Economic Review

24 Apr

Economic Review

Global Equity Markets 
Global shares continued their correction during March. Unnerving investors was the assertive rhetoric of US President Trump that “trade wars are good and easy to win”. After announcing tariffs on steel and aluminium imports to the US at the start of the month, three weeks later President Trump signalled there would also be specific tariffs on imports from China. All major markets finished the month down as did most sectors globally, with IT, financials and materials hardest hit. The best performing sectors were the bond yield proxies with utilities (+3.6%) and REITs up (+1.6%) for the month.

The US market experienced more volatility with the IT sector sold down on news that Cambridge Analytica had potentially compromised the privacy of facebook users during the US election campaign. The FANGs (Facebook, Amazon, Netflix and Google) led the sector decline, falling nearly 7%. As expected, the Federal Reserve raised rates by 0.25% in March noting the “economic outlook has strengthened in recent months”, although this positive news did not offset the nervousness around potential trade wars.

European markets were also sensitive to the US tariff and trade announcements. The 3% tax on technology revenue proposed by the European Commission added to the negative sentiment toward the IT sector. The European Central Bank (ECB) kept policy rates unchanged at its March meeting but Mario Draghi indicated that circumstances in which the ECB would need to buy bonds were really unlikely now.
While the prospect of a thaw in relations with North Korea was a positive, the global trade tensions were a stronger negative for the Asian region, with markets finishing down for the month. China’s response to the proposed US tariffs on imports from China was that it did not wish to become involved in a trade war, but nor would it “sit by and watch as China’s interests are damaged.” The Japanese market posted the largest decline as the yen continued to strengthen against the USD as a safe haven.

Table 1: Global share market performance – March 2018
US S&P 500 -2.7%
US Dow Jones -3.7%
Euro Stoxx 50 -2.2%
German DAX -2.7%
UK FTSE 100 – 2.4%
Japan Nikkei 225 -4.1%
China Shanghai Composite -3.1%
Source: Factset, IRESS

Australian share market review
Despite being exempted from the new US tariffs on steel and aluminium, Australia was not immune to the fallout from the global trade tensions. Adding to negative sentiment was the intense scrutiny given to the banks at the Royal Commission on misconduct within the financial system. The combined effect was a 3.8% fall in the S&P/ASX 200 Accumulation Index with financials down by 5.9% for the month. Resource shares also fell sharply (4.3%) as iron ore and metals prices declined amid the trade tensions.

Telcos remained out of favour (-6.1%) as competitive pressures continue. The only sector to record a positive performance in March was the AREITs (+0.1%).
The RBA kept rates on hold at its March meeting while the US Fed raised rates by 0.25%, further increasing the gap between US and Australian bond yields. The AUD continued to drift lower, finishing the month down by 1.3% at US$0.768.

Table 2: Australian share market performance – March 2018
S&P/ASX 200 Accumulation Index -3.8%
S&P/ASX 200 Industrials Accumulation Index -3.6%
S&P/ASX 200 Resources Accumulation Index -4.3%
S&P/ASX Small Ordinaries Accumulation Index -2.3%
S&P/ASX 200 A-REIT Accumulation Index +0.10%
Source: Factset, IRESS

Large Caps
Large Caps (S&P/ASX100)
The best performing Australian large cap stocks during the month were Graincorp (+6.3%), Evolution Mining (+5.9%) and Domino’s Pizza (+5.9%).

  • Graincorp’s (GNC) share price rose after management spoke at an agricultural forum and mentioned the company was reviewing whether it needed to own 100% of its infrastructure assets or if it should release capital by some sell-down.
  • Evolution Mining (EVN) benefitted from the rise in the gold price and a settlement with Emmerson mining over the Tennent Creek site as well as hosting a site visit to Cowal during the month.
  • Domino’s Pizza (DMP) regained some of the ground lost in the past months.

The worst performing Australian large cap stocks during the month were, Bank of Queensland (-13.2%), Fortescue Metals (-12.2%) and Qube (-11.1%).

  • Bank of Queensland (BOQ) was downgraded by a major broker during the month on the back of medium term concerns about increased margin pressure on mortgages; a digital offering that lags its competitors; funding disadvantage; and a focus on price to drive asset growth.
  • Fortescue Metals (FMG) lowered its 2H ore price realisation guidance due to subdued Chinese construction activity and trade tensions.
  • Qube (QUB) remained out of favour post its results announcement.

Listed property
The S&P/ASX 200 A-REIT Accumulation Index was a comparatively bright spot in March (+0.1%), outperforming the S&P/ASX 200 Accum by 3.9%. This was consistent with global REITs which came back into favour as 10-year bond yields sagged around the world.
Iron Mountain was the strongest performer during the month (+9.2%) after successfully refinancing while Vicinity was further marked down (-2.8%) as investors focused on core versus non-core retail assets.

Important Information
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.