April 2018 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
Easing concerns over a potential trade war between the US and China saw a stronger month for equities both globally and in Australia, as negotiations continued between China and the US to prevent proposed tariffs going ahead and causing further disruption in international markets. On the domestic front, the month was dominated by the Financial Services Royal Commission, with a particular focus on the misconduct of AMP Limited. Global bond yields increased over the month, while the Australian dollar weakened against both the USD and the Trade Weighted Index for the fourth month in a row.
The Federal Reserve did not meet in April, but left the current target range of 1.5% to 1.75% on hold at its meeting in early May, with two or three further rises expected later in the year by market participants. The US stock market, as measured by the S&P 500 Composite, returned 0.4% (in local currency terms) for the month. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell again to 69 in April, from 70 in March. The Markit US Manufacturing PMI increased to 56.5 in April, from 55.6.
The European Central Bank again kept rates unchanged and is still planning to reduce quantitative easing later in the year amidst the continued improvement in economic conditions in the Eurozone. Core inflation was 1% year-on-year in the March quarter, while headline inflation came in at 1.3% year-on-year – below the 1.4% forecast. Both of these readings, however, are still well below the ECB’s target rate of 2.0%. The Markit Eurozone Manufacturing PMI remained strong at 56.2, however, it was down from 56.6 in April. The Eurozone PMI Composite Output Index remained at 55.2. The Eurozone stock market generated a return of 5.2% over the month based on the Euro Stoxx 50 Index, in local currency terms.
Reported growth in the Chinese economy remained strong at 6.8% year-on-year in the March 2018 quarter, with the level of debt remaining a major issue of contention. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, rose slightly to 51.1 from 51.0 the prior month. However, eHowever, the Chinese RMB depreciated against the USD over the month by 0.9% and the Chinese stock market returned -2.7% (in local currency terms), as measured by the Shanghai Composite Index. Over the same period, the MSCI World ex Australia Accumulation Index returned 1.9% in local currency terms, and returned 2.8% in unhedged AUD terms due to the weakening of the AUD.
In Australia, the RBA kept the cash rate unchanged at 1.5%, with no rate rises priced into markets until 2019, given inflation is currently under target levels at 1.9% year-on-year as at March 2018. The Australian stock market, as measured by the S&P/ASX 300 Accumulation Index, returned 3.8% for the month. Over the month, all sectors experienced positive returns with the strongest sectors being Energy (10.7%), Materials (7.4%) and Healthcare (7.2%); while Utilities (2.2%), Telecoms (1.9%), and Financials (0.1%) experienced weaker returns. It was not surprising to see the Financials sector as the weakest performer given the Royal Commission, with the transgressions of AMP Limited seeing its share price fall by over 25% during the month. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, returned 4.3% in April, outperforming the S&P/ASX 300 Accumulation Index by 0.5%.
Bond yields largely increased in April on the back of a much stronger month for the global economy. The US 10-year government bond yield increased by 0.21% to 2.95%, the Australian 10-year government bond yield increased by 0.17% to 2.77%, the 10-year German government bond yield increased by 0.06% to 0.56% and the UK 10-year government bond yield increased by 0.07% to 1.42%.
The Australian dollar continued to weaken against the US dollar, finishing the month at 75.30 US cents, compared to 76.79 US cents at the end of March. The AUD also weakened against the currencies of Australia’s major trading partners, as measured by the TWI, which closed the month at 62.1 (down from 62.3).