Investment update for April 2017
Australian inflation returns to RBA target band
Geopolitical tension rose across the globe in April. North Korea continued to defy UN sanctions on nuclear tests. The US launched a missile strike against a Syrian airbase following reports of controversial chemical weapons being used by the Russian-backed Syrian President Bashar al-Assad. These events weighed on markets early in the month, and were further compounded when British Prime Minister Theresa May called a snap general election, which caused the UK market to fall sharply.
Market sentiment improved when pro-growth candidate Emmanuel Macron won the first round of French presidential election. The MSCI France Index surged over 4% in a day, ended the month 3.6% higher. The MSCI World Index also rose (1.4% in the day following the election and further towards the end of the month) as the effect extended beyond Europe.
In the US, the Federal Reserve Board of Governors revealed that most members expect the central bank to reduce its $4.5tn balance sheet over the next few years, while tightening monetary policy further towards interest rate normalisation. The Trump administration released a one-page broad tax reform plan that includes reducing the corporate tax rate from 35% to 15%. This is claimed to be the biggest tax cut in US history.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.3% over the month. In developed markets, France (3.6%) and Switzerland (3.3%) outperformed the broader market, while the UK (-1.3%) and Canada (0.4%) underperformed. The MSCI Emerging Markets Index (4.3%) outperformed unhedged developed markets.
Business sentiment continued to strengthen across Australia, and the NAB Business Survey reported the best business conditions since the global financial crisis. Annual headline inflation increased to 2.1% in March, achieving the Reserve Bank of Australia’s target of 2-3% for the first time in two years. Over the month, production of coking coal in Queensland was impacted by Cyclone Debbie, as miners were forced to declare force majeure on deliveries. This led to a large spike in coking coal prices, as China looked to fill the short term supply shortage from alternate sources.
The S&P/ASX300 Accumulation Index rose 1.0% in April. Small Cap stocks fell 0.3% for the month, while Large Cap stocks (1.0%) performed in line with the broader market. Industrials (4.1%), IT (3.5%) and Healthcare (3.4%) outperformed, while Telecommunication Services (-9.5%) and Consumer Staples (-2.5%) were the worst performing sectors.
The Australian dollar depreciated against most developed market currencies in April, which resulted in a return for unhedged overseas equities of 3.6% (in AUD).
The Australian dollar was trading at US$0.7475 as at 28 April 2017.
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
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