Investment update for December 2019
A year of geopolitical risks and slowing growth concludes with positive returns
Following the de-escalation of the US-China trade dispute and improved investor sentiment, international equity markets produced positive returns in December. The UK equity market benefited from the increased Brexit certainty that followed the Conservative Party’s decisive election victory. The Chinese equity market performed particularly well, benefiting from the improved trade outlook and further loosening in monetary policy by the People’s Bank of China. Bonds produced a negative return in December as bond yields increased. The US Federal Reserve left rates unchanged in the month and market expectations of future rate cuts moderated.
The Australian equity market was negative over the month, with most of the fall comprising Australian banks, together with Woolworths and Coles. The Australian dollar appreciated against all major currencies in December as sentiment on the global economic outlook improved. The oil price increased materially in December amid tensions in the Middle East. The rise in bond yields contributed to negative returns from listed property and Australian listed infrastructure, although international listed infrastructure was still a strong positive performer in the month.
Geopolitical risks have been a key concern in 2019, including Middle East disputes, North Korea, Hong Kong protests and Brexit uncertainty. However, the calendar year was an extraordinary period of positive returns across all the asset classes.
A key theme over the year was the shift in monetary policy to rounds of global easing. The US Federal Reserve moved from hiking rates in 2018 to cutting in 2019. The European Central Bank moved rates further negative and restarted quantitative easing (QE). In June, the RBA cut the cash rate (the first cut since 2016), which was cut twice more to a record low of 0.75%. This shift in monetary policy supported equities, producing very strong returns over the year, amid a backdrop of slowing global economic growth.
Markets experienced bouts of volatility, driven by changes in the outlook on the trade dispute between the US and China, but have recently benefited from a perceived de-escalation. Australian equities also produced very strong returns over the year. The RBA rate cuts provided support to the housing market. Bond markets delivered strong returns for the calendar year with the lowering of global policy rates leading to increases in bond prices and contracted credit spreads.
Currency markets were also volatile over the year but the Australian dollar was reasonably stable, ending with a small depreciation overall. A historically high trade surplus, especially the iron ore price, was offset by a continued decline in the relative yield differential.
Market performance over the financial year to date has been supported by central banks cutting rates. Equities have continued to produce very strong returns in the financial year to date, supported more recently by the trade de-escalation. However, Australian equities performance has fallen behind in the financial year to date, held back by resources, and bank share prices fell on the back of various regulatory issues. Bond returns have been more muted over the financial year, with yields rising in December as the outlook for further interest rate cuts has moderated.
Please view our full investment commentary brought to you by our advisers – Frontier – for a more in depth analysis of market conditions this month.
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