Investment update for November 2017
Elevated geopolitical risks and improved global economic conditions
Global economic conditions continued to improve in November, although inflation remained subdued. Geopolitical risks were elevated over the month, with North Korea conducting further missile tests, Venezuela defaulting on their foreign debt and a corruption crackdown sweeping across Saudi Arabia. Organisation of the Petroleum Exporting Countries (OPEC) revised their global oil demand forecast to expect a larger production deficit in 2018, leading to an increase in Oil prices, which ended the month 3.6% higher. Political risks increased across Europe, as German Chancellor Angela Merkel’s plans to form a four-party government failed, and a growing portion of the UK Conservative Party lost confidence in Prime Minister Theresa May after scant progress on Brexit negotiations. Despite weak economic growth in the UK, the Bank of England raised interest rates for the first time in 10 years, from 0.25% to 0.5%, citing higher inflation and a low unemployment rate (falling to a 42-year low).
Over in the US, Jerome Powell will be replacing Janet Yellen as the Chair of the US Federal Reserve (Fed), with the transition expected to occur in February 2018. Powell is expected to provide continuity to the Fed’s ongoing monetary tightening plans, while differing to Yellen in his support to potentially lighten regulations on the financial sector.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.7% over the month. The Australian dollar depreciated against most developed market currencies in November, which resulted in a return for unhedged overseas equities of 3.3% (in AUD). In developed markets, Hong Kong (3.5%) and the US (3.0%) outperformed the broader market, while France (-2.0%) and the UK (-1.8%) underperformed. The MSCI Emerging Markets Index (1.2%) underperformed unhedged developed markets.
The Reserve Bank of Australia (RBA) deputy governor Guy Debelle expressed growing confidence that non-mining business investments have been rising and expects Australia to join the synchronised pickup of global growth. However, wage growth remained subdued at 2% for the September quarter (year-on-year), despite achieving a 5-year low unemployment rate of 5.4%. Organisation for Economic Co-operation and Development (OECD) also urged Australia to begin increasing official interest rates, despite persistently weak inflation, which would cool the housing market and prevent a blowout in risky debt levels. The Australian Bureau of Statistics (ABS) estimated that ‘true’ inflation is currently overstated by around 0.22% due to a shift in spending patterns as rising rental prices, childcare and education are taking a larger proportion of the average household income. This has resulted in the ABS announcing they will be ‘re-weighting’ the Consumer Price Index (CPI) benchmark starting from the December 2017 quarter.
The S&P/ASX300 Accumulation Index rose 1.7% over the month. Small Cap (3.9%) stocks strongly outperformed the broader market, while Large Cap (1.2%) stocks underperformed. Property Trusts (5.3%), IT (4.5%) and Energy (4.3%) outperformed, while Telecommunication Services (-1.6%) and Financials (0.0%) were the worst performing sectors.
The Australian dollar depreciated against most developed market currencies in November, which resulted in a return for unhedged overseas equities of 3.3% (in AUD).
The Australian dollar was trading at US$0.7585 as at 30 November 2017.
Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays
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