Global equity markets continued their run of positive performance into March 2019, as Overseas developed shares increased 1.7% in hedged terms.

Progress on trade negotiations between the US and China, as well as a surprisingly dovish pivot from the US Federal Reserve (Fed) helped ease global growth concerns. The Fed’s announcement to end Quantitative Tightening (QT) in the second half of 2019 helped boost the returns of high quality bonds, as well as interest rate sensitive equity asset classes, such as REITs. Australian REITs performed particularly strongly, returning 6.0% over the month of March. Overall volatility was much more subdued in comparison to the month prior.

The Fed’s dovish tone helped bond markets experience elevated returns in March as yields decreased across developed markets. The US Treasury yield curve inverted briefly and the German 10-year yield fell below 0.0% for the first time since 2016. Additionally, long-dated Treasuries rallied, finishing with an increase of 4.7% for the first quarter of 2019.

Emerging markets lagged developed markets by 0.5% as the political crisis in Venezuela continued to unfold and the re-emerging India-Pakistan conflict showed that geopolitical risks remain elevated.

Upcoming elections in Turkey, Spain, Germany and India also fuelled tensions. Within the emerging markets space, India and China led whilst Brazil underperformed. The JPM EM Currency Index finished March weaker and was close to flat for the quarter. Emerging market debt also experienced a relatively poor return, decreasing 1.2% over March.

Meanwhile, in the UK, the British parliament rejected PM May’s Brexit proposal for the third time and failed to reach an agreement ahead of the deadline for withdrawal. The European Union (EU) extended the deadline until 12 April 2019 for the UK to either seek a longer extension or decide to leave the EU without a deal. Consequently, the Australian Dollar (AUD) appreciated 0.9% against the Pound Sterling (GBP) over March.

The Australian equity market underperformed its hedged international counterpart, with the S&P/ASX 300 Index increasing 0.7% during March. Small cap equities experienced negative returns both domestically (-0.1%) and abroad (-0.4%) over the month as investors sought less volatile equities. In sector terms, Real Estate led the Australian equity market, increasing 5.4% over the month, followed by Communication Services which increased 3.8%. The adjustment in housing markets has continued, following a recent large run-up in prices in Sydney and Melbourne. Conditions have also remained soft as mortgage rates remain low and there is strong competition for borrowers of high credit quality in the Australian market.

Significant Developments

• The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged again in its early April meeting at 1.50% per annum (pa), remaining at the same level since August 2016. RBA Governor, Philip Lowe, noted that the global economy grew above trend in 2018 but slowed in the second half of the year. Outlook for global growth remains reasonable, however downside risks have increased. In most advanced economies, unemployment is low and wage growth has picked up. Growth in the Chinese economy has continued to slow, with authorities easing policy while also paying attention to risks in the financial sector.
• Financial conditions have eased recently after tightening towards the end of last year, where long-term bond yields have declined to historically low levels, in swing with the subdued outlook for inflation and lower expectations for future rate hikes in several economies. The Governor also noted that Australia’s GDP activity has also been subdued, rising just 0.2% in the December quarter to be up 2.3% over 2018. The RBA is expecting underlying inflation to be 2% this year and 2.25% in 2020. Conditions in Sydney and Melbourne’s housing markets have continued adjusting, after the earlier large build up in prices. The RBA continues to view a low level of interest rates as ideal in supporting the current Australian economy.
• Australian seasonally adjusted employment increased by 4,600 in February, below expectations for a 15,000 rise while January figures were revised to an increase of 38,300. The unemployment rate decreased to 4.9% for February, below expectations to remain at 5.0%. The participation rate decreased to 65.6%, below expectations for 65.7%. Part time jobs increased by 11,900 and full time jobs decreased by 7,300.
• Australian building approvals increased 19.1% month-on-month to be down 12.5% for the year to February, compared to previous levels of 2.5% (revised) and -28.6% (revised) for respective periods ending January.
• The Institute for Supply Management (ISM) Manufacturing Index recorded 55.3 in March, above consensus for 54.5, and above the 54.2 recorded in February. Of the 18 manufacturing industries, Printing and Related Support Activities, Textile Mills and Food, Beverage and Tobacco Products were the top contributors, while Apparel, Leather and Allied Products and Paper Products were the only industries that reported a decrease in March. The ISM NonManufacturing Index recorded 56.1 in March, below consensus for 58.0 and below the 59.7 for February. Of the 18 non-manufacturing industries, the top performers in March were Construction, Other Services and Professional, Scientific and Technical Services. Educational Services and Retail Trade were the only industries to report a contraction over the month.
• US Non-Farm Payrolls increased by 196,000 in March, above the previous 33,000 increase (revised) for February. The unemployment rate remained at 3.8% over March.US gross domestic product (GDP) revised estimate for Q4 2018 is 2.2% quarter on quarter (QoQ) annualised, below expectations for 2.3%. The Caixin Manufacturing purchasing managers’ index (PMI) in China recorded 50.8 in March, above expectations for 50.0. The indicator signalled broadly stable and slightly improving operating conditions in March. An advanced estimate of the European Core Consumer Price Index (CPI) decreased to 0.8% over the year to March, below expectations for 0.9%.
• The Eurozone composite PMI decreased to 51.6 in March, above 51.3 for February, indicating a modest improvement in growth.
• The final estimate released for Q4 2018 Eurozone seasonally adjusted GDP was 1.1% for year-on-year (YoY) and 0.2% QoQ.

Australian Equities

The Australian equity market underperformed its hedged international counterpart index over the month, as the S&P/ASX 300 Index increased 0.7%. The S&P/ASX 50 was the strongest relative performer, increasing 1.0%, while the S&P/ASX Small Ords was the weakest, decreasing 0.1% over the month. The best performing sectors were Real Estate (+5.4%) and Communication Services (+3.8%), while the weakest performing sectors were Energy (-4.2%) and Financials (-2.6%). The largest positive contributors to the index return were BHP, Telstra and Woolworths, with absolute returns of 3.8%, 6.4% and 6.0% respectively. In contrast, the most significant detractors from performance were CBA, ANZ and Westpac with absolute returns of -4.5%, -6.6% and -3.3%, respectively.

Global Equities

The broad MSCI World ex Australia (NR) Index increased 1.7% in hedged terms and 1.5% in unhedged terms over the month, as the AUD experienced mixed movements against major developed market currencies. The strongest performing sectors were Real Estate (+4.7%) and IT (+4.5%), while Financials (-2.5%) and Industrials (-0.1%) were the worst performers.

In AUD terms, the Global Small Cap sector was down 0.4% and Emerging Markets was up 1.0% over March. Over March, the NASDAQ increased 2.6%, the S&P 500 Composite Index increased by 1.9% and the Dow Jones Industrial Average increased by 0.2%, all in USD terms. In local currency terms, major European equity markets experienced positive returns as the FTSE 100 (UK) increased 3.3%, the CAC 40 (France) increased by 2.3% and the DAX 30 (Germany) also increased by 0.1%. In Asia, the Japanese TOPIX (0.1%), the Hang Seng (1.6%), the Chinese SSE Composite (5.1%) and the Indian S&P BSE 500 (7.8%) all increased over March.

Real Assets

The Real Assets sector was positive for both domestic and global investors over March. The FTSE Global Core Infrastructure index increased 3.0% and Global Real Estate Investment Trusts (REITs) increased 3.9% over the month (both in AUD hedged terms). Domestic REITs posted an increase of 6.0% over March, while Australian Direct Property (NAV) returned 0.3% on a one month lagged basis.

Fixed Interest

Global bond markets were positive over March as yields decreased across most major regions. The Barclays Capital Global Aggregate Bond Index (Hedged) increased 1.7% and the FTSE World Government Bond (ex-Australia) Index (Hedged) increased 1.8% over the month. Ten-year bond yields decreased in Germany (-20 basis points (bps) to -0.07%), in the US (-30bps to 2.41%), the UK (-31bps to 1.00%) and in Japan (-7bps to -0.09%). Two-year bond yields experienced negative movements over the month as German bond yields decreased (-12bps to -0.67%), along with the UK (-19bps to 0.64%), US (-24bps to 2.29%) and Japan (-3bps to -0.18%). Returns for existing domestic bond holders were positive over March, with 10-year yields (-33bps to 1.78%) decreasing, whilst five-year yields (-28bps to 1.44%) and two-year yields (-25bps to 1.46%) also decreased. Of the Bloomberg Ausbond indices, the Treasury Index produced the highest return, increasing 2.2% over the month, while the Bank Bill Index return was the lowest at 0.2% over the month.

Currency Markets

The AUD depreciated against the USD over March, finishing with a Trade Weighted Index of 60.5 on 31 March 2019. The AUD appreciated against the Pound Sterling (+0.9%) and the Euro (+0.5%), but depreciated against the Japanese Yen (-0.9%) and the USD (-0.2%). On a tradeweighted basis, the local currency decreased 0.3% over the month.

Commodities

Iron Ore increased 1.8% over March, finishing the month at $86.5 per metric tonne. The S&P GSCI Commodity Total Return Index increased 1.8% over the month. Gold prices finished the month at US$1,295.72 per ounce, falling 1.5% over the period, while the oil price increased 3.8% to $68.55 per barrel over March.

Source: Mercer LLC