The yield on 10 year bonds hit 2.71% during the month, the highest since 2014 with the market reacting to the prospect of higher inflation risk as a result of the tax reforms announced in December.
A three day government shutdown resulted from the Senate blocking a temporary spending bill. Democrats were seeking assurances about proposed immigration issues.
Economic data released during the month were generally strong. Non-farm payrolls increased by 148k during December, unemployment was steady at 4.1% and initial jobless claims fell to 216k, the lowest level in nearly 45 years. Industrial production for December was ahead of expectations, increasing by 0.9% as were durable goods orders which grew by 2.9%.
The ISM manufacturing index for December rose to a better-than-expected 59.7 and the ISM non-manufacturing index remained strong despite falling to 55.9 from 57.4 the prior month.
Real GDP for the December quarter was below expectations at 2.6% annualised and also below the 3.2% growth recorded in the prior quarter.
The USD continued to weaken against major currencies, with the DXY index falling 3.8% during January.
Comments from the European Central Bank (ECB) had a more cautious tone than the data released during the month. At the ECBs first meeting of 2018, President Mario Draghi said there were still “no convincing signs of a sustained upward trend” in domestic price pressures and “very few chances at all” of a rate hike this year. Nonetheless data released during January were generally positive including stronger Euro economic sentiment, (+1.4pts to 116pts) and an increase in consumer confidence of +0.8pts to +1.3pts, both reflecting the strongest figures since mid-2000.
Eurozone PMIs continued to rise, up 0.5pts to 58.5 in January which was ahead of consensus of 57.9. Industrial production (ex-construction) for December was up 1% over November and manufacturing output also rose, up 1.3%. Retail sales for November rose 1.5% month on month, more than reversing the 1.1% decline recorded in October.
Another positive sign was the unemployment rate which fell to 8.7% in November, largely due to continued declines in France and Italy.
Chinese industrial activity growth was steady in real terms with 37 of the 41 major industrial sectors registering profit growth in 2017. Notable was the 2.6 times expansion in mining sector profits over 2016. High-tech manufacturing profit growth was also strong at 20.3%. Retail sales for December rose by 9.4% on an annualised basis, a slowdown from the previous period.
Fixed asset investment climbed 7.2% for the second consecutive month despite slowdowns in manufacturing, real estate and infrastructure investment. China’s trade surplus widened during December from AUD39bn to AUD55bn on the back of strong export growth, up 10.9% compared to slowing import growth of 4.5%. Import volumes of iron ore, copper and steel products all fell as did overall imports from Australia, which were down by 8.5%.
Australian economic review
Economic indicators for January were generally positive. A further 35k jobs were added to the economy in December (+19.5k part time and 15.1k full time), surpassing expectations. The participation rate rose to a seven year high of 65.7% and unemployment increased slightly from 5.4% to 5.5%. The NAB Survey of Business Confidence jumped four points to +11 points in December, its highest level since April 2017.
Consumer confidence was also strong, reaching its highest level since 2013 as measured by the Westpac consumer sentiment index which rose 1.8% to 105.1. November retail sales rose sharply by 1.2% in November buoyed by the release of the new iPhone and ‘Black Friday’ sales.
Despite the increases in consumer and business confidence and a strong labour market, CPI remains soft, with 4QCPI below expectations, up by only 0.6%qoq. Annualised CPI is 1.9%.
The Australian dollar continued to strengthen against the USD, closing the month at US81cents.
Global share market review
Most global share markets posted gains in the month of January, with a notably strong performance from emerging markets and the US again taking the lead in developed markets. The last few days of the month were impacted by concerns over bond market moves and some questioning if sentiment towards equities had become too bullish.
US market strength was aided by good 4Q company results and a lower USD. The market shrugged off any impact from a three day government shutdown as a result of the temporary spending bill being blocked in the Senate.
European markets continued to rise supported by the ECB’s decision to leave monetary policy unchanged. The prospect of a new coalition government between Angela Merkel’s Conservatives and the Social Democrats in Germany saw the DAX rise by 2.1%. But a surging British pound saw UK markets decline by 2%.
Asian markets rose over the month with the strongest performance from Hong Kong’s Hang Seng (+9.9%) which hit a record high. US dollar weakness and solid economic fundamentals supported the increase. The Bank of Japan’s confirmation that inflation was still some way from two per cent (currently 1% pa) and that easy monetary policy would continue saw the Nikkei close above 24,000 points for the first time since 18 November 1991, an increase of 1.45% for the month.
Table 1: Global share market performance – July 2017
US S&P 500 +5.6%
US Dow Jones +5.8%
Euro Stoxx 50 +3.0%
German DAX +2.1%
UK FTSE 100 – 2.0%
Japan Nikkei 225 +1.5%
China Shanghai Composite +5.3%
Source: Factset, IRESS
Australian share market review
The Australian share market declined by 0.5% in January, impacted by the strong Australian dollar and the local market’s sensitivity to increases in global bond yields. Sector performance was mixed for the month. Utilities (-4.5%) and Property (-3.3%) were weakest as investors globally continued their rotation out of income sectors. Rising bond yields have seen the trend away from yield into growth stocks accelerate over the past three months. Industrials (-2.1%) also declined.
The biggest gains came from the Healthcare (+3.2%), Information Technology (+2.0%) and Telecommunication Services (+0.8%) sectors.
A takeover bid for liver cancer treatment developer, Sirtex together with a well-received 2Q18 result from ResMed drove Healthcare higher.
The Australian dollar continued to appreciate against the USD in January finishing +3.2% higher at US$0.8055. This was primarily the result of US Dollar weakness against all major currencies.
Table 2: Australian share market performance – July 2017
S&P/ASX 200 Accumulation Index -0.45%
S&P/ASX 200 Industrials Accumulation Index -0.74%
S&P/ASX 200 Resources Accumulation Index +0.80%
S&P/ASX Small Ordinaries Accumulation Index -0.54%
S&P/ASX 200 A-REIT Accumulation Index -3.28%
Source: Factset, IRESS
The best performing Australian large cap stocks during the month were JB Hi-Fi (+17.2%), Flight Centre Travel (+15.3%), and Resmed Inc. (+13.5%).
- JB Hi-Fi (JBH) benefitted from stronger than expected Australian retail sales in November 2017, particularly in electronics. Less apparent impact from the arrival of Amazon saw several brokers upgrade their recommendations.
- Flight Centre (FLT) was upgraded by a broker during the month following the upbeat guidance it released to the market late last year.
- ResMed’s (RMD) 2Q18 result pleased the market, particularly by showing strong growth in mask sales and improved operating leverage.
The worst performing Australian large cap stocks during the month were, Navitas (-14.1%), Graincorp (-9.65%) and Fairfax (-8.97%).
- Navitas (NVT) – A decline in revenue and a sharp fall in EBITDA as a result of a reduced contribution from adult migrant English programs and lost contracts were announced when Navitas’ half yearly earnings were reported toward the end of the month. US expansion was also slower than planned.
- Graincorp (GNC) provided updates during the month on winter harvests which highlighted the negative impact of dry weather across eastern Australia during the 2017 winter crop growing periods. Volumes moving through GNC’s infrastructure are below expectations and lower than long term average volumes.
- Fairfax (FXJ) – The surprise resignation of Domain Group (DHG) CEO, Antony Catalano resulted in falls to both DHG and Fairfax share prices. FXJ retains a 60% holding in DHG post its ASX listing in November last year.
Rising bond yields continued to impact the listed property market, with the S&P/ASX 200 A-REIT Accumulation Index down by 3.3% in January, underperforming the S&P/ASX 200 by 2.8%. All stocks within the Index were down and this was reflected in across the board declines in each sector. Office declined by 2.2%, followed by Retail -2.3% and Industrials -3.9%.
Despite announcing revaluations that saw a net portfolio gain of 2.6% for six months, Vicinity (VCX) fell 1.4%. Iron Mountain (INM) continued the poor performance of December, finishing the month down 12.6%. Abacus Property Group (ABP) also lost significant ground, down 9.9% following the announcement that CEO Frank Wolf was to retire.
This publication is produced by the MLC Investment Policy Team and issued by MLC Wealth Management Ltd and its related companies and entities for the intended informational use by financial advisers. Whilst due care has been taken in preparing this report, Australian National Consulting, ANC Wealth and MLC does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. This report is general information only and has been prepared without taking into account an investor’s individual objectives, financial situation or needs. The report should not be taken to contain securities advice or recommendations. Past performance is no indication of future performance.