Summary of Key Views
Trade fears reignited
Markets continued their upward trajectory during April which has largely continued unabated since the so called ‘Powell put’ earlier in the year, with the US Fed chair signalling a pause to further rate hikes. However, market volatility has picked up as the US-China ‘trade war’ has been reignited as the US seeks to precent Chinese telecom manufacturer Huawei from accessing US suppliers. While we would argue that basing investment decisions on geopolitical issues is problematic, understanding the broader implications of such issues is important, particularly if they have the potential to impact global growth. At a minimum it creates market volatility and we do believe that we are experiencing more frequent bouts of volatility attributed to geopolitical issues. From an investment perspective, while we believe that most markets look to be priced at the fair to expensive range, pockets of relative value are appearing. An example of this is our current active tilt to emerging markets versus developed markets. We also continue to believe that alternative investments have a role to play within a portfolio as a source of diversification. While some parts of the broad sector have been challenged in terms of performance, we believe that if we head into a different market environment, accessing alternative sources of risk and return will become increasingly important.
Market developments during April 2019 included:
The S&P/ASX 200 Index returned 2.4% in April, rising above 6,300 points, but appeared to find some resistance in early May as it attempted to push past its previous August 2018 high. Performance was led by the Consumer Staples sector (+7.4%), with gains from A2 Milk Co (+17.2%), whose third quarter update revealed further gains in Chinese market share, and Bega Cheese (+10.7%), which won a dispute with Kraft Heinz over packaging design. The Information Technology sector (+7.3%) also extended its gains and remains the fastest growing sector over the past 12 months (+32.9%). Consumer Discretionary (+5.0%) had a positive April with retail sales generally holding up well despite the pressures constraining household spending. Weaker results came from the Materials sector (-2.1%), with lithium producers Galaxy Resources (-22.3%) and Pilbara Minerals (-22.8%) plagued by short sellers and a fall in the price of battery-grade lithium in China. In price terms Australian equities are fully recovered from the December quarter downturn but the outlook remains uncertain. The slowdown in the housing market is expected to continue in the near term and remain a source of headwinds for Australian equities, while the impact will be felt most in the Financials sector where margin pressures are expected to prevail as credit growth remains subdued.
Global shares extended their gains over April with the MSCI World Ex-Australia Index rising 4.3%, led by the ongoing recovery in developed market equities. Improving investor sentiment has led to renewed interest in emerging markets, although the benchmark is still suffering from large falls through 2018 and has been essentially flat in Australian dollar terms over the 12 months to April 2019, while the developed market index has returned 14.1%. In the US, the S&P 500 Index gained 4.1%, with the Information Technology sector (+6.4%) continuing to build, including the ‘FAANG’ cohort. However, while the return of risk appetite has contributed to their recent strong performance, the FAANGs have been unable to make up for earlier losses and each are dealing with their own idiosyncratic risks. European shares, measured by the broad STOXX Europe 600 Index, returned 3.7% in euro terms in April, led by a bounce back from the automotive industry and solid gains from technology and financial services shares. After seriously considering a merger, Deutsche Bank (+1.5%) and Commerzbank (+16.1%) broke off discussions, deciding that it would not create sufficient value. With valuations looking increasingly stretched and lingering concerns prevailing, global equities are expected to remain volatile in the near term.
The RBA has maintained its cautious stance on monetary policy, holding the cash rate steady at 1.50% at its May meeting despite the expectation of a cut following a weak inflation reading for the March quarter. However, while the RBA acknowledges that the household sector is struggling, it still expects disposable income to lift on the back of a robust labour market. The recent inversion of the US yield curve has raised the spectre of a possible recession. While investors debate the timing and severity of any future recession, at the very least markets expect that the Fed is more likely to cut rates rather than hike again in the short term. Globally, emerging markets remain attractive to many bond managers given the lure of attractive yields, although many still expect volatility to remain a challenge, particularly for those markets exposed to the strengthening US dollar. The US 10-year Treasury yield rose from 2.41% to 2.50% over April, while the spread between 10-year and 2-year yields expanded from a low of 13 to 24 basis points. The Australian 10-year yield was flat over the month, ending at 1.79%. The downward pressure in yields led to positive returns for fixed income in April, with Australian bonds returning 0.3% and global bonds flat in Australian dollar hedged terms.
REITs (listed property securities)
Australian listed property had a weak April, returning – 2.6% and suffering from a general rise in yields. After strong performance across all sectors in March, retail was the major drag in April. With retail assets representing almost 46% of the S&P/ASX 300 A-REIT Index, the underperformance of this sector is more pronounced. With retail sales growth currently around 3.0% per annum—well below peak years over the last decade of over 5.6% and the average 3.6%—this is translating into weaker rental growth and higher capital expenditure to improve patronage at shopping centres. Retail landlord Scentre Group (-7.1%) reported moderate in-store sales growth, with major department stores and cinemas down over the March quarter, while Vicinity Centres (-2.3%) was down in April after announcing lower than expected growth in funds from operations over the six months to December as well as the resignation of its chairman. Globally, developed market REITs fell 1.0% in Australian dollar hedged terms. In the US, REITs also came under pressure, returning -0.3% in US dollar terms, with gains from Warehouse/Industrial REITs (+4.2%) and Manufactured Homes (+2.9%), and losses from Regional Malls (-5.3%), Healthcare (-4.7%) and Single Tenant (-3.1%) sectors.
Preliminary estimates for April indicate that the index increased by 0.9 per cent (on a monthly average basis) in SDR terms, after increasing by 0.8 per cent in March (revised). The non-rural and rural subindices increased in the month, while the base metals subindex was unchanged. In Australian dollar terms, the index was unchanged in April. Over the past year, the index has increased by 14.4 per cent in SDR terms, led by higher iron ore, LNG and, beef and veal prices. The index has increased by 18.2 per cent in Australian dollar terms. Preliminary estimates for iron ore, coking coal, thermal coal and LNG export prices are being used for the most recent months, based on market information. Using spot prices for the bulk commodities, the index increased by 1.2 per cent in April in SDR terms, to be 17.8 per cent higher over the past year.