Market update - February 2019

The main factor driving market returns in February was US-China trade talks. Despite an impasse over tariffs and intellectual property for the Chinese tech sector, there was enough progress for Trump to suspend a tariff increase on $200 billion of Chinese goods scheduled for 1 March 2019. Investors took this action as a positive and optimism increased that a resolution to the US-China Trade standoff is near. Another factor supporting the market was the comment made by the US Federal Reserve chairman, Jerome Powell, reaffirming the Bank’s “patient approach” to interest rates management. Lastly, the market responded positively to the roll out of Chinese stimulus measures, such as lowering the capital reserve requirements for commercial banks, cutting taxes and stepping up infrastructure investment.

The investment returns of the major markets for one and three months, financial year, and one year to 28 February 2019 are summarised below.

Market performance - 28 February 2019

Month

Quarter

FYTD

1 Year

Australian Equities

6.0%

9.9%

2.4%

6.8%

Australian Unlisted Property - estimated

0.5%

2.1%

5.2%

9.9%

Australian Listed Property

1.8%

9.7%

8.1%

18.9%

Global Listed Property (Hedged into AUD)

0.4%

4.0%

4.8%

15.7%

Overseas Equities (Hedged into AUD)

3.5%

1.7%

1.4%

3.0%

Overseas Equities (Unhedged into AUD)

5.6%

5.3%

5.2%

10.7%

Emerging Markets (Unhedged into AUD)

2.7%

9.0%

3.9%

-0.9%

Australian Bonds

0.9%

3.1%

4.4%

6.2%

Overseas Bonds (Hedged into AUD)

0.1%

2.5%

2.6%

3.6%

Cash

0.2%

0.5%

1.4%

2.0%

Australian Dollar vs. US Dollar

-2.4%

-2.6%

-3.7%

-8.7%

Source – JANA, FactSet

The Australian equity market outperformed most global peers with the ASX 300 returning 6.0% in February. The Reserve Bank of Australia left the official cash rate on hold at 1.5%, unchanged for 31 months, although RBA governor, Philip Lowe, indicated the Bank had moved to a neutral stance on Monetary policy, whereas previously there was a tightening bias. Banks experienced a relief rally in the wake of the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was light on specific recommendations for the banks' core business structures. Stocks were also supported by stronger commodity prices from Chinese stimulus and a better than expected domestic earnings season.

Australian small caps stocks (6.8%), and to a lesser extent large caps (6.1%), outperformed the broader market, while mid-caps lagged (5.0%). Consumer Staples (-1.4%), Health Care (1.3%) and Property Trusts (1.8%) underperformed in February, while Financials significantly outperformed (9.1%), primarily due to Banks rising as the market reacted positively to a less prescriptive Royal Commission Report.

US equities rose on a solid quarterly earnings season, which saw 70% of the S&P 500 beating expectations in the December quarter, and from the suspension of the tariff increases on Chinese goods due to start in early March. There was also a surge in US jobs growth and consumer confidence.

Eurozone equities gained, buoyed by the news that the European Central Bank was looking to restart its targeted long-term refinancing operations, which provides banks with low cost funding. UK equities rose on hopes that the UK would avoid a disorderly exit from the European Union. After a very strong rally last month, Emerging Markets (EM) rose marginally in February. Supporting EM was a less restrictive outlook for US monetary policy and the prospect of a weaker US dollar, as well as easing trade tensions. However, some EM countries are still dealing with currency depreciation and inflation, and there were market detracting geopolitical tensions between Pakistan and India over the disputed Kashmir region.

The Australian dollar depreciated against most major trading partners during the month, falling against the USD (-2.4%), the Yen (-0.2%) and the Pound (-3.5%). The weakening Australian dollar resulted in unhedged global equities (5.6%) outperforming hedged global equities (3.5%).

Australian and Overseas bonds delivered positive returns over the month.