Market update - January 2017

Markets were largely driven by political headlines over the month, as Donald Trump was inaugurated as the US President on 20 January. Despite discussions of global reflation led by a manufacturing recovery in China, UK and US, global markets switched to a risk-off sentiment. The initial ‘Trump rally’ dissipated and investors reduced their positions in infrastructure and energy, as the new Trump administration failed to provide further details on their proposed fiscal policies.

The US S&P500 Index traded flat in the first half of January and ended the month higher as Trump issued orders to build two new US oil pipelines. However, some gains were lost as investors became increasingly concerned that Trump’s protectionist stance (which included an executive order for the US to withdraw from the Trans Pacific Partnership) and controversial immigration plans might outweigh the benefits of his pro-business policies.

These concerns, along with a lack of clarity around other proposed fiscal policies, led to a depreciation of the US Dollar Index by 2.6%. In addition, the US Federal Reserve reaffirmed plans of a gradual interest rate increase going forward, citing strong employment and rising inflation stemming from a number of Trump’s proposed fiscal policies.

The S&P/ASX300 climbed strongly early in the month, supported by a continued increase in iron ore prices, but ended the month lower. The Australian dollar appreciated by 4.8% to the US dollar, supported similarly by the rally in commodity prices, strong Chinese GDP growth and weakness in the US dollar. On 25 January, Moody’s Investors Services released a report which reaffirmed Australia’s AAA sovereign credit rating, citing Australia’s robust institutional framework and emphasising that Australia has stronger fiscal metrics than many other AAA rated countries.

UK Prime Minister Theresa May confirmed her plans for a ‘hard Brexit’ on 17 January, promising that the British Parliament will be given the final vote on these plans. This led to a strong appreciation of the British Pound as investors gain increased certainty over the expected outcome of Brexit. Despite the concerns over Brexit, the most recent UK Manufacturing Purchasing Managers’ Index (PMI) rose to a 2 year high of 56.1.

The investment returns of the major markets for one and three months and financial year to 31 January 2017 are summarised below.

Market Performance - 31 January 2017 Month Quarter FYTD
Australian Equities -0.8% 6.4% 9.6%
Australian Property (Unlisted)* 0.5% 3.1% 6.3%
Australian Property (Listed) -4.7% 2.5% -7.2%
Overseas Equities (Hedged into AUD) 1.4% 7.4% 12.4%
Overseas Equities (Unhedged into AUD) -2.3% 6.7% 7.5%
Emerging Markets (Unhedged into AUD) 0.6% 1.2% 8.3%
Australian Bonds 0.6% -1.0% -1.4%
Overseas Bonds (Hedged into AUD) -0.3% -1.5% -1.6%
Cash 0.2% 0.4% 1.1%
Australian Dollar vs. US Dollar 4.8% -0.2% 2.0%

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays
*Estimate at 10/02/2017

The S&P/ASX300 Accumulation Index fell 0.8% in January.  Small Cap stocks fell 2.4% for the month, while Large Cap stocks (-0.7%) outperformed the broader market.  Materials (4.8%), Health Care (4.6%) and Utilities (1.1%) stocks outperformed, while Property Trusts (-4.7%) and Industrials (-4.4%) were the worst performing sectors.

The MSCI World Index ex-Australia (hedged into AUD) rose 1.4% over the month.  The Australian dollar appreciated against most developed market currencies in January, which resulted in a return for unhedged overseas equities of -2.3% (in AUD).  In developed markets, Hong Kong (7.8%) and Singapore (5.7%) outperformed the broader market, while Italy (-4.8%) and Finland (-3.1%) underperformed.  The MSCI Emerging Markets Index (0.6%) outperformed unhedged developed markets.

Australian bonds delivered positive returns over the month, partly offsetting their negative returns from the previous months. Overseas bonds’ returns were negative for the month and financial year to date.