Investment Market Update

September 2018 Monthly Commentary

(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)

September was another mixed month for share markets, as gains in China and US were balanced by losses in Australia and emerging markets (in local currency terms). September has historically been a volatile time of year for markets and this trend continued with risks currently enhanced by the continued threat of a global trade war led by the US and China, as well as concerns surrounding recent economic and political events in a number of emerging markets. The Australian dollar appreciated against the USD in September to finish the month at 72.24 US cents, whilst the AUD remained at the same level month to month against the Trade Weighted Index. Bond yields largely rose across the board over the month, including in the US and in Australia. 

American shares experienced yet another positive month in September, as the S&P 500 Composite rose by 0.5% (in local currency terms). The Federal Reserve met at the end of the month and increased interest rates for the third time this year to a range of 2% to 2.25%. Despite trade war threats, the US economy is strong and continuing to grow, with low levels of unemployment. The Fed also removed comments from its statement referring to its monetary policy as ‘accommodative’, with further rate hikes expected this year and next. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) remained unchanged at 67 in September, whilst the Markit US Manufacturing PMI rose to 55.6 in September, from 54.7 in August.

The Markit Eurozone Manufacturing PMI fell to 53.2 in September, from 54.6, whilst the Eurozone PMI Composite Output Index also declined to 54.2, from 54.5. European equities, as measured by the Euro Stoxx 50 Index, rose 0.2% over the month (in local currency terms). Fears in Turkey subsided somewhat during the month as Turkey’s central bank increased interest rates by 6.25% to 24%, in an attempt to stop the lira from dropping further. More broadly, the MSCI World ex Australia Index rose by 0.8% (in local currency terms). This was slightly above the equivalent unhedged AUD index, which rose by 0.6%. 

The Chinese stock market, as measured by the Shanghai Composite Index, rose 3.5% in September (in local currency terms). Despite this, the Chinese RMB continued to depreciate against the USD, falling by 0.5% over the month. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, fell again to 50.0, from 50.6. Despite the gains in China, the MSCI Emerging Markets Index fell 1.2% over the course of the month (in local currency terms). Emerging markets have significantly underperformed developed markets in 2018 thus far, falling 9.0% since the end of January, as measured by the MSCI Emerging Markets Index (in local currency terms). The strength of the US dollar and rising interest rates has been a major factor in its poor performance, combined with the crises in Turkey and Argentina, as well as social and political unrest in Brazil. 

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The Australian share market, as measured by the S&P/ASX 300 Accumulation Index, fell by 1.2% in September. Although most sectors experienced negative returns for the month, Energy (4.3%), Materials (4.1%) and Telecoms (2.7%) performed strongly. Utilities (-3.1%), Consumer Discretionary (-3.8%) and Healthcare (-7.3%) 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 1.5% in August, underperforming the S&P/ASX 300 Accumulation Index by 0.3%.The Reserve Bank of Australia met in early October and again left the cash rate unchanged at 1.5%, resulting in a record 26 consecutive months without a change. With inflation still at the lower end of the RBA’s target range, as well as the continued concerns of falling house prices combined with high levels of household debt, no hikes are anticipated by the market until 2020 at the earliest.

Bond yields rose across the board in September as the US 10-year government bond yield rose by 20bps to 3.06%, the Australian 10-year government bond yield rose by 15bps to 2.67%, and the UK 10-year government bond yield rose by 15bps to 1.57%. After its steep fall in August, the 10-year German government bond yield rose back up by 14bps, to end the month at 0.47%.

The Australian dollar appreciated against the US dollar in August, finishing the month at 72.24 US cents, compared to 71.89 US cents at the end of August (a rise of 0.4%). The AUD remained flat against the currencies of Australia’s major trading partners, as measured by the TWI, which closed the month at 62.2, the same as the end of August.

This investment summary does not constitute advice. All investment figures quoted relate to before-tax performance of the relevant industry benchmark. 
©Willis Towers Watson