Economic Review

17 Oct

Economic Review

Global Equity Markets 
Global shares made solid gains in September after August’s weak performance. While there are concerns over rising political risks including a Congressional impeachment inquiry into President Trump, BREXIT, Hong Kong protests as well as attack on Saudi oil production facilities, global shares gained comfort from more monetary stimulus measures from central banks in September.

Wall Street started the month on a promising note with more soothing comments from both Washington and Beijing suggesting that trade negotiations would resume. Some favorable economic data including moderate wages growth and strong retail spending also helped US shares. However trade tensions with China and the global slowdown are impacting the US economy. Falling US manufacturing production and weaker business investment motivated the US central bank to again cut interest rates by 0.25% in September.

European shares made strong gains in September with the European Central Bank (ECB) also cutting interest rates. The ECB lowered their key overnight deposit rate by 0.1% to -0.5% as well as resuming bond asset purchases of Euro 20 billion per month. The ECB’s new monetary stimulus measures are in response to subdued European economic activity data as well as concerns over global trade tensions and Britain’s pending exit from the European Union.

Asian share markets provided a mixed performance in September. Chinese shares (MSCI) were weak as economic activity data continues to disappoint. China’s industrial production recorded its slowest annual growth since 2002 while retail sales growth also moderated. However China’s central bank mitigated the downside by lowering bank reserve requirements to stimulate bank lending. Japan’s share market (TOPIX) made strong gains in September in a sharp recovery from August’s weakness.

Table 1: Global share market performance – September 2019
US S&P 500 +1.7%
US Dow Jones +1.9%
Euro Stoxx 50 +4.3%
German DAX +4.1%
UK FTSE 100 +2.8%
Japan Nikkei 225 +5.1%
China Shanghai Composite +0.7%
Source: Factset, IRESS, August 2019

Australian share market review
The Australian share market bounced back in September. The best performing sectors were energy and financials. The spike in oil prices that followed Saudi oil production cuts boosted energy stocks. Financial sector shares gained as the recent revival in Australian housing prices appears to be mitigating concerns over household credit risks. The AREIT sector declined in September.

Australia’s economic data releases in September have been modest. Australia’s real economic growth was only 1.4% in the year to June 2019. This is the weakest annual growth since 2009. Housing construction continues to fall while consumer spending remains sedate. However strong exports and solid government spending are key positives. There are also more promising signs with Australian house prices making solid gains in recent months after the RBA’s June and July interest rate cuts.

A rebound in iron ore prices and lower interest rates in the US and Europe helped the Australian Dollar (AUD) stabilise in September, finishing the month up by 0.3% against the USD to USD0.6755.

Table 2: Australian share market performance – September 2019
S&P/ASX 200 Accumulation Index +1.8%
S&P/ASX 200 Industrials Accumulation Index +1.6%
S&P/ASX 200 Resources Accumulation Index  +3.0%
S&P/ASX Small Ordinaries Accumulation Index +2.6%
S&P/ASX 200 A-REIT Total Return Index -2.7%
Source: Factset, IRESS, October 2019

Large Caps (S&P/ASX100)
After Pay Touch Group (+15.8%), Boral (+13.7%) and Fortescue Metals (+13.4%) were the best performing large cap stocks during September.

  • After Pay Touch (APT) – APT shares continued to perform well on the back of their very solid FY 19 result and positive news about the rate of growth in new customers and US and UK growth.
  • Boral (BLD) – BLD shares were sold down in August following its disappointing 2019 result with a major investor exiting its position. Once the position had been sold down, the BLD share price regained some ground.
  • Fortescue Metals (FMG) – FMG raised $600m at the start of September which pushed out the maturity of its debt profile. A stronger iron ore price was another positive catalyst for the stock.

The worst performing Australian large cap stocks during the month were CYBG (-18.4%), Evolution Mining (-12.6%) and A2 Milk (-10.3%).

  • CYBG PLC (CYB) – CYBG shocked the market with the size of the increase in its legacy Payment Protection Insurance (PPI) costs, weakening the bank’s capital position amid ongoing Brexit uncertainty.
  • Evolution Mining (EVN) – Gold stocks generally performed poorly during September with the gold price weaker possibly as a result of the small rise in bond yields.
  • A2 Milk (A2M) – A2M shares have continued to be sold down post its disappointing FY19 result and concern about increased marketing expenses and the prospect of flat margins.

Listed property
The S&P/ASX 200 AREIT Total Return Index declined by 2.7% in September 2019, underperforming the S&P/ASX 200 Total Return Index by 4.5%.

The Retail AREIT sector posted the smallest decline (-1.2%), followed by Industrial AREITs (-2.3%). The Diversified AREIT sector declined by 3.1% and Office lagged with a decline of 5.2% for the month.

Written 4 October 2019.

Important Information
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