Investment update for December 2017
A broadly positive year ends with strong gains
The equity bull market continued to run through December, with all major equity markets closing out 2017 with strong gains. Given the widespread improvement in economic growth, it is perhaps unsurprising that equity markets have been almost universally positive over 2017. The US produced particularly strong gains over the year. For the first time, the S&P 500 ended every month of the calendar year with a gain.
During the month, US President Donald Trump had his first major legislative victory as the Senate passed the administration’s extensive tax code reform bill, which includes a reduction in the corporate tax rate to 21%. While the market reaction to the passing of the bill was muted, anticipated tax cuts have been a key driver of US equity market strength since Trump’s election.
The first phase of Brexit negotiations concluded in mid-December. The terms of the transition period and exit will be finalised in a second phase, and pressure on negotiations will remain high as agreement is required by October 2018.
The US economy continued to improve in December, enabling the US Federal Reserve (Fed) to progress with a 25-basis point increase in interest rates (to 1.5%). The Fed raised its 2018 GDP estimate from 2.1% to 2.5%, whilst also increasing its inflation estimate from 1.6% to 1.7%. Tightening labour markets, rising household consumption and growth in business fixed investment were cited as key reasons for the upwardly revised estimates. With such supportive conditions in the US, investors are broadly anticipating that the central bank will look to raise rates at least three times throughout 2018. This further reaffirms the Fed’s plan to reverse Quantitative Easing (QE) and normalise interest rates.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.2% over the month In developed markets, the UK (5.0%) and Japan (1.4%) outperformed the broader market, while France (-0.9%) and Germany (-0.7%) underperformed. The MSCI Emerging Markets Index (0.6%) underperformed unhedged developed markets.
In Australia, the Reserve Bank of Australia (RBA) left the official cash rate on hold at 1.5%, citing low inflation and low wage growth as reasons for holding rates steady. Housing prices showed further signs of cooling, with the Australian Bureau of Statistics (ABS) National House Price Index dipping 0.2%. Amazon made its long-awaited entry into the domestic market, having little impact on local competition and alleviating fears of margin compression for retailers, at least for now. The ASX Consumer Discretionary Index rose 3% during the month, despite Myer falling 20% due to weaker than expected retail sales during the Christmas period. Commodities rallied, with Copper, Iron Ore and Coal spot prices all rising between 4% and 6%. As a result, the ASX300 Commodities index leapt 7.1% during the month, primarily driven by the smaller commodities companies in the index.
The S&P/ASX300 Accumulation Index rose 1.9% over the month. Small Cap (3.2%) stocks strongly outperformed the broader market, while Large Cap (2%) performed in line. Energy (6.5%) and Materials (6.1%) were the strongest performing sectors in Australia, whilst Utilities (-4.5%) and Industrials (-1.0%) were the weakest performers.
The Australian dollar appreciated against most developed market currencies in November, which resulted in a loss for unhedged overseas equities of 1.7% (in AUD).
The Australian dollar was trading at US$0.7800 as at 29 December 2017.
Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays
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