Investment update for October 2017
Political uncertainty affects Australian Dollar
As synchronised global economic growth continued in October, global markets performed strongly. Japanese Prime Minister Shinzo Abe’s solid victory in a snap election fuelled expectations of continued monetary easing by the Bank of Japan. This led to the Japanese Nikkei 225 Index rallying 8.2% over the month, since most major central banks have already commenced, or are considering tightening monetary policy. Late in the month, the European Central Bank announced a 9-month extension to the Quantitative Easing program at a tapered rate of €30bn bond purchases per month, starting from January 2018. The Euro depreciated by almost 2% against the US dollar on the day following the announcement.
The US ISM Manufacturing Index rose to a 13-year high over the month of September, illustrating the benefits of a prolonged weakness in the US dollar and an increase in global demand over the year. Despite a strong recovery of the US economy and labour market, Federal Reserve Chair Janet Yellen commented that the low inflation has been the ‘biggest surprise in the US economy’ this year (core US inflation was 1.7% in the year to September). Late in October, the US Senate announced that they had achieved significant progress on its proposed $1.5tn tax cut plans. Buoyed by positive economic data and the recent optimism over progress on tax reform, the US 10-year Government bond yield rallied to hit a 7-month high of 2.475%.
The MSCI World Index ex-Australia (hedged into AUD) rose 2.7% over the month. In developed markets, Japan (5.6%) and Germany (3.0%) outperformed the broader market, while Switzerland (1.3%) and the UK (1.6%) underperformed. The MSCI Emerging Markets Index (5.9%) outperformed unhedged developed markets.
Australian equities ended the month higher, largely driven by strong performance of the Energy sector following strong gains in Crude Oil prices (7.2%). Inflation continues to miss expectations, as the September quarter inflation came in at 1.8% year-on-year, lowering expectations of an interest rate increase by the Reserve Bank of Australia in the near term. At the end of the month, the Australian High Court disqualified Deputy Prime Minister Barnaby Joyce from the Parliament due to his dual-citizenship status, leading to the government losing a one seat majority. Against the backdrop of increased political uncertainty and lower interest rate expectations, the Australian Dollar fell by 2.3% against the US Dollar over the month.
The S&P/ASX300 Accumulation Index rose 4.0% over the month. Small Cap (6.0%) stocks strongly outperformed the broader market, while Large Cap (3.5%) stocks underperformed. IT (8.4%), Energy (6.4%) and Health Care (5.5%) outperformed, while Property Trusts (2.2%) and Telecommunication Services (2.4%) were the worst performing sectors.
The Australian dollar depreciated against most developed market currencies in October, which resulted in a return for unhedged overseas equities of 4.3% (in AUD).
The Australian dollar was trading at US$0.7673 as at 31 October 2017.
Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays
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