December 2017 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
Global equity markets were mixed over December. US equities rallied on the back of tax reform bills for companies and individuals being approved by both houses of Congress. This marks a positive return for US equities in every month of 2017 (as measured by the S&P 500 Composite in local currency terms).
The Fed raised rates from a range of 1.00-1.25% to 1.25%-1.50% for the third time in 2017 and the fifth time in the current cycle. Also in December, President Trump announced Jerome Powell as the new Fed Chairman, replacing Janet Yellen in February 2018. The US stock market, as measured by the S&P 500 Composite returned 1.1% (in local currency terms). The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose from a downwardly revised 69 in November to 74 in December. The Markit US Manufacturing PMI rose to 55.1 in December from 53.9 in November.
EU leaders have decided to progress onto the second phase of Brexit negotiations, following acceptance of a joint proposal from the UK and European commission which stipulated that sufficient developments have been made in the first round of discussions. The next stage will focus on the details of Britain existing outside the EU. As at December, the Euro Area’s core inflation reading is expected to remain at 0.9% year-on-year and headline inflation is expected to remain at 1.5%, both below the ECB’s target rate of 2.0%. The Markit Eurozone Manufacturing PMI came in at 60.6 in December, up from 60.1 in November. The Eurozone PMI Composite Output Index rose to 58.0 in December from November’s reading of 57.5. The Eurozone stock market generated a return of -1.8% over the month based on the Euro Stoxx 50 Index in local currency terms.
Economic data out of China was weaker than expected due to the Chinese government’s efforts to minimise pollution by limiting the output in the metals sector. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, rose to 51.5 in December from 50.8 in November. The Chinese RMB appreciated against the USD over the month by 1.5%, and the Chinese stock market returned -0.3% (in local currency terms), as measured by the Shanghai Composite Index. Over the same period, the MSCI World ex Australia Accumulation Index returned 1.1% in local currency terms, and -1.7% in unhedged AUD terms.
In Australia, the cash rate remained at 1.5% in order to support the Australian economy during a period where both inflation and wage growth remain persistently low. Low wage growth has likely resulted in lower household consumption, causing the Australian economy to grow slower than expected. The Australian stock market, as measured by the S&P/ASX 300 Accumulation Index, returned 1.9% for the month. The strongest sectors over the month (excluding listed property) were Energy (6.5%), Materials (6.1%) and Telecommunications (5.5%); while the Healthcare (-0.5%), Industrials (-0.9%) and Utilities (-4.5%) sectors experienced the lowest returns. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, returned 0.1% over December, underperforming the S&P/ASX 300 Accumulation Index by 1.7%.
Movements in global bond yields were mixed in December. While the US 10-year government bond yield remained unchanged at 2.41%, the Australian 10-year government bond yield rose by 0.13% to 2.63% and the 10-year German government bond yield rose by 0.06% to 0.43%. In contrast, the UK 10-year government bond yield fell by 0.14% to 1.19%.
The Australian dollar strengthened against the US dollar, finishing the month at 78.09 US cents, compared to 75.66 US cents at the end of November. The AUD also strengthened against the currencies of Australia’s major trading partners, as measured by the Trade Weighted Index, which closed the month at 64.9 (up from 63.6 at the end of November).
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.