The US economic engine continued to chug along in August. The August Manufacturing ISM Report of Business recorded the US PMI (survey of purchasing managers) at 61.3, signifying continued expansion, with the overall economy growing for the 112th month.
So will the US juggernaut continue? From a valuation perspective it is no surprise that the US market looks expensive on most valuation measures. However, economic indicators such as the above-mentioned PMI remain strong and certainly momentum, which is a shorter-term indicator, remains positive. In recent years the US market (and indeed other markets) have benefited from cheap credit through accommodative monetary policy. The economy has experienced a massive injection of liquidity via central bank quantitative easing and government policies such as corporate tax cuts have provided an additional platform for market growth.
In the short term we think that this growth trajectory will continue. Hence, we have held a neutral view on both Australian and global equities despite valuations not being particularly attractive. We continue to watch the shape of the US yield curve, which remains flat, and we are monitoring the trajectory of rates in the US. We are also observing the impact that slowing QE will have on markets as there is no doubt that when you inject a massive amount of liquidity into the economy, bubbles are likely to appear within equity markets.
The S&P/ASX 200 Index returned 1.4% in August, with the Telecommunications (+13.1%), Information Technology (+12.9%) and Health Care (+10.7%) sectors among the top gainers. TPG (+50.0%) and Vodafone announced a merger that will provide a major third challenger to Telstra (+9.2%) and Optus, with a combined enterprise value of $15 billion. The merger is positive news for markets as it should result in stabilising Average Revenue Per User (ARPU) but could raise competition concerns. Earnings season saw a flurry of buying in the IT sector on the back of positive earnings results, led by language and search data services company Appen (+41.2%), which announced revenue growth of 106% in H1 2018 driven by both organic growth and its Leapforce acquisition. Energy stocks (-1.3%) were down, due predominantly to major gentailer Origin Energy (-18.6%), with its Energy Markets division bolstered by higher wholesale electricity prices but underlying earnings impacted by competition and higher-than expected currency hedging costs. Both Origin and AGL (-5.5%) are also subject to regulatory uncertainty with the scrapping of the National Energy Guarantee (NEG). The Materials sector (-4.8%) took a hit in August as commodity prices tumbled and the US dollar rose on fears of emerging market contagion and trade tensions between major economies.
Global developed market shares, measured by the MSCI World Ex Australia Index, returned 4.1% in Australian dollar terms, driven by US share performance and a rising US dollar. The US S&P 500 Index returned 3.2% in local terms, with Information Technology (+6.7%) the top performing sector, followed by Consumer Discretionary (+5.0%) and Health Care (+4.2%). Apple (+19.6%) continued its inexorable rise through August, reporting revenue growth of 17% over the year, strong demand for the iPhone X and robust growth in services like Apply Pay and Apple TV. Amazon (+13.2%) drove gains in the consumer discretionary sector, becoming the second stock after Apple to reach a US $1 trillion market cap.
European shares, measured by the broad STOXX Euro 600 Index, were down 1.8% in August, with falls from Banks (-8.1%), Telecommunications (-7.1%) and Basic Resources (-6.8%). The MSCI Emerging Markets Index was steady in August in Australian dollar terms, but certain emerging market indices were hit hard in local currency terms, including China’s CSI 300 Index (-5.0%) and Turkey’s Borsa Istanbul 100 Index (-4.4%). Recent emerging market volatility began in Turkey as the result of the country’s weakening fiscal position, a strengthening US dollar, and a potential trade war with the US. However, investors fear these issues may become systemic within the emerging markets sector.
The Barclays Global Aggregate Index returned 0.3% in AUD hedged terms, with developed market yields largely holding firm on the back of positive economic data, while yields in some emerging markets fell sharply. The US 10-year Treasury yield held below 3.00% throughout August, falling as low as 2.82% before rising above 2.90% in early September following strong jobs numbers. The 2-year yield finished August at 2.63% before climbing to 2.71% in early September—its highest level in more than 10 years.
The latest growth and inflation data leave the US Fed in tightening mode, with a 25 basis point hike expected in September and a strong likelihood of another move in December. Markets are concerned that central banks in Turkey, Argentina and other emerging markets may need to draw down heavily on foreign exchange reserves, including US Treasuries, to stem pressure on their currencies. Locally, Australian bonds returned 0.8% in August, with Australian corporate debt returning 0.8% and government debt returning 0.9%, while long-term government bonds (with a maturity of ten years or more) returned 1.5%.
The S&P/ASX 200 A-REIT Index returned 2.7% in August led by industrial property manager and Amazon landlord Goodman Group (+11.1%), which announced better-than-expected operating profit for FY 2018. The retail sector continues to drag due to both structural and cyclical headwinds, with income growth among shopping centre portfolios lagging office and industrial. BWP Trust (-2.4%), whose core tenant is Wesfarmers-owned Bunnings Warehouse, came under pressure in August due to flat results and concerns that the transitioning of some Bunnings stores to alternative uses may result in rent-free periods. Scentre Group (- 3.3%), the manager of Westfield, was lower in August despite announcing a 3% rise in funds from operations, with leasing spreads (the difference in rental terms between new and existing leases) falling from -2.5% to -6.6% over the past year. Globally, developed market property rose 1.1% on a hedged basis in August. US REITs had a solid month, with the Bloomberg US REIT Index up 2.2%, with gains from the Health Care (+6.4%), Single Tenant (+3.7%) and Mall (+3.1%) sectors.
The Australian equity market (as measured by the S&P/ASX 200) started the year off much like the previous finished, although most of the steam had been taken out of the rally with January producing a solid +1.20% return. February was much more muted with the uncertainty of an imminent reporting season hanging over the market however with better-than-expected results, coupled with softer-than-expected domestic inflation data, March provided some highlights as Australian shares hit new record highs. The quarter ended on a high with March producing +3.27% closing the quarter off with an attractive +5.53%.
2023 made for another very interesting year in investment markets as macro / regime driven events resulted in extreme shifts in investor sentiment on an almost monthly basis. Investors chose to shoot first and ask questions later in what can best be described as a year of maximum noise.
The Australian equity market (as measured by the S&P/ASX 200) started the September quarter with a flurry but ended up in the red as the global “higher-for-longer” narrative (interest rates) coupled with the ever-increasing cost of living concerns caused consumer confidence to wane.