Market update - January 2018

Global economic conditions continued to strengthen and remained broadly synchronised in the new year, which led to most developed equity markets posting gains in January. Labour markets continued to tighten, with the unemployment rate reaching a nine year low of 8.7% in the Eurozone and remaining at its 17-year low of 4.1% in the US. With unemployment continuing to grind lower, wage growth began to show strength as the US recorded a year-on-year rise of 2.9% in January. Such supportive economic conditions caused inflationary expectations to rise, with the US 10-Year Government bond yield increasing to 2.7%, its highest level since early 2014.

US equities were strong in January following major tax reform legislation announced by the Trump administration in December. Even a brief government shut-down was unable to slow the S&P500 which returned 5.7%. Economic indicators in the US were mixed, with annualised December quarter GDP coming in at 2.6%, missing broader market expectations of 3.0%. Consumer confidence was revised higher, as sentiment was bolstered by large firms, such as Apple, American Airlines and JP Morgan, announcing wage increases following the tax reduction bill passing through the Senate. The US macroeconomic picture remained strong, with low unemployment and a sustainable level of economic activity.

In Australia, the RBA kept the cash rate on hold at 1.5%, with its forward-looking guidance remaining largely unchanged. While uncertainty remains regarding household consumption, the central bank anticipates Australian GDP growth of approximately 3% p.a. over the coming years. Inflation data for the December quarter was released, with the reading of 0.6% slightly below the consensus forecast of 0.7%. Australian retail data surprised on the upside, with a 1.2% gain month-on-month as both business and consumer confidence rose over the month.

The investment returns of the major markets for one and three months, financial year, and one year to 31 January 2018 are summarised below.
 

Market Performance - 31 January 2018 Month Quarter FYTD 1 Year
Australian Equities -0.4% 3.2% 8.2% 12.4%
Australian Property (Unlisted)* 0.5% 3.8% 7.0% 13.0%
Australian Property (Listed) -3.2% 2.0% 6.3% 8.1%
Global Listed Property (Heged into AUD) -1.3% 2.3% 3.8% 8.3%
Overseas Equities (Hedged into AUD) 3.9% 6.9% 14.6% 23.6%
Overseas Equities (Unhedged into AUD) 1.8% 3.3% 10.7% 18.8%
Emerging Markets (Unhedged into AUD) 4.6% 6.5% 19.2% 32.7%
Australian Bonds -0.3% 0.1% 1.1% 2.7%
Overseas Bonds (Hedged into AUD) -0.7% -0.3% 1.1% 3.2%
Cash 0.2% 0.4% 1.0% 1.7%
Australian Dollar vs. US Dollar 3.5% 5.6% 5.6% 6.7%

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

 

The Australian equity market went against the trend in January, with the ASX300 drifting 0.4% lower, while most other developed markets saw positive returns. The Telecommunications sector rose 0.8%, recording its first consecutive monthly gain since mid-2016. Healthcare (3.1%) was the standout sector for the month due to corporate activity with Sirtex Medical Ltd rising 66.2% after receiving a takeover offer. Interest rate sensitive sectors such as Utilities and Real Estate struggled against a backdrop of rising bond yields. Small Cap stocks (-0.5%) marginally underperformed the broader market, while Large Caps (-0.4%) performed in-line.

The MSCI World Index ex-Australia (hedged into AUD) rose 3.9% over the month. The Australian dollar had mixed results against other developed market currencies, appreciating strongly against the USD (3.5%), however depreciating against the Pound Sterling (-1.5%). In aggregate, the AUD strengthened in January resulting in the unhedged MSCI World Index (ex-Australia) rising 1.8%. In developed markets, the US (5.7%) and Hong Kong (4.7%) outperformed the broader market, while the UK (-2.0%) and Canada (-1.1%) underperformed. The MSCI Emerging Markets Index (4.6%) outperformed unhedged developed markets.

Australian and overseas bonds delivered negative returns over the month.