Investment update for October 2018

A solid global economic environment weathers some market volatility

Financial markets experienced a large increase in volatility in October. Like the market correction in February, the market movements appeared to be triggered by an increase in the US 10-year bond yield, expectations of accelerating US wage growth and inflation, and tightening US monetary policy. Interest rates are higher in the US than in Australia, which is not the norm historically.

After falling nearly 10% peak to trough, equity markets started to rebound in the last few days of the month. The falls were broad based across all markets, with small companies falling further. Listed property and infrastructure returns were negative in October, but compared well to the broad equity market.

Over the month, the Australian dollar depreciated against the US dollar and Japanese Yen, which provided some downside protection to foreign currency returns. However, there were a number of days during the month that the Australian dollar increased. The UK pound and the Euro increased in value over the month.

Amid the global equity sell-off in October, the global economic environment remained solid. The US in particular produced strong economic growth, which flowed through to robust growth in equity earnings, with a large majority of S&P 500 companies exceeding expectations.

President Trump announced sanctions on Iran that contributed to the significant rise in oil prices in 2018. However, the oil price fell more than 10% in October with increased supply, ahead of the sanctions coming into effect in November.

Italy continues to pose a financial risk to the EU and government sovereign bond yields have risen. The Italian Government had proposed a large expansion of fiscal spending, but it has been recently asked to revise its spending plans as the initial draft budget was rejected by the European Commission for breaching EU budget rules. Angela Merkel announced that she will step down as German Chancellor in 2021. This increases the political risk within the Eurozone
at a crucial time with Brexit and Italy.

In China, economic growth is at the lowest reported level since the global financial crisis. In response to slowing growth and trade tensions Chinese authorities appear to be moving to support the domestic economy. The People’s Bank of China (PBOC) announced during October another reserve ratio cut supporting banks to release additional funding into the economy.

The RBA kept the cash rate in Australia unchanged at 1.5% at its latest monetary policy meeting. Headline annual inflation has fallen below the RBA target range minimum of 2% for this quarter, while the unemployment rate has dropped to 5%, a 6.5-year low. The Australian housing market is experiencing a fall in prices led by declines in Sydney and Melbourne, which will make it difficult for the RBA to raise rates in the near term.

Please view our full investment commentary brought to you by our advisers – Frontier – for a more in depth analysis of market conditions this month. The monthly commentary can also be viewed on YouTube.

Read our monthly market snapshot.

We trust you find this information useful in understanding how your AvSuper investment is being influenced and welcome your feedback on how we can improve the information we provide to you.