Market update - February 2018

Equity markets pulled back in February as investors began to worry about the prospect of the US Federal Reserve raising rates at a faster pace than had previously been anticipated. This uncertainty also led to a rise in volatility which spiked to levels last seen in mid-2015.  Despite this volatility in markets, macroeconomic data was strong with Eurozone unemployment at 8.6% continuing to grind towards near decade lows and fourth quarter 2017 US GDP registering annual growth of 2.5%.  Earnings growth expectations were also revised higher in the US, Europe and Japan given the stronger economic environment.

Jerome Powell gave his first address to Congress as the newly appointed Federal Reserve Chairman, taking a more hawkish tone (i.e. more biased to rates going up) and suggesting there could be as many as four interest rate hikes in 2018.  Yields on US 10-year Treasuries continued to rise on future growth and inflation expectations, with the 10-year yield edging closer towards 3%.

In Australia the Reserve Bank held the official cash rate at 1.50% for the 13th consecutive month, citing ongoing concern regarding low real wage growth and high debt levels limiting spending in the household sector.  The interim reporting season for Australian companies listed on the stock exchange took place in February. The results were broadly positive with firms largely reaffirming or slightly upgrading full year guidance.  Cost inflation began to creep up with a broad-based uptick in input costs, while capital expenditure in the Materials sector increased.  

The investment returns of the major markets for one and three months, financial year, and one year to 28 February 2018 are summarised below.

Market Performance - 28 February 2018 Month Quarter FYTD 1 Year
Australian Equities -0.3% 1.8% 8.5% 10.3%
Australian Property (Unlisted)* 0.5% 3.5% 7.4% 12.7%
Australian Property (Listed) -3.2% -6.2% 3.0% 0.5%
Global Listed Property (Heged into AUD) -6.2% -6.3% -2.6% -1.7%
Overseas Equities (Hedged into AUD) -3.7% 1.2% 10.4% 15.3%
Overseas Equities (Unhedged into AUD) -0.4% -0.3% 10.3% 16.6%
Emerging Markets (Unhedged into AUD) -0.9% 4.4% 18.2% 29.2%
Australian Bonds -0.3% -0.5% 1.4% 2.9%
Overseas Bonds (Hedged into AUD) -0.2% -0.7% 0.9% 2.1%
Cash 0.1% 0.4% 1.1% 1.7%
Australian Dollar vs. US Dollar 3.8% 2.6% 1.6% 1.4%

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

The domestic market outperformed global equities, with the ASX300 managing a small gain of 0.3%, primarily driven by the Health Care and Consumer Staples sectors which saw strong results from the likes of CSL and Woolworths. Small Cap stocks (0.0%) underperformed the broader market, while Large Caps (0.8%) outperformed.  Healthcare (7.0%) and Consumer Staples (2.1%) were the strongest performing sectors in Australia, whilst Telecommunications (-6.2%) and Real Estate (-3.2%) were the weakest.

The MSCI World Index ex-Australia (hedged into AUD) fell 3.7% over the month.  The Australian dollar depreciated against most developed market currencies in February, declining 5.9% against the Yen, 3.8% against the USD and 1.7% against the Euro.  In aggregate, the AUD depreciated in February resulting in the unhedged MSCI World Index (ex-Australia) returning -0.4%.  France (-2.8%) outperformed the broader market, while the US (-3.7%) and Germany (-5.2%) underperformed.  The sell-off in global equities also extended to Emerging Markets, with the MSCI Emerging Markets Index (-0.9%) underperforming unhedged developed markets.

The US equity market fell in February, declining nearly 9% early in the month before recovering to finish down 3.7%.  This was against a backdrop of continued strength in economic data, with unemployment standing at a 17 year low of 4.1%, and business confidence at close to its highest level in over a decade on the back of recent tax reforms. 

Bonds delivered positive returns in Australia but negative returns overseas for the month of February. Both Australian and overseas bonds had negative returns for the three months to February.