- Share markets moved higher as complacency rose
- Bond yields moved higher but central bank liquidity limited the rise
- Slowdown in Chinese industrial growth points to risks for commodity prices
Searching for growth
Share markets may be starting to run out of puff against a backdrop of rising complacency and low volatility. The market has priced an improvement in earnings following the bounce in commodity prices, but will growth be sufficient to sustain momentum in prices for the remainder of the year?
In the US, economic data softened in the month as regional industrial surveys pointed to a slowdown in manufacturing activity. That said, consumer spending remains on track for a strong contribution towards GDP in the September quarter as the labour market continues to chug along with strong employment growth.
Late in the month, comments from US Federal Reserve (Fed) Chair Janet Yellen that the case was building for another rate rise weighed on markets. Despite this, the Fed is likely to wait until concrete signs of inflation emerge before tightening policy rates further.
In Europe, growth drivers continued to show a pace of gradual expansion as consumer sentiment remains strong and industrial production improves. In the UK, the Bank of England cut rates and raised bond purchases in a bid to shore up business confidence. Across in Japan, speculation continued that the Bank of Japan will announce further measures to stimulate growth.
In China, the dataflow was poor as broad based measures of investment and spending signalled a slowdown in growth. So far, investment has mainly been driven by the public sector as private sentiment declines. Credit growth has also recently slowed as authorities try to clamp down on excessive borrowing. Given this backdrop commodity prices may be at risk, especially at a time when the government looks to reduce overcapacity in steel, coal and industrial goods production.
In Australia, an interest rate cut by the Reserve Bank (RBA) in August provided a further boost to the housing market with property prices and auction clearance rates in major capital cities on the rise. Dwelling approvals also improved as low interest rates stimulate housing construction. Meanwhile, the labour market remained firm as the transition towards non-resources growth gathered momentum with tourism, health care and services performing strongly.
Share markets rose moderately after the strong increase in July. Global developed share markets were up 0.6% in August in hedged Australian dollar (AUD) terms. European shares were up 1.2% in local currency terms as consumer sentiment remained strong given easy monetary conditions. That said, concerns over the undercapitalised Italian and Portuguese banking sectors still highlight some risk factors in the region.
The UK market (FTSE index) rose by 0.8% as a lower British Pound (GBP) favoured companies with offshore earnings. This offset concern of a domestic slowdown which weighed on the outlook. In the US the share market remained flat as most of the pickup in earnings had already been reflected.
The Australian share market underperformed major developed markets, down 1.6% in the month, due to weaker financial and industrial sectors where earnings growth and dividends are most at risk from undershooting expectations.
Emerging market shares outperformed developed markets, up 2.3% in US dollar (USD) terms. This was due to an increase in portfolio flows into the region on the back of reduced Fed rate hike expectations and a softer USD. Commodity producing countries like Russia, Brazil and South Africa continued to benefit from higher bulk commodity and oil prices.
Bond yields remained low despite moving slightly higher in the month. US 10-year bond yields rose 0.12% with a similar increase observed for European and Japanese bonds. This resulted in a return of 0.1% in the month for international fixed income. Australian fixed income outperformed international fixed income as expectations of further monetary easing by the RBA provided support.
Across credit markets, spreads have continued to decline as central bank liquidity encourages the search for yield. Also, higher commodity prices helped to ease concerns of distress across the high yield market where energy companies make up almost 20% of issuance.
Currency markets also reflected the benign environment of low volatility. The USD softened against major currencies as expectations for US rate hikes were pushed out. However, the AUD fell by 1.1% due to expectations of a further narrowing of the interest rate differential to the US as prospects for further RBA cuts set in. This helped unhedged investments in the month. The New Zealand dollar was up 1.9% following a bounce in milk prices and stronger investment inflows.
Indexes: Australian Shares – S&P / ASX300 Accumulation, Global Shares (hedged/unhedged) – MSCI World ex Australia, Global Emerging Markets – MSCI Emerging Free Net in AUD (unhedged), Global Small Companies (unhedged) – MSCI World Small Cap exAustralia, Global Listed Property – FTSE EPRA/NAREIT Developed Rental Index exAustralia (hedged), Cash – Bloomberg Bank Bill, Australian Fixed Income – Bloomberg Composite Bond All Maturities, International Fixed Income – Barclays Global Aggregate Bond Index (hedged).
Please note: Past performance is not indicative of future performance
Disclaimer: This information is current as at 4 September 2016 but is subject to change. This information is issued by OnePath Funds Management Limited (OFM) ABN 21 003 002 800 AFSL 238342. OFM is a wholly owned subsidiary of Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522 but is not a bank. The information is general in nature and does not take into account a potential investor’s personal needs and financial circumstances. This information is not to be construed as investment or financial product advice, and should not be relied upon as a substitute for professional advice. Before acting on this information, potential investors should consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. Potential investors should read the relevant Product Disclosure Statement (PDS) available at onepath.com.au and consider whether the particular product is right for them. Although all the information in this document is obtained in good faith from sources believed to be reliable no representation of warranty, express or implied is made as to its accuracy or completeness. Past performance is not indicative of future performance. The value of investments may rise or fall and the repayment of subscribed capital is not guaranteed.