Monthly Commentary – OCTOBER 2017

Developments in the global economy

Inflation remains low through most of the world, although the weaker Pound has seen UK inflation move above 2%. As a result, the Bank of England increased official rates at its November meeting. Politics dominated Asia with the Chinese National Congress and Japanese elections.

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Australia

The Consumer Price Index increased by 0.6% in the September quarter to be 1.8% above year ago level. The largest increase occurred in Alcohol and Tobacco which increased by 2.2% in the quarter and 7% over the past year.

In contrast, Communications prices fell 1.4% in the quarter and are 2.9% lower than a year ago. Inflation remains just below the Reserve Bank’s 2-3% target range. While this is likely to make it a focus of monetary policy discussions, there appears to be little in recent Reserve Bank statements to suggest they are concerned about inflation trends.

Labour force data showed a fall in the unemployment rate to 5.5% in September from 5.6% a month earlier. Full-time employment increased by 6,100 while part-time employment jumped by 13,700.

Consumer confidence spiked in September to 101.4 with a result above 100 suggesting more optimists than pessimists.

Consumer sentiment has been subdued for some time with September’s result being the first time this year that optimists outnumbered pessimists.

US

Initial estimates show the US economy grew at an annualised rate of 3% in the September quarter largely matching June quarter’s growth despite the impact of Hurricanes Maria, Harvey and Irma.

Growth was broad-based with exports, business investment and consumption all contributing to growth. However, consumption spending slowed to 2.4% from 3.3% in the June quarter, mostly likely reflecting hurricane disruption. More recent consumer data in the form of consumer sentiment surveys suggests the momentum of this part of the economy remains positive. Employment may also have been impacted by the hurricanes with non-farm payrolls falling 33,000 in September following an increase of 169,000 a month earlier.

In contrast, the unemployment rate fell to 4.2% – its lowest rate since early 2001.

Europe

European economic data took a back seat to the Catalan succession debate in October. Developments in Spain are being closely watched, not least within the European Union (EU), as it again calls into question the long-term viability of the EU. With European core inflation having hit a ceiling of 1.2% a few months ago and recent readings below 1.0%, there is little discussion of the European Central Bank increasing interest rates anytime soon. In contrast, UK inflation has been above 2% for much of the year, prompting the Bank of England to increase official rates by 25 basis points to 0.5% at its November meeting.

China

The 19th National Congress of the Communist Party of China took centre stage in October. Xi Jinping asserted his authority at the Congress by having his political thought included as part of the Party’s constitution. Furthermore, the absence of younger officials elected to the Politburo Standing Committee was seen as a potential strategic move by Xi to secure his position as General Secretary beyond the next five years. The major economic news was the release of the September quarter GDP. As usual, there was little surprise that annual growth was 6.8%, little changed from the pace of growth seen over the past two years.

Japan

Japan’s inflation rate increased to 0.7% in August from the 0.4% rate it had been stuck at since the start of the year and the highest inflation since March 2015. In political news, Prime Minister Shinzo Abe and his Liberal Democratic Party were returned to power, ensuring continuity of the “three arrows” strategy of monetary stimulus, government spending and structural reform to boost growth and avoid deflation.

 

 

Developments in financial markets

Australian shares performed strongly in October, after lagging for some months. Nevertheless, international markets still posted robust returns on continued positive economic news and despite the distractions of Japanese elections, the Chinese National Congress and European separatist concerns.

 

Australian shares

The S&P ASX200 Accumulation Index increased by 4.0% in October. This was its largest monthly gain since December 2016 and follows five months of lacklustre returns driven in part by concerns following the Commonwealth Budget. The strong showing in October means that over the past 12 months the market has returned 16.1%. Resources performed strongly, returning 4.6%, but the rest of the market was not far behind with Industrials posting a 3.9% return. Small cap stocks again outperformed, returning 6.0% in October.

Returns were robust across all sectors although Telecoms (+2.4%) and A-REITs (+2.3%) were laggards. The best performing sector in October was Information Technology (+8.8%) which benefitted from positive sentiment towards the sector as US tech stocks soared to new highs. The other strong performer was the Energy sector (+6.5%) which may have been helped by announcement of the Government’s energy policy and a rise in oil prices.

Best performing stocks in the top 100 were Vocus (+20.5%) and Healthscope (+17.4%). Worst performing stocks were Fortescue (-9.7%), Lend Lease (-9.5%) and Perpetual (-6.5%).

International shares

The MSCI World ex Australia index returned 2.5% in October, slightly bettering September’s return. The fall in the A$ over the past few months has meant that over the past three months international equities have returned close to 10% for unhedged Australian investors.

The S&P500 continued its strong performance returning 2.3% in October following September’s 2.1% result. Consistently strong economic data and the better than expected October earnings reporting season have been supportive of equities despite concerns about valuations. Over the past 12 months, the S&P500 has returned 23.6%.

European markets matched the US with the Euro STOXX index also returning 2.3% in the month and 24.6% over the past year. The German DAX index added a further 1.7% in October following September’s 6.4% rise while France’s CAC was up 2.0%. Italy’s MIB30 index was the laggard increasing by only 0.7%. UK’s FTSE increased 1.6% reversing the previous month’s losses.

Asian markets also participated in the positive equities sentiment. Hong Kong’s Hang Seng Index increased 2.5% and Singapore’s Straits Times Index was 4.8% higher. The Shanghai Composite posted a 1.3% return with attention focussed on the National Congress of the Communist Party. Japan’s Nikkei was the strongest performer, increasing by more than 8% on positive sentiment following Prime Minister Shinzo Abe’s re-election.

Fixed Interest and Cash

Australian and global fixed interest indices were in positive territory in October, following September’s decline. The Bloomberg Composite Bond Index returned 1.1% in October and 1.6% over the past 12 months. The Barclay Global Aggregate (Hedged) provided a lower return of 0.5% in the month but the 12-month return was slightly higher at 1.9%. Australian 10-year government bond yields ended the month lower at 2.67% as expectations of Reserve Bank tightening were wound back. In contrast, US bond yields were slightly higher at 2.37% in response to better-than-expected GDP figures and a significant increase in consumer sentiment.

Property

Australian property trusts underperformed the broader Australian sharemarket but posted a gain of 2.3% in October following the previous month’s 0.5% return. Over the past 12 months, A-REITs have returned 7.9%, lagging the overall market.

Global real estate again struggled in October managing to just spill over into positive territory, following September’s price fall. However, over the past 12 months, global REIT returns have been in line with Australian property trusts.

Currency and commodities

The Australian dollar weakened further in October to end the month at US$0.7656. The major driver of the fall was increased expectations the US Federal Reserve will raise rates in December, with lower iron ore prices also playing a part.

Gold, lead and tin also ended the month lower. In contrast, zinc and nickel prices rose and oil prices hit a two year high with Brent Crude moving above US$60 per barrel.

Key market returns at 31 October 2017

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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).

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