Investment update for August 2017
Defiant North Korea sets the scene
Geopolitical risks escalated throughout August as North Korea continued to defy the United Nations and fired a missile across Japan, while a war of words with US President Donald Trump further elevated tensions. This has prompted meetings with the United Nations Security Council to discuss new sanctions on North Korea. With this backdrop, it is unsurprising that investors took a more risk-off stance, reduced investments in equities and bought into safe haven assets such as the Japanese Yen and gold, with the latter rising by 3.9% over the month.
August also saw the majority of US companies report quarterly earnings with most S&P 500 firms beating analyst expectations. In the US economy, alongside strong jobs growth and a historically low unemployment rate of 4.3%, GDP rebounded to record 3% annualised growth for the June quarter. Despite achieving Trump’s GDP growth target, subdued inflation continued to concern a growing number of US Federal Reserve members, who expressed desires to postpone the interest rate normalisation plans until the inflation trend is clearer.
The MSCI World Index ex-Australia (hedged into AUD) rose 0.3% over the month. In developed markets, the UK (1.5%) outperformed the broader market, while Switzerland (-1.2%) and Germany (-0.6%) underperformed.
Australian economic conditions remained broadly on track in August, domestic wage growth continued to be low (0.5% for the June quarter, 1.9% for the year), and the Reserve Bank of Australia (RBA) left interest rates unchanged. The RBA lowered the growth forecast of the Australian economy, and highlighted uncertainties that might form significant headwinds, including a rising Australian Dollar, rising house prices and changes in China’s economic policies. Australian companies delivered mixed earnings results in the half yearly reporting season, with a notable increase in the number of companies that failed to meet expectations. As a result of China’s supply side reforms, the Resource sector benefited from high commodity prices and brought a strong positive to the season.
The S&P/ASX300 Accumulation Index rose 0.7% over the month. Small Cap (2.7%) stocks strongly outperformed the broader market over the month, while Large Cap (-0.8%) stocks underperformed. Energy (5.2%), Consumer Staples (5.2%) and Industrials (4.6%) outperformed, while Telecommunication Services (-7.2%) and Financials (-2.1%) were the worst performing sectors.
The Australian dollar depreciated against most developed market currencies in August, which resulted in a return for unhedged overseas equities of 0.9% (in AUD).
The Australian dollar was trading at US$0.7898 as at 31 August 2017.
Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays
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