Investment update for May 2017
Australian property prices and weak wage growth hit credit ratings
While Macron’s election as French president boosted investor confidence early in May, and global markets ended the month on a strong note, ongoing geopolitical concerns in the Middle East and North Korea weighed on market performance. Concern also mounted around US President Trump after accusations he disclosed classified information to Russian officials, and after he controversially fired FBI director James Comey. These events corresponded with the MSCI World Index and S&P 500 Index falling more than 1.5% and 1.8% respectively in a single day.
In the US, healthcare reforms passed through the House of Representatives, providing some comfort to investors concerned about the new administration’s ability to implement significant reform. The strengthening US labor market, combined with inflation approaching target, led the US Federal Reserve (Fed) to leave interest rates unchanged in May. The Fed suggested recent weakness in US economic data was ‘transitionary’ and signaled further interest rate rises in 2017. Further plans to reduce the bank’s $4.5tn balance sheet were outlined with a proposal on the table to allow a capped number of bonds to roll-off monthly without being reinvested. US equities rallied towards the end of the month, after the release of the US Federal budget clarified proposed infrastructure and defense spending initiatives.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.9% over the month. The Australian dollar depreciated against most developed market currencies in May, which resulted in a return for unhedged overseas equities of 2.9% (in AUD). In developed markets, the UK (4.9%) and Japan (2.2%) outperformed the broader market, while Canada (-1.4%) and the US (1.4%) underperformed. The MSCI Emerging Markets Index (3.4%) outperformed unhedged developed markets.
Despite sluggish readings on Australian economic activity, the Reserve Bank of Australia revised their inflation and growth forecasts slightly upwards, while holding interest rates unchanged. Australian equities trended lower over the month as commodities prices fell on weaker global demand and increasing stockpiles.
The Australian Federal Budget provided details of a large new infrastructure spending initiative as well as plans to eliminate the deficit through a new levy on major banks. Towards the end of the month, ratings agency Standard & Poor downgraded the credit ratings of 23 Australian financial institutions, citing heightened risks to a sharp correction in domestic property prices, compounded by weak domestic wage growth. Given the proposed major bank levy, which is expected to have a material impact on underlying earnings, financials were the worst performing sector for the month.
The Australian dollar depreciated against most developed market currencies in May, which resulted in a return for unhedged overseas equities of 2.9% (in AUD).
The Australian dollar was trading at US$0.7450 as at 31 May 2017.
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
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