Monthly Commentary – JANUARY 2018

Developments in the global economy

The US economy continued to show robust growth in the final quarter of 2017 while survey indicators suggest that momentum is likely to be maintained into the new-year. In Australia, consumer sentiment has shown further improvement and this is now being reflected in actual spending behaviour.

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Australia

Consumer sentiment continues to improve with the Westpac/Melbourne Institute index increasing to 105.1 in January from 103.3 a month earlier. The index is now at its highest level since late 2013. The increased confidence seen since September last year has been reflected in retail sales data. The most recent ABS data available for November showed a 1.5% increase in the month following a 0.5% rise in October. Note that the November result was impacted by the release of the iPhone X and Black Friday sales but still reflect consumer willingness to spend. Anecdotal reports also suggest that Christmas spending in December was also robust. The December CPI showed a 0.6% increase in the quarter taking inflation for the year to 1.9%. While there has been a slow rise in inflation, it is unlikely to prompt monetary tightening at this stage but does suggest that if the current trend continues a rate hike in the second half of 2018 is looking more likely. Employment increased by 34,700 in December with 15,100 new full-time positions created. However, this was insufficient to absorb the number of new people looking for work resulting in the unemployment rate increasing to 4.6% from 4.5%.

US

The advance estimates of December quarter GDP showed the economy grew by an annualised 2.6% in the quarter following the September quarter’s 3.2% increase. Consumer spending and residential investment were both robust while inventories and imports held back growth. Core consumer prices (excluding food and energy) increased 0.3% in December to be 1.8% above year ago levels. While it would be premature to suggest inflation is now trending higher, the result is likely to focus more attention on inflation indicators as a gauge to the timing of the next Fed tightening. The US ISM manufacturing survey rebounded to 59.7 in December from 58.2 a month earlier.

Europe

Survey indicators suggest both consumers and business continue to increase in confidence, in line with improving economic activity. The Eurozone consumer confidence index has steadily improved over the past 12 months, but remained in negative territory until last month. The January reading of 1.3, improved on December’s 0.4 showing and is the best result since late 2000. A similar pattern can be seen in business sentiment, although there was a slight pullback in January from the highest reading on record posted in December. Improved consumer confidence is partly driven by the fall in the unemployment rate which hit 8.7% in December. While still high compared to other developed markets, it has fallen from close to 10% a year ago.

China

Chinese GDP increased by 6.8% in the year to the December quarter, unchanged from the previous quarter, and above the Chinese Government’s 6.5% target. Despite the target, most expect growth will slow to closer to 6% over coming years. Anti-pollution measures introduced in 2017, together with a greater focus on debt levels of state-owned enterprises are expected to see an easing in growth momentum. Consumer prices increased 1.8% in December from a year earlier, largely unchanged from the trend of the second half of the year.

Japan

Japanese indicators continue to suggest economic growth can be sustained in the near term at the current rate of about 2.5%. Japan’s Leading Economic Index increased to 108.3 in November from 106.5 a month earlier. This compares to readings below 105 for most of the first half of 2017. At the same time inflation remains subdued at 1.0% in December, although it has increased from the 0.4% rate seen earlier in 2017.

 

 

Developments in financial markets

Global equities markets powered ahead in January with the major drivers being continued robust economic data and a positive response to the US tax cuts, although Australian equities failed to share in the enthusiasm. Fixed interest markets responded to the same news with yields moving higher.

 

Australian shares

The S&P ASX200 Accumulation Index started the year on a negative note falling by 0.4% in January following the 1.8% return in December. The Resources sector returned 0.8% while Industrials saw a negative return of 0.7%. Small caps also suffered fatigue after their strong showing in 2017 falling by 0.5%. The best performing sectors in January were Healthcare (+3.2%), Information Technology (+2.0%) and Telecommunications (+0.8%). Healthcare was boosted by a 66% jump in the Sirtex share price following a takeover proposal by Varian Medical Systems. The only other sector to post a positive return in January was the Materials sector, boosted by the Resource component. Worst performing sectors in the month were Utilities (-4.5%) which continued their recent poor showing, AREITs (-3.3%) and Industrials (-2.1%). In the ASX100, the best performing stocks were JB HiFi (+17.2%), Flight Centre (+15.4%) and Resmed (+13.5%). The worst performing stocks were GrainCorp (-9.7%), Fairfax (-9.0%) and Macquarie Atlas Roads (-8.7%).

International shares

The MSCI World ex Australia index returned 3.9% in January extending the run of positive results to start the year with the highest monthly return in more than two years. Over the past 12 months, developed market global equities have returned 22.3% before taking into effect the impact of currency. Emerging markets were even stronger, posting a 6.8% return in January and 34.5% over the past 12 months. Most major markets posted double digit returns with India the laggard with a 4.2% return.

The S&P500 increased by 5.6% in January. The introduction of the Tax Cuts and Jobs Act which will see US corporate tax rates cut to 21% from 35% together with a raft of positive earnings announcements were the main drivers of strength offsetting any negativity from the temporary government shutdown. Following a weak end to 2017, European markets rebounded in January. Italy, which was hardest hit in December, recorded a 7.6% return in January while Germany (+2.1%) and France (+3.2%) also posted solid returns.

Major Asian markets were uniformly strong benefitting from positive global sentiment and continued robust Chinese growth. The Shanghai Composite increased by 5.3% while Hong Kong’s Hang Seng powered ahead to post a 9.9% gain to follow up December’s 2.5% rise. After a lacklustre end to 2017, Singapore’s Straits Times Index bounced 5.3%. Japan’s Nikkei Index continued its modest but consistent performance increasing 1.5% in January. Over the past 12 months, the Nikkei has returned 21.3%.

Fixed Interest and Cash

Major Asian markets were uniformly strong benefitting from positive global sentiment and continued robust Chinese growth. The Shanghai Composite increased by 5.3% while Hong Kong’s Hang Seng powered ahead to post a 9.9% gain to follow up December’s 2.5% rise. After a lacklustre end to 2017, Singapore’s Straits Times Index bounced 5.3%. Japan’s Nikkei Index continued its modest but consistent performance increasing 1.5% in January. Over the past 12 months, the Nikkei has returned 21.3%.

Property

The S&P/ASX200 AREITs index returned -3.3% in January following December’s 0.2% increase. Higher bond yields hurt the property trusts but domestic conditions also had an impact with Australian AREITs underperforming their international counterparts.

Global REITs returned -1.2%, erasing December’s gains. Improving perceptions regarding global growth momentum partly offset the negative impact of higher bond yields.

Currency and commodities

The Australian dollar continued to rise in January and broke through the US$0.80 barrier to end the month at US$0.8057. Further gains in commodity prices were the most likely reason for the $A’s rise although iron ore prices remained largely unchanged in the month at US$73 per tonne following a strong rise late in 2017. Other major metals saw price increases in January with the exception of Copper which fell 1.8%. Nickel (+6.7%), Zinc (+7.7%) and Gold (+4.2%) ended higher. Brent Crude increased 3.4% to US$68.9 per barrel.

 

Key market returns at 31 January 2018

If you have any questions, please contact us on info@fortressfs.com.au

Download the January Commentary PDF here.

 

Fortress Financial Solutions founder Chris Black is an award-winning financial planner based in Toowoomba who specialises in superannuation, investing, business succession, cash flow management, retirement planning and personal insurances (including life insurance, income protection, total permanent disability and trauma insurance).

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557.

This market update was compiled by BTFG Research.

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