Market update - November 2018

Geopolitical concerns between the US and China continued to play out with a meeting between President Xi and President Trump at the G20 summit showing some inclination to de-escalate the tensions with a 90-day pause on any tariff increases. However, there are still significant points of contention between the two countries which are increasing investor concerns of a potential slowdown in economic growth. Brexit negotiations showed progress with a withdrawal agreement approved between the UK and the European Union (EU), however, the agreement still needs to be submitted to the UK Parliament where there is considerable skepticism the deal will be passed. In Italy, recent discussions between the Italian government and the EU over the previously submitted Italian budget plan appear to be more constructive and suggest the possibility of a compromise.

The geopolitical concerns above outweighed the relatively solid market fundamental data in November, with most major global stock markets unable to recover the sizeable declines registered in October. Conversely, Australian and Global bonds recorded positive returns aided by continued risk-off sentiment as well as comments from the US Federal Reserve’s (Fed) Chair that rates are now “just below” the neutral level, suggesting fewer future rate rises.

In Australia, the Reserve Bank of Australia (RBA) kept rates on hold for the 25th consecutive meeting at 1.50%, citing low and stable inflation and an expectation that this low rate will gradually produce reduced unemployment and increase inflation to its 2-3% target band.

The investment returns of the major markets for one and three months, financial year, and one year to 30 November 2018 are summarised below.

Market performance - 30 November 2018

Month

Quarter

FYTD

1YR

Australian Equities

-2.2%

-9.3%

-6.8%

-1.0%

Overseas Equities (Hedged into AUD)

1.3%

-4.9%

-0.3%

2.5%

Overseas Equities (Unhedged into AUD)

-1.8%

-6.5%

-0.1%

4.8%

Emerging Markets (Unhedged into AUD)

1.1%

-6.3%

-4.7%

-5.1%

Australian Property (Unlisted)

0.5%

2.2%

3.0%

11.1%

Australian Property (Listed)

-0.3%

-4.9%

-1.5%

1.6%

Global Listed Property (Hedged into AUD)

3.6%

-1.4%

0.8%

4.2%

Australian Bonds

0.2%

0.3%

1.3%

2.5%

Overseas Bonds (Hedged into AUD)

0.4%

-0.2%

0.2%

0.5%

Cash

0.2%

0.5%

0.8%

1.9%

Australian Dollar vs. US Dollar

3.0%

1.0%

-1.2%

-3.8%

 

Source – JANA, FactSet

The Australian share market as represented by the ASX 300 fell 2.2% over the month. The decline was driven by the Energy sector (-10.7%) following a significant decline in the oil price and increased regulatory scrutiny, and the Materials sector (-4.7%) where concerns around slowing Chinese growth weighed. The IT (1.0%) and Financials (1.4%) sectors were the strongest performing, retracting some of their losses in October.

Global equity markets recovered some of their October losses in November but the relatively stronger Australian dollar put the November month return in negative territory as noted further below. In the US, the S&P 500 rose by 2.0%, partially recovering October’s falls following a strong third-quarter earnings season in which earnings per share (EPS) grew in excess of 25% year-on-year. Further gains were constrained by poor sentiment and investor sensitivity to future earnings guidance.

From a currency perspective, the Australian dollar appreciated against major currencies during November, which were likely motivated by the RBA’s updated growth forecasts and comments. The AUD rose against the USD (3.0%), Yen (3.7%), Pound (3.2%) and the Euro (3.1%). In aggregate, these moves resulted in unhedged equities (-1.8%) underperforming hedged equites (1.3%). 

Australian and Overseas bonds delivered positive returns over the month.