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Economic and Investment Update - November

by Lonsec Research

Summary of Key Views

Remaining cautious

Equity markets rebounded in October after a market correction in the September quarter. Volatility eased after the US Federal Reserve (the Fed) delayed the first rate hike and the European Central Bank (the ECB) implied it would expand its QE program in December. Chinese monetary policy was also eased during the month. In Australia, the RBA retains a ‘glass half full’ view on the economy and seems to be on hold in the short term, with an easing bias if growth continues to disappoint.

As we head into Christmas, some of the ‘old worries’ have appeared again in that China continues to slow and commodity prices continue to fall, while strong employment numbers in the US has increased the odds of an interest rate hike in December. As a result, there has been an increase in the US yield curve while the USD has rallied strongly. We expect the ECB to ease policy in December which should depress the Euro and keep the USD strong.

We note that volatility seems to be on the rise again in November and equity markets have started to retreat again. Lonsec retains a cautious stance as we are concerned that a rising USD is a negative for US companies and there seems further downside to come in commodity prices, given production levels remain elevated.

In Australia, the maco-economic environment seems stable but we note that large-cap companies on the ASX are struggling for growth and it seems only a matter of time before job losses are announced. In our view, unemployment will start to rise in 2016 and the RBA will need to ease interest rates further.

Lonsec retains a generally bearish short term view with an underweight position in Australian equities, slightly underweight Global equities, neutral A-REITs and Australian Fixed Interest, slightly underweight International Fixed Interest and overweight Cash position.

Market developments during October 2015 included:


The Australian large cap equity market as measured by the S&P/ASX 200 Accumulation Index, posted a 4.4% total return during the month but nevertheless underperformed its regional and global counterparts. Energy was the best performing domestic sector – up 8.0%, in line with the global trend. However, the Australian Mining & Metals sub-sector heavily underperformed its global counterpart, dragged down by a weakening iron ore price.

The S&P/ASX Small Ordinaries Accumulation Index also performed strongly, up 7.1%. This outperformance relative to its large cap counterpart was driven by the turnaround in small resources companies, which were up 16.2% in October. Other notable outperformers over the month included vitamin maker Blackmores, Domino’s Pizza, and baby foods producer Bellamy’s Organic.

After mostly weak performance recorded in September, global share markets rebounded over October to record their best month in four years. This occurred against a backdrop of generally weakening economic data in most major economies, which saw the Fed hold off on raising rates, the People’s Bank of China cut rates, and rising speculation of further easing from the European Central Bank (ECB) and Bank of Japan.

While the timing of the Fed lift-off remains uncertain, the S&P 500 Accumulation Index still gained 6.7% over the month. Earnings momentum supported the rally; 76% of companies in the index beat analyst EPS estimates, with only 30% yet to report at month’s end according to JP Morgan. Solid results from Microsoft, Google and Amazon confirmed the transition to a new age economy is well underway.

Other global markets were all stronger across October: Japanese Nikkei +9.7%, Hong Kong Hang Seng +8.6%, German DAX +12.3%, UK FTSE 100 +4.9%.

Fixed Interest

Bonds were little changed over the month and remain influenced by the conflicting forces of weak growth, monetary stimulus and reserve manager selling. The Australian fixed interest market, as measured by the Bloomberg AusBond Composite Index, was up 0.3%. The Bloomberg AusBond Bank Bill Index, which comprises lower risk and shorter dated securities, similarly finished 0.2% higher.

US long bond yields finished the month slightly higher after the Fed appeared to leave the door open to tightening monetary policy at its next meeting in December. The Barclays Global Aggregate Index (Hedged A$) inched up 0.5% in October. Otherwise, Eurozone and Japanese bond yields finished the month lower on talk of further QE.

REITs (listed property securities)

The S&P/ASX 300 Property Accumulation Index returned 4.9% in October, outperforming the broader domestic market. The sector is up ~18% over the past 12 months or ~13% YTD. Office stocks have lagged the market over the past year returning 13.6%, vs. the sector 12 month return of 18.2%. Residential stocks regained the previous month’s losses.

Globally, REITs returned 5.6% over the month, as measured by the FTSE EPRA/NAREIT Developed Index. New Zealand was the top performing region in USD terms (+11.9%), while Japan was the worst (+3.2%).


November 30, 2015
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