October 2018 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
October was a particularly volatile month for global markets, with steep losses experienced by all major equity markets, and most having all calendar year to date gains erased. As has been the theme over the last several months, the continued threat of a global trade war, rising interest rates in the US, issues across Europe and emerging markets, as well as concerns about global growth are all likely to have played a part in the market sell off, although markets did rally somewhat towards the end of the month. The Australian dollar continued depreciating against the USD over the month, finishing at 70.73 US cents at the end of October, whilst also falling against the Trade Weighted Index. Bond yield movements were mixed over the month, with yields rising in the US but falling in the UK and Australia.
As per the rest of the world, US shares performed poorly in October, with the S&P 500 Composite Index falling by 6.9% (in local currency terms). Driven by strong earnings growth and solid economic fundamentals, the US equity market has been a very strong performer over the past year and, despite October’s performance, the index is still up 6.7% over the last 12 months. The Federal Reserve did not meet in October, but are expected to keep interest rates at the range of 2% to 2.25% when they meet in early November. US midterm elections, and the impact they will have on President Trump’s ability to implement his policies, will be of particular focus. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) increased to 68 in October, from 67, whilst the Markit US Manufacturing PMI slightly rose to 55.7 in October, from 55.6 in September.
The Markit Eurozone Manufacturing PMI fell to 52 in October, from 53.2, whilst the Eurozone PMI Composite Output Index declined again to 52.7, from 54.1 in September. European equities, as measured by the Euro Stoxx 50 Index, fell 5.9% over the month (in local currency terms), with the European Central Bank leaving interest rates unchanged, as expected. More broadly, the MSCI World ex Australia Index fell by 6.8% (in local currency terms). This was slightly worse than the equivalent unhedged AUD index, which only fell by 5.4% due to the depreciation of the AUD.
The Chinese stock market, as measured by the Shanghai Composite Index, fell 7.7% in October (in local currency terms), taking losses over the past 12 months to 23.3% for the index. The Chinese RMB continued to depreciate against the USD, falling by a further 1.6% over the month. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, fell to 50.1, from 50.6 in September. Emerging markets, more broadly, were hit heavily with losses in October, with the MSCI Emerging Markets Index falling 7.8% over the course of the month (in local currency terms).
The Australian share market, as measured by the S&P/ASX 300 Accumulation Index, fell by 6.2% in October, with the sell-off large enough to be dubbed as an official correction by market observers (given the fall of over 10% since the market’s peak in late August). All sectors experienced negative returns for the month, with Utilities (-4.0%), Consumer Staples (-4.9%) and Materials (-5.2%) performing the best, whilst Consumer Discretionary (-8.3%), Energy (-10.3%) and IT (-11.4%) were the worst performing sectors for the month. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, fell by 3.1% in October, outperforming the S&P/ASX 300 Accumulation Index by 3.1%.The Reserve Bank of Australia met in early November and as expected, left the cash rate unchanged at 1.5%. Inflation data to the end of the September quarter was released during the month, with year to date headline inflation falling from 2.1% to 1.9% over the quarter, now below the RBA’s target range of 2-3%.
Bond yield movements were mixed in October as the US 10-year government bond yield rose by 8bps to 3.14%, the Australian 10-year government bond yield fell by 4bps to 2.63% and the UK 10-year government bond yield fell by 14bps to 1.44%. The 10-year German government bond yield also fell by 9bps, ending the month at 0.39%.
The Australian dollar continued to depreciate against the US dollar in October, finishing the month at 70.73 US cents, compared to 72.24 US cents at the end of September (a fall of 2.1%). Additionally, the AUD fell against the currencies of Australia’s major trading partners, as measured by the TWI, closing the month at 61.9, falling from 62.2.
This investment summary does not constitute advice. All investment figures quoted relate to before-tax performance of the relevant industry benchmark.
©Willis Towers Watson