Investment update for October 2019
Continuing record low interest rates squeeze major banks
As with the year to date overall, international equities produced strong positive returns in October. Global central banks continued to provide more monetary policy support. News that the US and China may soon strike a “Phase One Trade Deal” helped emerging markets equities, and the improved sentiment supported Japanese equities, which performed particularly strongly.
US economic growth slipped in the third quarter, driven by further contraction in the manufacturing sector. The US Federal Reserve lowered interest rates, as expected, for the third time this year. However, the statement of monetary policy decision was interpreted as less dovish since key phrases such as “act as appropriate to sustain the expansion” were omitted.
The European economy remains fragile. The UK produced a negative return for the month. Japan showed a slight improvement, due to a sharp rise in retail sales and an increase in production. Although this is expected to be a temporary increase in activity in anticipation of the consumption tax increase.
The European Central Bank and Bank of Japan left negative rates policy unchanged, and both continued to provide forward commitment to maintain low interest rates until a meaningful pickup in inflation is observed.
The Australian equity market produced a negative return over the month. The Resources sector was the key contributor to the negative performance as commodity prices reversed. There are concerns about a squeeze on the profit margins of the major banks, amid a prolonged period of record low interest rates and weak credit growth.
The Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to 0.75% at its October meeting. Headline inflation remained below the RBA target of 2-3%. While the unemployment rate came down, retail sales growth was weak and credit growth remains sluggish despite increasing house prices. The RBA continued to deliver a consistent message of further easing and an extended period of low interest rates, but it indicated it was unlikely to adopt negative rates.
The Australian dollar appreciated against most major currencies in October. The exception was the GBP which continues to experience heightened volatility caused by another Brexit delay and now an upcoming general election in December. Bond markets produced a negative return in October. Bond yields rose across the globe, reflecting increased appetite for riskier assets. Listed property and infrastructure followed the broad equity market and had positive returns in the month, although the global listed infrastructure index was flat.
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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