Economic Review

09 Nov

Economic Review

Global Equity Markets 
Global shares delivered dramatic negative returns in October, with the worst monthly performance since May 2012 (MSCI World Index). A combination of concerns appear to have contributed to the declines including higher US bond yields, the escalating US China trade war, emerging market stress, Italy’s contentious budget stimulus measures as well as European governments proposing digital revenue taxes on technology companies.

US shares led the charge downwards. The technology heavy NASDAQ index fell by -9.2% given disappointing earnings guidance from Amazon and Google. The UK Government’s decision to impose a 2% revenue tax on technology companies revenue (the “digital” tax), following a similar 3% proposal by the European Union, also undermined technology shares. The broader S&P 500 also recorded a sharp -6.9 % return in October. The prospect of higher US interest rates and bond yields were another negative for Wall Street. Given strong US jobs growth, the unemployment rate at 3.7 % which is the lowest since 1969 and a pickup in wages growth, the potential for higher inflation and lower profit margins seems to be cautioning US share markets. Adding to this negative sentiment is that US tariffs on Chinese imports could slow US economic activity and also result in higher prices over the medium term.

European shares fell sharply in line with their US counterparts. Global trade tension as well as the Italian government’s budget stance were the primary concerns. Italy’s coalition government’s fiscal stimulus program and larger budget deficit forecasts have caused consternation with a sharp rise in Italian bond yields over recent months. European economic activity also appears to be slowing judging by the softer September quarter GDP growth result and business surveys.

Asian share markets also went into a tailspin in October. Chinese shares were sharply lower on rising trade tension with the US as well as softer Chinese economic activity results. China’s business surveys show that exports orders are falling given weaker global demand and the threat of more tariffs from the US. China’s real economic growth slowed to 6.5 % in the September 2018 quarter, the weakest result since 2009. Korean (-12.6%), Taiwanese (-10%) and Japanese (-9.1%) share markets also suffered sharp losses given global trade concerns.

Table 1: Global share market performance – October 2018
US S&P 500 -6.9%
US Dow Jones -5.1%
Euro Stoxx 50 -5.9%
German DAX -6.5%
UK FTSE 100 -5.1%
Japan Nikkei 225 -9.1%
China Shanghai Composite -7.7%
Source: Factset, IRESS

Australian share market review
Australian shares posted a large negative return in October. All sectors were in the red, with the largest falls seen in information technology (-11.2%), energy (-10.5%) and consumer discretionary (-8%). The S&P/ASX 200 Accumulation Index fell by -6.1%, with industrials (-5.9%) outperforming resources (-6.6%) for the month.

Driving Australian markets lower were global share weakness as well as local concerns about the potential for tighter credit conditions in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and its intense scrutiny of financial institutions.

The Australian dollar (AUD) depreciated against the US Dollar in October as higher US interest rates, weaker global risk appetites and softer commodity prices (particularly energy and metals) weighed on the currency. And as expected, the Reserve Bank (RBA) kept the cash interest rate on hold at 1.5%.

Table 2: Australian share market performance – October 2018
S&P/ASX 200 Accumulation Index -6.1%
S&P/ASX 200 Industrials Accumulation Index -5.9%
S&P/ASX 200 Resources Accumulation Index -6.6%
S&P/ASX Small Ordinaries Accumulation Index -9.6%
S&P/ASX 200 A-REIT Accumulation Index -3.1%
Source: Factset, IRESS

Large Caps (S&P/ASX100)
As markets imploded, investors sought out the Gold sector with Evolution Mining (+12.5%), Newcrest (+6.2%) and Northern Star (+5.8%), the best performing large cap stocks during October.

  • Evolution Mining (EVN) – As well as the flight to gold stocks, EVN’s share price increased after the company announced a larger than expected quarterly gold production report as well as reporting lower costs than the market had expected.
  • Newcrest Mining (NCM) – NCM held its investor day at which it confirmed FY19 production and cost guidance as well as positive news on its Cadia and Telfer assets.
  • Northern Star (NST) – Following its 20% plus share price rise in September 2018, NST added a further 5.8% in October as investors sought out quality gold producers.

The worst performing Australian large cap stocks during the month were AMP (-22.3%), Iluka Resources (-19.0%) and Xero Limited (-18.8%).

  • AMP (AMP) – AMP shares plunged after the company announced it was selling its ANZ Wealth Protection and Mature business to Resolution Life plus a planned IPO of its NZ Wealth business. It expects to raise A$3.45b which will reduce debt, simplify the business and enable it to focus on its growth businesses but also reduces earnings.
  • Iluka Resources (ILU) – ILU’s 1H18 result had revealed lower zircon production as well as lower production from its Sierra Leone rutile mine. Compounding this was a halt to mining in the mine as a result of strike action taken by some of its workers during October.
  • Xero Limited (XRO) – The Company provided a trading update and proposed convertible notes offering at the end of September 2018. It also announced that following its strategic alliance with US payroll platform Gusto that it would cease development of its own US payroll product resulting in an impairment to assets. It also confirmed FY19 EBITDA would be reduced as a result of its acquisition of Hubdoc Inc.

Listed property
The S&P/ASX 200 AREIT Accumulation index performed relatively well in October 2018, declining by 3.1% for the month and outperforming the S&P/ASX 200 Accumulation Index by 3.0%. M&A, buyback and REIT transaction activity all picked up during the month. Industrial AREITs bucked October’s downward trend finishing up by +0.1% while Retail declined by 1.4%, Office by 2.8% and Diversified AREITs fell by 7.3%.

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