Monthly market update December '18
December was a choppy month for global equity markets. The continued trade war rhetoric courtesy of President Donald Trump and the US Federal Government shut down contributed to the heightened volatility over the month. President Trump and Chinese President Xi Jinping did agree, however, to postpone any further tariff increases for 90 days, with the two countries working on an agreement during this period. The Australian dollar depreciated against the USD over the month, finishing at 70.49 US cents at the end of December. Bond yields also fell over the month in all major economies.
US equities fell during December with the S&P 500 Composite dropping by 9.1% (in local currency terms), with the VIX Index (a key measure of implied volatility) ending December at 25.4, up from 16.4 at the end of November, and peaking at 36.1 during the month. Over the calendar year US equities fell 4.9%. The Federal Reserve met in December and, as expected, increased interest rates for the fourth time in 2018 to the range of 2.25% to 2.50%. Given concerns over slowing economic growth and current market conditions, the Fed signalled they are taking a more patient approach, reducing the projected rate increases for the next year to two rate hikes, rather than three. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell again to 56 in December, from 60 in November, whilst the Markit US Manufacturing PMI also fell, down to 53.8 in December, from 55.3 in November.
Theresa May chose to delay the vote on her Brexit deal in British Parliament until January, due to a lack of support from her colleagues, although she did survive a vote of no-confidence during the month. The Markit Eurozone Manufacturing PMI fell to 51.4 in November, from 51.8, whilst the Eurozone PMI Composite Output Index also declined, falling to 51.1 (from 52.7 in November). European equities, as measured by the Euro Stoxx 50 Index, fell 5.4% over the month (in local currency terms). More broadly, the MSCI World ex Australia Index fell by 8.1% (in local currency terms), whilst the equivalent unhedged AUD index only fell by 4.3%, due to the depreciation of the AUD. Over a one year period, the index has fallen by 7.5% (in local currency terms).
The Chinese stock market, as measured by the Shanghai Composite Index, fell 3.6% in December (in local currency terms). The Chinese RMB rose against the USD, appreciating by 1.2% over the month. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, unexpectedly fell below 50, falling to 49.7 from 50.2 in November. Emerging markets, more broadly, fell in December, with the MSCI Emerging Markets Index declining by 2.5% 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 only 0.2% during the month, bringing annual returns to -3.1%, although falls in December were significantly less than other equity markets over the month. Individual sector returns were mixed for the month, with Materials (5.1%), Utilities (2.8%) and Healthcare (2.7%) as the best performing sectors, whilst Financials (-3.1%), IT (-4.1%) and Telecommunications (-5.1%) were the worst performing sectors. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, rose by 1.7% in November, outperforming the S&P/ASX 300 Accumulation Index by 2.0%. The Reserve Bank of Australia met in early December and, as expected, left the cash rate unchanged at 1.5%.
On the back of the large equity market falls, bond yields declined heavily across the board in December as the US 10-year government bond yield fell by 30bps to 2.68%, the Australian 10-year government bond yield fell by 27bps to 2.32% and the UK 10-year government bond yield fell by 9bps to 1.28%. The 10-year German government bond yield also fell, by 7bps, ending the month at 0.24%.
The Australian dollar depreciated against the US dollar in December finishing at 70.49 US cents, compared to 73.06 US cents at the end of November (a fall of 3.5%). Additionally, the AUD also fell significantly against the currencies of Australia’s major trading partners, as measured by the Trade Weighted Index, closing the month at 60.7 from 63.3 at the end of November.
Update provided by Willis Towers Watson, legalsuper’s investment asset consultant. This investment commentary does not constitute advice. All investment figures quoted relate to before-tax performance of the relevant industry benchmark.
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