May 2017 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
Politics continued to grab the headlines in May, with the French Presidential election taking place and further Trump-led actions in the US. Closer to home, the Australian Government outlined its 2017/18 budget, while all but the largest banks suffered ratings downgrades.
Political risk remains elevated in the US with FBI director James Comey being fired in the middle of the FBI’s investigation into ties between the Trump presidential campaign and Russia. Also during the month, President Trump withdrew from the Paris Agreement. We see this move as largely symbolic and believe there is enough momentum with other participants, including corporates, for the transition to a low carbon economy to continue. The US market had a positive month with the S&P 500 Composite Index returning 1.3% (in local currency terms) due to strong economic data and higher oil prices. Builder confidence in the market for newly built, single-family homes, measured by the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 70.0 in May from 68.0 in April, due to increased home sales and increased sales expectation over the next six months. The Markit Manufacturing PMI for the US fell to 52.7 in May from 52.8 in April. This was the lowest reading since September 2016 due to subdued increases in output and employment.
Centrist candidate Emmanuel Macron was elected as the French President during May, winning 66% of the vote. Also during May, there were discussions of an early Italian election, which is currently scheduled to be held in May 2018. The prospect of an early election (around September-October) is being driven by the governing Democratic Party as they have expressed a desire to hold the election before a contractionary budget is due later this year. The Eurozone’s core inflation reading was 0.9% year-on-year for May and its headline inflation is expected to rise to 1.4% for the year to May which are both well below the European Central Bank’s target rate of 2%. The Markit Eurozone Manufacturing PMI rose to a six-year high of 57.0 in May, from 56.7 in April, which is the strongest expansion in factory activity in over six years. The Eurozone PMI Composite Output Index rose to 56.8 in May, unchanged from April’s final reading, which was driven by a strong increase in new business and new orders. The Eurozone stock market generated a return of -0.1% over the month based on the Euro Stoxx 50 index in local currency terms. On a one year basis, the same index returned 16.0% in local currency terms.
China’s sovereign credit rating was downgraded by Moody’s during May from Aa3 to A1. The Chinese manufacturing PMI as measured by Caixin Manufacturing PMI fell to 49.6 in May, from 50.3 in April, representing the first decline in manufacturing since June 2016. The Chinese RMB appreciated against the USD over the month by 1.1%, and the Chinese stock market fell 1.2% (in local currency terms), as measured by the Shanghai Composite Index. Over the same period, the MSCI World ex Australia Accumulation Index returned 1.6% in local currency terms, and 2.8% in unhedged Australian dollar terms.
In Australia, the Reserve Bank maintained the cash rate at 1.5% at both its May and June meetings. The Australian economy grew by 0.3% in the March quarter with low growth over the quarter driven by a fall in housing investment, weak consumer spending and trade. The Federal Budget was released during the month with the main focusses including job growth and a new $6.2 billion bank levy. Shortly after the budget was released S&P downgraded every major financial institution excluding the big four banks and Macquarie. These factors contributed heavily to the Financials sector experiencing poor returns. The Australian stock market, as measured by the S&P/ASX 300 Accumulation Index, returned -2.7% over May. The strongest sectors over the month (excluding listed property) were Industrials (4.7%), Telecommunications (3.4%) and Energy (1.5%); while the Consumer Stapes (-0.4%), Healthcare (-2.4%), and Financials (-7.7%) sectors experienced negative returns. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation index, returned -1.0% over May, outperforming the S&P/ASX 300 Accumulation Index by 1.7%.
Movements in bond yields over the month were modest. UK and Australian 10-year government bond yields fell by 0.04% and 0.19% respectively, finishing the month at 1.05% and 2.39%. The German 10-year government bond yield fell by 0.01% to 0.30% and the US 10-year bond yield fell by 0.08%, finishing at 2.20%.
The Australian dollar weakened modestly against the US dollar, finishing the month at 74.30 US cents, compared to 74.88 US cents at the end of April. The AUD depreciated against the currencies of Australia’s major trading partners, as measured by the Trade Weighted Index, which closed the month at 63.8 (down from 64.5 at the end of April).
Note: This investment commentary does not constitute advice. All investment figures quoted relate to before-tax performance of the relevant industry benchmark. © 2017 Willis Towers Watson.