Market update - December 2016
Global markets continued to be supported by Central Bank policy outcomes, increases in commodity prices, and a positive outlook for global growth and inflation expectations.
The US equity markets (S&P500) trended upwards in the first half of December, supported by expectations that the proposed Trump policies will bring about greater economic and earnings growth in the US market. On 14 December, the US Federal Reserve implemented an interest rate increase of 0.25%. Although this increase was widely expected, the US Federal Reserve provided a more hawkish (optimistic) outlook on the economy and signaled a faster pace of rate hikes going forward. This placed downward pressure on US equities and led the S&P500 to trade range-bound in the second half of December, before ending the month 2.2% higher.
The Reserve Bank of Australia (RBA) held interest rates at 1.5%, citing improving economic conditions in China, increases in commodity prices and increasing headline inflation. Although Australia’s GDP contracted by 0.5% in the September quarter (Q3), it is widely expected that this will rebound in Q4 and thus a technical recession will be unlikely. The Australian share market ended the month strongly.
Despite initial market skepticism, the Organization of the Petroleum Exporting Countries (OPEC) announced a deal to reduce crude oil production by a combined amount of 1.2 million barrels a day, which is equivalent to 4.5% of their total output. Subsequently, 11 non-OPEC members also agreed to further reducing production by 558,000 barrels a day starting 1st Jan 2017. This was a collaborative attempt to accelerate the natural process of rebalancing the oil market by reducing the current levels of oversupply. This deal boosted the price of Crude Oil WTI which ended the month 8.7% higher.
In the month of December, the European Central Bank (ECB) extended its Quantitative Easing (QE) program for an additional 9 months until December 2017, while reducing the QE program’s monthly asset purchases from €80bn to €60bn. In response to the depreciation of the Euro currency and an extended QE program, the European Stoxx 600 index rallied in the month of December.
The monthly, quarterly and financial-year-to-date returns of the major markets to 31 December 2016 are summarised below.
|Market Performance - 31 December 2016/td>||Month||Quarter||FYTD|
|Australian Property (Unlisted)*||0.5%||1.6%||4.2%|
|Australian Property (Listed)||6.8%||-0.7%||-2.6%|
|Overseas Equities (Hedged into AUD)||2.9%||5.3%||10.8%|
|Overseas Equities (Unhedged into AUD)||4.5%||7.8%||10.0%|
|Emerging Markets (Unhedged into AUD)||2.3%||1.4%||7.7%|
|Overseas Bonds (Hedged into AUD)||0.4%||-2.2%||-1.4%|
|Australian Dollar vs. US Dollar||-2.0%||-5.4%||-2.8%|
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
*Estimate at 10/01/2017
Australian equities as measured by the S&P/ASX300 Accumulation Index rose 4.3% in December. Small Cap stocks rose 3.6% for the month, while Large Caps stocks (4.5%) outperformed the broader market. Utilities (8.7%), Listed Property Trusts (6.8%) and Energy (6.1%) stocks outperformed, while Healthcare (0.9%) and Telecommunication Services (0.5%) were the worst performing sectors.
The MSCI World ex-Australia Index (hedged into AUD) rose 2.9% over the month. The Australian Dollar depreciated against most developed market currencies in December, which resulted in a return for unhedged overseas equities of 4.5% (in AUD). In developed markets, Italy (13.7%) and Spain (8.9%) outperformed the broader market, while Hong Kong (-6.4%) and New Zealand (-1.1%) underperformed. The MSCI Emerging Markets Index (2.3%) underperformed unhedged developed markets.
Australian and global bonds provided negative returns over the quarter and financial year to date as shown in the table above.