Market update - October 2016

The month of October saw an increase in volatility in most global markets.  There were concerns that the US Federal Reserve would raise interest rates.  The increase in volatility towards the end of the month was also driven by increased concerns of the possibility of a Trump victory in the US Presidential election in November.  Performance across global markets was mixed, with the Australian and US markets ending the month lower, while European markets ended in positive territory.

Australian equity markets gradually trended lower over the first half of October due to a rise in global bond yields.  This rise led to a major sell-off in defensive high yield stocks which put significant downward pressures on rate sensitive sectors such as listed property, infrastructure and utilities. Towards the end of October, Australian equities fell further due to a sell-off caused by some disappointing earnings announcements.

October was a volatile month for the US equity market.  The market moved positively initially, supported by a rally in oil prices due to positive comments from OPEC agreeing to cut their oil production.  However, this trend was reversed as investors questioned the likelihood of the cut.  Towards the end of the month the market trended downwards as Trump appeared to be closing the gap in US Presidential polls. Commentary from the US Federal Reserve about the likelihood of interest rate increase and below expectation US economic releases contributed to the US market ending the month lower.

The monthly, quarterly and financial-year-to-date returns of the major markets to 31 October 2016 are summarised below.

Market Performance - 31 October 2016 Month Quarter FYTD
Australian Equities -2.2% -3.2% 3.0%
Australian Property (Unlisted)* 0.5% 2.6% 3.0%
Australian Property (Listed) -7.7% -14.0% -9.4%
Overseas Equities (Hedged into AUD) -0.5% 0.5% 4.7%
Overseas Equities (Unhedged into AUD) -1.3% -1.3% 0.7%
Emerging Markets (Unhedged into AUD) 0.8% 4.0% 7.1%
Australian Bonds -1.3% -1.1% -0.4%
Overseas Bonds (Hedged into AUD) -0.9% -0.8% -0.1%
Cash 0.1% 0.5% 0.6%
Australian Dollar vs. US Dollar -0.6% 0.1% 2.2%

Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
*Estimate at 10/11/2016

The Australian equity market as measured by the S&P/ASX300 Accumulation Index fell 2.2% in October.  Small Cap stocks fell 4.7% for the month, while Large Cap stocks fell 1.5%, outperforming the broader market.  Materials (up 1.2%) and Financials (up 0.7%) outperformed, while Healthcare (down 8.1%) and Listed Property Trusts (down 7.7%) were the worst performing sectors.

The global equity market as measured by the MSCI World ex-Australia Index (hedged into AUD) fell 0.5% over the month.  The Australian Dollar appreciated against most developed market currencies in October, which resulted in a return for unhedged overseas equities of -1.3% (in AUD).  In developed markets, Austria (6.7%) and Spain (5.9%) outperformed the broader market, while Belgium (-6.3%) and Finland (-4.4%) underperformed.  The MSCI Emerging Markets Index (0.8%) outperformed developed markets.

Australian and global bonds had negative month in October, erasing the positive returns over the previous three months, resulting negative returns for the quarter and financial year to date.