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Monthly market update.

February 2018

Equity markets pulled back in February as investors began to worry about the prospect of the US Federal Reserve raising rates at a faster pace than had previously been anticipated. This uncertainty also led to a rise in volatility, as measured by the CBOE Market Volatility Index (VIX), which spiked to levels last seen in mid-2015. Despite this volatility in markets, macroeconomic data was strong with Eurozone unemployment (8.6%) continuing to grind towards near decade lows and fourth quarter 2017 US GDP registering annual growth of 2.5%. Earnings growth expectations were also revised higher in the US, Europe and Japan given the stronger economic environment.

The US equity market fell in February, declining nearly 9% early in the month before recovering to finish down 3.7%. This was against a backdrop of continued strength in economic data, with unemployment standing at a 17 year low of 4.1% and business confidence at close to its highest level in over a decade on the back of recent tax reforms. Jerome Powell gave his first address to Congress as the newly appointed Federal Reserve Chairman, taking a more hawkish tone (i.e. more biased to rates going up) and suggesting there could be as many as four interest rate hikes in 2018. Yields on US 10-year Treasuries continued to rise on future growth and inflation expectations, with the 10-year yield edging closer towards 3%.

The Australian market saw its interim reporting season take place in February, which in aggregate saw reasonable top-line revenue growth, with firms largely reaffirming or slightly upgrading full year guidance. Cost inflation began to creep up with a broad-based uptick in input costs, while capital expenditure in the Materials sector increased. The RBA held the official cash rate at 1.50%, citing ongoing concern regarding low real wage growth and high debt levels limiting spending in the household sector. The domestic market outperformed global equities, with the ASX300 managing a small gain of 0.3%, primarily driven by the Health Care and Consumer Staples sectors which saw strong results from the likes of CSL and Woolworths.

The MSCI World Index ex-Australia (hedged into AUD) fell 3.7% over the month. The Australian dollar depreciated against most developed market currencies in February, declining 5.9% against the Yen, 3.8% against the USD and 1.7% against the Euro. In aggregate, the AUD depreciated in February resulting in the unhedged MSCI World Index (ex-Australia) returning -0.4%. In developed markets, Australia (0.3%) and France (-2.8%) outperformed the broader market, while the US (-3.7%) and Germany (-5.2%) underperformed. The sell-off in global equities also extended to Emerging Markets, with the MSCI Emerging Markets Index (-0.9%) underperforming unhedged developed markets.

The S&P/ASX300 Accumulation Index rose 0.3% over the month. Small Cap stocks (0.0%) underperformed the broader market, while Large Caps (0.8%) outperformed. Healthcare (7.0%) and Consumer Staples (2.1%) were the strongest performing sectors in Australia, whilst Telecommunications (-6.2%) and Real Estate (-3.2%) were the weakest.

The yield on 10-year Australian Government bonds held steady at 2.8% over the month, while the 10-year yield in NZ rose to 3.0%. Elsewhere in the world, US 10-year yields rose to 2.9%, whilst remaining broadly flat in the UK, Eurozone and Japan. In Australia, long dated bonds outperformed the broader market, while inflation-linked bonds underperformed.

Market Performance – February 2018

(income and capital gain or loss) 


3 months

Australian Shares (S&P/ASX 300 Accumulation)

0.3% 1.8%

International Shares (MSCI AC World ex-Aust) unhedged

-0.4% -0.3%

International Shares (MSCI AC World ex-Aust) hedged

-3.7% 1.2%

Unlisted Property (Mercer Unlisted Property Funds Index (Pre Tax)

0.3% 3.3%

Listed Property Trusts (S&P/ASX 300 Property Trusts Accumulation)

-3.2% -6.2%

Australian Bonds (UBS Composite Index)

0.3% -0.5%

Global Bonds (Barclays Global Aggregate (Hedged))

-0.2% -0.7%

Cash (UBS Bank Bills)

0.1% 0.4%

Appreciation of $A against $US

-3.8% 2.6%

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

Market Performance - 28 February 2018

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

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