Investment update for August 2019
Bond yields at record lows across many countries
Further escalation of trade tensions contributed to a sharp decline in equity markets early in August. Although markets did gradually recover some of the losses, equity markets were moderately negative across the globe. The UK was particularly impacted with ongoing political instability with the threat of a hard Brexit. With that, the UK GDP contracted in the second quarter of the year.
Resources stocks produced large negative returns in the month with the iron ore price falling significantly, after very large price rises over the previous year. Australian small caps also fell, after gains in July.
Manufacturing data from the US continues to weaken with the Purchasing Managers’ Index (PMI) at its lowest since 2009. There are signs of the weakness spreading to other aspects of the economy. Consumer Sentiment indices have weakened. In Europe, there is looming fears of Italian and German recessions due to poor ongoing manufacturing data, particularly in the German automobile sector.
Global monetary easing is expected to continue as a result of subdued inflation and the slowdown in economic growth. The US Federal Reserve (the Fed) lowered interest rates by 0.25% at the start of the month. The expectations are that the European Central bank (ECB) will lower interest rates and reinstate quantitative easing.
China continued with its stimulus policies with The People’s Bank of China (PBOC) announcing new Loan Prime Rates (LPR) that will be used to set the interest rate of new commercial bank loans and mortgages. The move resulted in a negative response from the US, accusing China of currency manipulation. The Chinese currency-CNY/USD has depreciated materially, but this has primarily been driven broadly by USD strength.
Bond yields continued their downward trajectory and are at record lows across many countries. This translated to strong returns from bonds in August, and government bonds, particularly Australian government bonds, have produced some of the highest investment returns over the last 12 months.
Listed property and infrastructure continued to benefit from falling bond yields and had positive returns in August, with the exception of Australian listed infrastructure.
The RBA announced no change to interest rates in August. Employment data continued to be solid but the unemployment rate remained steady for the month. The housing market showed signs of recovery with houses prices rising in Melbourne and Sydney and auction clearance rates rebounding strongly. Supporting factors for this stabilisation include recent RBA rate cuts and changes to serviceability metrics by APRA. However, dwelling construction approvals continue to fall sharply and indicate that contracting housing construction will continue to be a drag on economic growth.
The Australian dollar fell further against all major currencies in August. The Australian dollar was at its lowest level against the USD since the GFC.
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.
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