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October Market Performance
- Recent economic data continues to show that the major economies are all growing and that global growth is accelerating.
- In Japan, the recent elections returned Prime Minister Shizo Abe’s Liberal Democratic Party with a larger majority allowing a continuation of Abenomics.
- In the US, markets reacted favourably to the details of the Republican tax reforms and news that Jerome Powell will be nominated as the next Federal Reserve Chairman.
- In China the 19th Communist Party Congress elected Xi Jinping for another five years as President and General Secretary paving the way for further reform of the Chinese economy.
- Australian employment continues to grow strongly helped by strong business conditions.
Despite another busy month in both a political and non-political sense, there was little out there to rattle equity markets during October. While the turmoil in Spain regarding the independence of Catalonia, and the announcement of charges being filed against three former Trump campaign personnel, caused market jitters, the broad theme of synchronised global economic growth and strong corporate earnings has continued.
In the United States, unemployment and underemployment have both fallen to new cyclical lows of 4.1% and 7.9% respectively, however, wages growth and inflation are still both subdued. October’s ISM non-manufacturing index rose to its highest since the index began in 2005 and the ISM manufacturing survey also remains at healthy levels with both indices suggesting that fourth quarter growth could be relatively solid. The announcement that Jerome “Jay” Powell will replace Janet Yellen as the next Chair of the Federal Reserve Board of Governors is likely to mean that the process of normalising interest rates is likely to continue over the next few years. Plans by House Republicans to cut corporate and personal taxes were largely in line with expectations but whether these plans can become law remain uncertain given the impact on the housing sector, small business and other interest groups.
In the Eurozone, the initial estimate of annual GDP growth in the September quarter was better than expected, rising to 2.5% (from 2.3% in the June quarter) which is now the best growth rate since 2011. At its October meeting, the European Central Bank announced that it would halve the size of its bond buying program to €30 billion per month from January 2018. However, with inflation still well below target at 1.4% per annum, the post-meeting statement from Mario Draghi was relatively dovish suggesting that interest rates will be on hold until at least 2019 and bond-buying could be extended beyond the September 2018 scheduled end-date.
In China, the official PMIs for October suggest that the economy has slowed a little in recent months. In the detail, PMIs for medium and small sized manufacturing firms are now both in contraction territory. The 19th Communist Party Congress went smoothly for President Xi cementing his power for the next five years and providing a mandate to more aggressively pursue economic reform. This is overdue, given China has been reliant on debt-fuelled growth since the financial crisis with corporate debt to GDP near 160%, up from around 100% ten years ago. However, deep Chinese reform also brings risks of a potential slowdown in 2018.
In Japan, Shinzo Abe’s gamble to hold an early election last month paid off and the ruling Liberal Democrat Party retained its two-thirds majority of the lower house, effectively locking them in power until 2021. For investors, the win secures the future of Abenomics, and in particular the aggressive easing of monetary policy.
In Australia, October saw another strong employment report with unemployment falling from 5.6% to 5.5% and business conditions remaining at strong levels. However, September quarter inflation was lower than expected falling from 1.9% to 1.8% year-on-year. Retail sales have also been subdued with sales flat in September after falling in both July and August as consumers battle with low wages growth and higher utility bills.
- Emerging market shares rose 3.9% in local currency terms helped by gains in India.
- The German DAX Index rose 3.1%.
- The Euro 100 index gained 2.2% over the month.
- The Japanese Nikkei 225 Index was 8.1% higher, boosted by the election result.
- The US Standard & Poor’s 500 Index was up 2.3% in October.
- Australia’s S&P/ASX All Ordinaries Index rose 4.0%.
The S&P/ASX 200 Accumulation Index had a strong month during October rallying 4.0% to outperform developed market global equities. In the Australian equity market the best performing sectors were energy (+6.4%), consumer discretionary (+6.2%), healthcare (+5.5%) and utilities (+5.0%). The energy sector rise was led by Santos (+11.9%), consumer discretionary by Treasury Wine Estates (+14.3%) and Star Entertainment Group (+9.7%). Healthcare was dominated by Healthscope (+17.4%) and two offshore heavyweights of Cochlear (+10.5%) and ResMed (+11.5%) while the utilities sector was led by Macquarie Atlas (+9.8%) and AGL Energy (+8.1%).
Both Telecommunications (+2.4%) and REITs (+2.2%) underperformed the rise in the broader market. Telstra weighed on the index, up only 1.4% while Vocus (+20.5%) and TPG Telecom (+11.5%) both had strong rises.
Big movers this month
Information Technology 8.4%
The MSCI World ex-Australia Index (in local currency terms) returned 2.5% in October, however, a decline in the Australian Dollar meant the index rose 4.3% in Australian Dollar terms. Technology and materials finished as the top-performing sectors during a month in which corporate earnings largely beat expectations. On the other hand, telecoms shares provided the most significant drag on index performance during the month (albeit they still rose), on the back of relatively lacklustre earnings and a rise in bond yields.
The S&P/ASX 300 A-REIT Accumulation Index (which includes distributions) returned 2.3% in October. Over the past year, property securities have returned 8.6%, including distributions, outperforming international property securities which returned 7.7%.
A-REITs have also outperformed currency-hedged Global REITs over three, five and seven years.
Australian bonds bounced back in October with a return of 1.09% over the month as government bond yields fell in Australia following softer-than-expected inflation data. Two-year Australian Commonwealth Government bond yields fell from 1.96% to 1.83% per annum and the ten-year bond yield fell from 2.84% to 2.68% per annum.
Internationally, the Bloomberg Barclays Global Aggregate Bond Index (A$ hedged) returned 0.47% as bond yields rose by five basis points in the United States but fell marginally in the United Kingdom and Germany as the ECB announced its “dovish” policy tightening and inflation readings continued to surprise on the downside. In the US, 10-year Treasury bond yields rose from 2.33% per annum to 2.38% per annum.
Australian dollar (AUD)
The Australian Dollar fell 2.3% against the US Dollar in October and on a Trade-Weighted Index basis, the Australian Dollar lost 2.0% due to a rebound in the US Dollar and lower iron ore prices which fell 14% over the month.
The information contained in this Market Update is current as at 10/11/2017 and is prepared by GWM Adviser Services Limited ABN 96 002 071749 trading as ThreeSixty Research, registered office 105-153 Miller Street North Sydney NSW 2060. This company is a member of the National group of companies.
Any advice in this Market Update has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on any advice, consider whether it is appropriate to your objectives, financial situation and needs.
Past performance is not a reliable indicator of future performance. Before acquiring a financial product, you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.