Market update - October 2018

Market volatility returned in October, with all major equity markets falling over the month. In a reversal of multi-year trend, value stocks outperformed relative to growth stocks.  Despite the risk-off sentiment, global bonds delivered a negative return mostly due to rising long-term US yields as investors increasingly focused on the US Federal Reserve’s (Fed) monetary policy normalisation path.

Chief among the geopolitical concerns is the ongoing US-China trade war, and consequently concerns for Chinese growth. China recorded GDP growth of 6.5% (year on year) for the third quarter, which was slightly lower than consensus expectations. The People’s Bank of China (PBoC) cut its reserve requirement ratio yet again in October in an attempt to stimulate bank lending. 

In Europe, the European Central Bank (ECB) maintained its guidance that it will cease its quantitative easing program by the end of the 2018 calendar year, despite acknowledging somewhat weaker recent economic data. In Italy, the previously submitted budget plan to the European Commission, that would see the 2019 Italian deficit rise to 2.4% of GDP, was rejected and revisions asked to be made to reach fiscal targets. Moody’s has downgraded Italy’s sovereign debt by one notch, to just retain its investment grade status. In terms of Brexit, a summit between the European Union and the UK took place, although setbacks over the Irish boarder led to stalled negotiations.

In Australia, the Reserve Bank unsurprisingly kept rates on hold for the 24th consecutive meeting at 1.50%, and inflation was below expectations with annual CPI at 1.9% for the September quarter.

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

Market performance - 31 October 2018

Month

Quarter

FYTD

1yr

Australian Equities

-6.2%

-6.0%

-4.7%

2.9%

Overseas Equities (hedged into AUD)

-6.9%

-4.6%

-1.5%

3.0%

Overseas Equities (unhedged into AUD)

-5.4%

-0.8%

1.7%

10.2%

Emerging Markets (unhedged into AUD)

-6.8%

-7.3%

-5.7%

-5.0%

Australian Property (Unlisted)

0.4%

2.2%

2.5%

11.3%

Australian Property (Listed)

-3.1%

-2.1%

-1.2%

7.3%

Global Listed Property (hedged into AUD)

-3.1%

-3.6%

-2.7%

3.0%

Australian Bonds

0.5%

0.9%

1.0%

3.1%

Overseas Bonds (hedged into AUD)

-0.2%

-0.3%

-0.3%

0.2%

Cash

0.2%

0.5%

0.7%

1.9%

Australian dollar vs. US dollar

-2.0%

-4.7%

-4.1%

-7.6%

Source – JANA, FactSet

Australian equities as measured by the ASX 300 fell 6.2% over the month. Australian small caps stocks (-9.6%) underperformed, while large caps (-5.4%) outperformed. The IT sector (-11.4%) reversed some of its recent gains, while the Energy sector (-10.3%) was negatively impacted by weaker global oil prices. The more defensive sectors of Utilities (-4.0%) and REITs (-3.8%) were the strongest performing sectors.

In the US, the S&P 500 fell by 6.8% despite most S&P 500 companies reporting third quarter earnings-per-share growth above estimates. However, future earnings guidance was weaker than expected. The US economic environment remains robust, with the unemployment rate falling to 3.7%, the lowest in almost 50 years, and third quarter US GDP at 3.5% quarter-on-quarter annualised, beating consensus expectations.

The Australian dollar was mixed against the major currencies during October.  It fell against the USD (2.0%) and the Yen (2.7%), was flat against the Pound and appreciated slightly against the Euro (0.4%). In aggregate, these moves resulted in unhedged equities (-5.4%) outperforming hedged equities (-6.9%). 

Overseas bonds delivered negative returns over the month.