Monthly Commentary – NOVEMBER 2018

Developments in the global economy

Incoming economic data again showed little to suggest the share market falls are driven by current weakness. Robust US employment data was again a feature of the month’s economic releases and consumer confidence remains at high levels. Domestically, consumption data has eased and wages growth showed a marginal improvement but remains subdued.



Data released by the Australian Bureau of Statistics showed that consumption spending eased back in the September quarter following a strong June quarter. Seasonally adjusted turnover in volume terms increased by 0.2% in the September quarter following a rise of 1.0% in the previous quarter. Dining out continues to be the main discretionary spending of choice increasing by 1.2% in the quarter while Household Goods retailing, Department Stores, and Clothing and Footwear also suffered falls in the quarter. On the labour market front, wages growth showed a marginal improvement but remains subdued. The Wage Price Index increased by 0.6% to be 2.3% above year ago levels. The number of people employed continues to increase with 32,800 new workers employed in October but this was insufficient to see a change in the unemployment rate which remained at 5.0%.


The US Federal Reserve has tried to dampen negative sentiment connected to the operation on monetary policy with limited success until late in the month. In an address to the Economic Club of New York, Fed Chairman Jerome Powell made the comments that US monetary policy was “…close to neutral…” and the “…gradual pace or raising interest rates…” which seemed to allay fears that monetary tightening would derail the US economic trajectory. Economic statistics reinforced the fact that there was little in current data to suggest an economy on the brink of recession. Non-farm payrolls increased by 250,000 in October with the unemployment rate steady at 3.7%. The Michigan Consumer Sentiment survey maintained its recent high levels at 97.5 in November, slightly below October’s 98.6 reading. Related to the level of consumer confidence, retail sales rebounded in October, rising 0.8%, following a 0.1% decline a month earlier. Over the past 12 months, retail sales increased by 4.6%.


Both business and consumer sentiment deteriorated in November with share market falls hurting confidence. Consumer confidence for the EU fell to -3.9 compared to -2.7 in October. Ongoing consumer weakness is evident in retail sales which were flat in September to be up only 0.8% compared to a year earlier. Subdued labour markets are likely to see continued softness in household consumption related data with year-on-year employment growth running at 1.3%. Despite the current subdued economic environment, the ECB reaffirmed its decision to end its asset purchase program at the end of December in the minutes of its 24-25 October meeting.


In early November, interesting data showing an easing in the services sector was released. The Caixin Purchasing Managers Index surveys a panel of around 400 businesses to gauge the strength of the economy. The manufacturing component was largely unchanged at 50.1 in October compared to 50.0 a month earlier suggesting the sector is neither expanding nor contracting. However, the Services PMI fell to 50.8 from 53.1 with the trade conflict with the US seemingly taking a toll.


Preliminary data showed that Japan’s real GDP contracted by 0.3% in the September quarter following a 0.8% increase in the June quarter. An unusually high number of earthquakes, heavy rain and other natural disasters impacted consumption and investment in the quarter. However, retail sales figures for October suggest that consumption has bounced back. Retail sales increased by 1.2% following September’s 0.2% decline. Over the past 12 months, retail sales have increased by 3.5%.


Developments in financial markets

Global markets recovered some ground that was lost over November while Australian equities lost further ground with resources hit hard in particular. Ongoing uncertainty has held back markets, however there was no repeat of the significant falls of October.


Australian shares

TThe S&P/ASX200 Accumulation Index returned -2.2% in November as many equity markets continued to show increased risk aversion on the back of concerns around higher US interest rates and geopolitical risks. This is the third consecutive month of negative returns for the market and sees the 12 month return slip into negative territory. However, three year returns remain solid at 7.7% p.a. While Resources accounted for much of the fall in Australian equities there was a broad array of results within Industrials. While Financials (+1.4%) and Information Technology (+1.0%) both posted positive returns all other sectors recorded negative returns over November. Consumer Discretionary (-5.1%) was the weakest sector with Healthcare (-4.0%), Telecoms (-3.2%) and Consumer Staples (-3.1%) all following closely while Utilities (-1.8%) was not much better. However, Materials (-4.8%) was very weak with its significant Resources exposure.

International shares

The MSCI World ex Australia Index returned 1.3% in November recovering some of the losses from October’s sharp fall and maintaining positive returns over 12 months. While emerging markets had a strong month, returning 3.0%, this was not enough to lift 12 month returns (-5.0%) into positive territory. Emerging markets have been increasingly identified as showing more attractive valuations relative to developed markets although heightened risk aversion continues to hold equities in check.

The Shanghai Composite fell 0.6% while Hong Kong’s Hang Seng rose a very solid 6.1%. Japan’s Nikkei 225 gained 2.0% recovering some of October’s considerable loss.

European markets fell with the German DAX delivering -1.7% and the French CAC40 returning -1.8% while the U.K. FTSE100 lost 1.6%.

Fixed Interest and Cash

The Bloomberg Barclay’s Global Aggregate Bond Index hedged in $A returned 0.5% in November raising the 12 month return to 0.5% which is marginally more respectable than where it sat at the start of the month. While the Bloomberg AusBond Composite Bond Index posted a less inspiring 0.2% return over the month its 2.5% 12 month return remains well ahead, reflective of the differing monetary policy trends in the US and Australia. While US bond yields have risen over the last year they remain low by historical standards. The US Federal Reserve is expected to again increase the Fed funds rate by 25 basis points to a new range of 2.25-2.50% at its December meeting. Locally, the cash rate remains unchanged at 1.50% for a second year as the RBA keeps tab on lacklustre wage inflation coupled with household debt.


The S&P/ASX 200 AREIT Accumulation index returned -0.4% in November again outperforming the broader market as the defensive characteristics of property trusts were valued in the market rout. However the 1.5% 12 month return, while positive, has not been particularly inspiring. Global REITs were up 3.8% over the month, a solid result.

Currency and commodities

The Australian dollar rose to US$0.7306 at the end of November after a significant trend reversal following several months of consistent downtrend. The AUD strength appears to have come about with questions raised about the number of remaining Fed rate rises and potential positive news to come from the US and Chinese leadership meeting at the G20 summit. With uncertainty remaining in markets Gold benefited, rising to US$1226.25 at the end of the month. Iron ore suffered a precipitous fall to end the month at US$65 with uncertainty the predominant driver of price falls.

Key market returns at 30 November 2018


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