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Monthly market update.

September 2017

Global equity markets rallied over the month of September, despite ongoing geopolitical tensions between North Korea and the US. The ‘war of words’ intensified between these two countries, as the United Nations Security Council approved new sanctions on North Korea, following a nuclear test performed early in the month. Interestingly however, the US Volatility Index (VIX) fell by 10.2% over the month as markets grew accustomed to ongoing developments of these events. Over the month, several major central banks increased their bias towards monetary policy tightening, with the Bank of Canada announcing an unexpected interest rate hike, the Bank of England signaling they may need to take similar action sooner than the market expected and the US Federal Reserve (Fed) announcing their balance sheet reduction plans would commence in October 2017. These synchronised moves by central banks, combined with a modest upside surprise in US inflation, led to a rally in global yields.

US equity prices were largely suppressed early in the month, as investors were concerned about the potential impact the recent consecutive hurricanes might have on the US economy and the Fed’s interest rate normalisation plans. Relatively benign comments from various Fed members in relation to future monetary policy settings and ongoing geopolitical tensions with North Korea also added to concerns. As a result, the US Dollar Index fell to a 2-year low and over 10% below the highs reached in early 2017 following US President Trump’s election.  However, equity prices and US Dollar weakness largely reversed in the second half of the month, on the news of the upside inflation surprise and less severe forecasts for the economic impact of the hurricanes. The Fed also released their balance sheet normalisation plans, by allowing an incrementally increasing amount of Treasuries and mortgage-backed securities to roll-off without being reinvested, starting from October 2017. Towards the end of the month, US President Trump provided more details on the long-awaited tax cut initiative, with plans to reduce the US corporate tax rate from 35% to 20% and boost international competitiveness of domestic firms.

The latest Australian GDP came in at slightly below expectations, which indicated the economy grew by 0.8% for the June 2017 quarter, bringing the year-on-year growth to 1.8%. Towards the end of the month, the Australian Dollar depreciated sharply due to an increasing divergence in monetary policy outlook for Australia relative to other global developed economies, a fall in iron ore prices of nearly 20% over the month and a credit rating cut on China’s government debt by Standard & Poor’s.

The MSCI World Index ex-Australia (hedged into AUD) rose 2.5% over the month. The Australian dollar depreciated against most developed market currencies in September, which resulted in a return for unhedged overseas equities of 3.5% (in AUD). In developed markets, Germany (6.2%) and France (4.9%) outperformed the broader market, while the UK (-0.8%) and Hong Kong (-0.5%) underperformed. The MSCI Emerging Markets Index (0.7%) underperformed unhedged developed markets.

The S&P/ASX300 Accumulation Index was broadly unchanged over the month. Small Cap (1.3%) stocks strongly outperformed the broader market, while Large Cap (-0.2%) stocks underperformed. Health Care (2.3%), Energy (1.1%) and Financials (1.1%) outperformed, while Telecommunication Services (-4.5%) and Utilities (-3.6%) were the worst performing sectors.

The yield on 10-year Australian Government bonds rose to 2.8% over the month. Elsewhere in the world, the US, UK, Japanese, Euro and New Zealand 10-year Government bond yields all rose. In Australia, short dated bonds outperformed the broader market, while inflation-linked bonds underperformed.

Market Performance – September 2017

Performance
(income and capital gain or loss) 
%

Month

3 months

Australian Shares (S&P/ASX 300 Accumulation)

0.0% 0.8%

International Shares (MSCI AC World ex-Aust) unhedged

3.5% 2.7%

International Shares (MSCI AC World ex-Aust) hedged

2.5% 4.4%

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

1.9% 2.8%

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

0.6% 1.9%

Australian Bonds (UBS Composite Index)

-0.3% -0.1%

Global Bonds (Barclays Global Aggregate (Hedged))

-0.4% 0.9%

Cash (UBS Bank Bills)

0.1% 0.4%

Appreciation of $A against $US

-1.1% 2.3%

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

Marketing Performance - 30 September 2017

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

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