Market update - March 2018

Risk off sentiment in March saw equities print a negative month and also resulted in a negative quarter for both domestic and global equities. The rest of the asset classes fared better, with bonds and property holding on to gains for the month. Overall, the risk tone soured for a number of reasons.

Much of the focus in March was in relation to President Trump signing a memorandum imposing tariffs on over $50bn of Chinese imports, including steel and aluminum. This followed an earlier announcement of broad based steel and aluminium tarrifs. The initial response from China was modest with tariffs on $3bn of US imports, including wine, fresh fruit and nuts, however, it did spark fears of an escalating trade war. As such, the market volatility that erupted in February continued in March. Also contributing to the equity market weakness were concerns surrounding the ‘FANG’ stocks (Facebook, Amazon, Netflix, Google/Alphabet), which sold-off sharply following Facebook’s privacy breach and President Trumps rhetoric on Amazon detracting value from the US economy. 

This volatility in equity markets masked strong economic data, with the US unemployment rate stable at a 17 year low of 4.1% for the sixth consecutive month in March, consumer confidence being revised upwards during the month, and the Manufacturing PMI edging higher to 55.6 which is indicative of the strongest level of manufacturing since early 2015. Due to the broad-based growth observed in the US economy, the Federal Reserve, led by Jerome Powell in his first meeting as Chairman, raised rates by 0.25% to a target range of 1.5% to 1.75%. This was the sixth rate rise since December 2015 as the Fed continues its path to normalise monetary policy following its quantitative easing program post the GFC.

In Australia GDP data was released during the month, with growth slowing to 0.4% over the quarter and 2.4% over the year (from a previous level of 2.9%). This is despite a tightening labour market and the improvement in consumer confidence observed over the past 12 months. The RBA again left the official cash rate on hold at 1.5% for a record 17th consecutive meeting, citing the ongoing concerns surrounding subdued wage growth, low inflation levels and a desire to reduce unemployment further before considering tightening. The Financial Services Royal Commission began in March and negative sentiment weighed on the banks, with the four majors falling between -5% and -7% over the month.

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

Market performance - 31 March 2018  Month %  Quarter % FYTD % 1 year %
Australian Equities -3.7 -3.8 4.5 2.9
Overseas Equities (Hedged into AUD) -2.2 -2.1 8.0 11.6
Overseas Equities (Unhedged into AUD) -0.5 0.9 9.7 13.9
Emerging Markets (Unhedged into AUD) -0.3 3.5 17.8 24.7
Australian Property (Unlisted) 0.5 1.2 7.8 10.9
Australian Property (Listed) 0.1 -6.2 3.1 -0.1
Global Listed Property (Hedged into AUD) 2.5 -5.1 -0.1 2.2
Australian Bonds 0.8 0.9 2.3 3.3
Overseas Bonds (Hedged into AUD) 0.8 -0.1 1.7 2.9
Cash 0.1 0.4 1.3 1.7
Australian Dollar vs. US Dollar -1.6 -1.9 0.0 0.6

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

In Australia the S&P/ASX300 Accumulation Index fell 3.7% over the month with much of the fall being contributed by Financials (-5.9%) and Telecommunications (-6.2%). Large Cap stocks fell 4.1% and Small Cap stocks fell 2.3%. Defensive sectors of Real Estate (0.1%) and Utilities (-0.8%) were the strongest performing sectors in the ASX.

The MSCI World Index ex-Australia (hedged into AUD) fell 2.2% over the month. The Australian dollar depreciated against most developed market currencies in March, resulting in a better return of -0.5% for the unhedged MSCI World Index ex-Australia. In the US, the S&P 500 had its worst month in two years, sliding 2.7% primarily as a result of uncertainty surrounding trade tensions and concerns over “new age” technology stocks. Emerging Markets (unhedged) marginally outperformed Developed Markets, with the MSCI Emerging Market Index returning -0.3%.

Australian and overseas bonds delivered positive returns over the month.