Global Listed Property (Hedged into AUD)

2.0%

4.2%

3.1%

9.6%

Australian Bonds

1.5%

3.5%

2.5%

11.2%

Overseas Bonds (Hedged into AUD)

2.2%

4.2%

2.9%

10.0%

Cash

0.1%

0.3%

0.2%

1.8%

Australian Dollar vs. US Dollar

-2.2%

-2.8%

-4.0%

-6.8%

Source – JANA, FactSet

 

The escalation in trade tensions and general market unrest triggered profit taking in global equity markets, which fell in August. The energy sector led the market lower driven by falling oil prices on growing concerns that US-China tensions would weaken demand for crude oil. The UK and European markets also fell sharply on the back of global developments but also on increased fears of a no-deal Brexit as new prime minister Boris Johnson brought in a tougher negotiating stance.

The MSCI World ex-Australia Index (hedged into AUD) returned -2.0% for the month. Emerging markets were negatively impacted by a strong US dollar and underperformed developed markets (-2.7%). Argentina experienced major turbulence in August with its equity market dropping by over 50% after the national primary election outcome which suggested the current government could lose power in October, raising concerns over a potential sovereign default.

The Australian equity market ended August 2.3% lower, with Materials (-7.3%) and Energy (-5.6%) posting the largest losses, on the back of sharply falling iron ore (-24.3%) and oil prices. Small caps fell 3.9%, underperforming large caps. Australian Property Trusts (1.3%) underperformed Global Property Trusts (2.0%) for the month.

The global trade tensions and market unrest pushed investors to seek for ‘safe-haven’ assets such as bonds and precious metals. This led to the strong performance of bonds for all periods shown above.

The Australian Dollar fell against the major developed market currencies over the month, depreciating against the Japanese Yen (-4.4%), USD (-2.2%), Sterling (-1.7%) and Euro (-1.2%).  The moves in the Australian dollar were more than enough to offset the fall in global equities, resulting in a positive return of 0.3% for unhedged global equites.

Australian bonds and Overseas bonds delivered positive returns over the month.