Risk assets faltered
- The rally from December faltered slightly with most equity markets down for the month.
- Global shares were down 2% and up 0.3% in hedged and unhedged terms, respectively.
- Domestically, Australian shares underperformed international markets this month with -2.4% performance in August.
- Australian health care stocks continued to perform strongly with CSL (ASX: CSL) seeing its FY19 results favourably received as the company guided to earnings growth by another 7% to 10% for FY20. This followed 17% growth in FY19 to $US1.91bn in line with market expectations and even allowed for the short-term hit to profitability of switching to a direct distribution model.
- The Australian dollar (AUD) fell against major currencies following another bout of trade-induced fears for global growth. The prospect of a weaker Chinese economy due to harsher tariffs has contributed to speculation against the Australian dollar as has stronger iron ore supply which reduces resource earnings (a key support for the AUD).
- Fixed income and bond substitutes such as listed property rose in August both domestically and globally. Unhedged assets outperformed hedged equivalents in line with the depreciation of the AUD.
- International fixed income continued to rise on the prospect of additional central bank easing and demand for safe haven assets. The prospect of falling interest rates makes existing bonds more attractive so much so that almost 30% of the Barclays Global Aggregate is now offering a negative yield (due to investors bidding prices higher). Weaker US PMI results have stoked fears of weaker global growth as well, driving bond yields lower.
With mixed economic news…
- US-China trade tensions flared up with new US tariff threats realised in early September with more waiting in the wings.
- These fears have abated somewhat with the restart of trade negotiations between China and the US in October.
- Global business surveys pointed to weaker manufacturing growth with the Markit Global Manufacturing PMI remaining in contractionary territory.
- The Reserve Bank of Australia (RBA) remained on hold in early September and reiterated the need for a government response to slowing economic growth.
- The Australian economy grew in line with expectations at 0.5% for the quarter and 1.4% for the year to June 2019.
- This slower rate of growth was driven by weakness in both consumer and business spending as well as a decline in inventories.
- The outlook for growth may see some room for an uptick from these levels given still strong resource demand as well as the full impact of the RBA rate cuts and government tax refunds to be felt in the September quarter. That being said we continue to favour defensive exposures for the Australian economy as weak wage growth and household indebtedness act as constraints to a material uptick in consumption.
- The unemployment rate remained at 5.2% while employment growth surprised on the upside. Leading business indicators such as the NAB Business Survey continue to suggest weaker labour markets ahead.
- We saw an uptick in sentiment towards property markets continue with some appreciation in Sydney and Melbourne.
- A resumption of stronger credit growth has also appeared with 4.2% growth in the number of commitments for owner-occupiers (consensus: 1.5%). This may see financial stability concerns raised for future RBA rate decisions.
Major asset class performance
|Asset classes||1 month %||1 year %||5 years (p.a.) %|
| Australian |
|Global shares (hedged)||-2.0||0.5||8.6|
|Global shares (unhedged)||0.3||7.6||13.5|
| Global small |
| Global listed property |
| Australian |
|International fixed income||2.2||10.0||5.1|
Source: Bloomberg & IOOF, 31 August 2019. Indices used: Australian Shares: S&P/ASX 200 Accumulation Index, Global shares (hedged): MSCI World ex Australia Net Total Return (in AUD), Global shares (unhedged): MSCI World ex Australia Hedged AUD Net Total Return Index; Global small companies (unhedged): MSCI World Small Cap Net Total Return USD Index (in AUD); Global emerging markets (unhedged): MSCI Emerging Markets EM Net Total Return AUD Index; Global listed property (hedged): FTSE EPRA/NAREIT Developed Index Hedged in AUD Net Total Return; Cash: Bloomberg AusBond Bank Bill Index; Australian fixed income: Bloomberg AusBond Composite 0+ Yr Index; International fixed income: Bloomberg Barclays Please note: Past performance is not indicative of future performance.
|Exchange rates||At close on 31/8|| 1 month|
| 1 year|
|Trade weighted index||58.9||-1.0||-5.3|
Source: Bloomberg & IOOF, 31 August 2019. All foreign exchange rates are rounded to two decimal places where appropriate. Please note: Past performance is not indicative of future performance.
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