Economic Review

29 May

Economic Review

Global Equity Markets 
Global shares stabilised in early in April with more modest commentary by both the US and China over trade. While large US tariffs on steel and aluminium imports as well as selective imports from China are still pending, politicians on both sides of the Pacific were calmer in April. Energy stocks globally benefited from higher oil prices on concerns over renewed US sanctions on Iran and declining Venezuelan production.

Global shares were also assisted by strong profit reports for the March quarter. US corporate earnings were particularly robust, benefiting from both corporate tax cuts and cheap financing with low interest rates. The European and Japanese share markets made notably strong gains in April with the benefit of weaker currencies versus the US Dollar which strengthened against all G10 currencies except the Canadian dollar. A higher weighting to Energy and better than forecast 1Q earnings reported-to-date also buoyed European markets.

Asian Equities were generally higher in April, on the somewhat conflicting signals of increasing trade tensions between China and the US, and the improving relationship on the Korean Peninsula. Japanese markets were encouraged that the United States did not inlcude new trade demands during the April summit between Prime Minister Shinzo Abe and President Donald Trump; with steelmakers and non-ferrous metal firms leading gains. The market also benefited from the strong US dollar and positive economic data, finishing April up 6.2%. March industrial production was ahead of expectations with unemployment steady at 2.5% and inflation at 0.9% year on year, both in line with consensus.

Chinese economic data was a little weaker than expected with the Caixin manufacturing PMI below consensus and March CPI (+2.1% yoy) also below expectations. GDP was in line at 6.8% yoy as real estate rebounded and strong consumption shored up domestic demand. The net result was the China Shanghai Composite declined by 2.7% in April.

Table 1: Global share market performance – April 2018
US S&P 500 +0.7%
US Dow Jones +0.2%
Euro Stoxx 50 +5.8%
German DAX +4.3%
UK FTSE 100 +6.4%
Japan Nikkei 225 +6.2%
China Shanghai Composite -2.7%
Source: Factset, IRESS

Australian share market review
Australian shares recovered solidly in April after a disappointing performance in March. There were strong gains for energy (+10.8%) and metals & mining sectors (+9.1%) on the back of rising commodity prices and a takeover bid for Santos. Healthcare also continued its strong performance, up 7.4% in April and 14.8% calendar YTD, also buoyed by M&A activity. Not surprisingly, financial sector shares (+0.1 %) were subdued given the intense scrutiny and revelations of the Royal Commission on misconduct within the financial sector.

The combined effect was a 3.9% rise in the S&P/ASX 200 Accumulation Index which returned the market to near neutral (-0.1%) for the calendar YTD. Reflecting the strength of the resources sector and issues with the financial sector, their respective market shares of the S&P / ASX 200 are steadily drawing nearer – resources market cap has been below that of banks since 2012.

April also saw a significant drop in volatility, falling by more than 20% on March to finish the month at 15.9%.

The Australian dollar (AUD) drifted lower against a stronger US Dollar, finishing the month at US 75.3 cents. This drift is likely to continue with Australian interest rates predicted to remain stable while US rates are set to increase.

Table 2: Australian share market performance – April 2018
S&P/ASX 200 Accumulation Index +3.9%
S&P/ASX 200 Industrials Accumulation Index +2.5%
S&P/ASX 200 Resources Accumulation Index +9.8%
S&P/ASX Small Ordinaries Accumulation Index +2.8%
S&P/ASX 200 A-REIT Accumulation Index +4.5%
Source: Factset, IRESS

Large Caps
M&A activity drove prices upwards for Healthscope (+25.6%) and Santos (+21.1%), with South 32 (+15.5%) enjoying stronger.

  • Healthscope (HSO) received an unsolicited takeover offer of $2.36 from private equity firm BGH Capital which was a premium of 16% to the company’s share price pre bid.
  • Santos (STO) received an unsolicited takeover proposal from Harbor Energy for US4.98 per share or A$6.50 representing a premium of 28% to the company’s share price pre bid.
  • South 32 (S32) benefitted from the significant increase in the alumina price.

The worst performing Australian large cap stocks during the month were all in financial services, AMP (-19.0%), Perpetual (-13.5%) and IOOF (-11.9%).

  • AMP’s (AMP) appearance at the Royal Commission into the financial sector raised serious issues regarding the company’s governance and business practices that precipitated the departure of the company’s CEO and Chairman and other key personnel.
  • Perpetual (PPT) announced net outflows for the quarter of $1.3bn from institutional clients together with a further drop in FUM of $1.3bn related to market movements.
  • IOOF (IFL) was not immune to the negative sentiment arising from the Royal Commission.

Listed property
The S&P/ASX 200 A-REIT Accumulation Index rose by 4.5% in April outperforming the S&P/ASX 200 Accumulation Index by 0.6%.
Westfield Corporation was the strongest performer during the month (+8.0%) closely followed by Goodman Group (+7.6%) and Iron Mountain (+ 6.5%). All stocks posted positive returns for the month.

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.