Monthly market update December '19
Geopolitical developments resulted in mixed results across global equity markets during December, with North America, Europe and Japan all posting negative returns whilst the UK, Asia, China and Emerging Markets indices increased. The net effect was a 2.3% increase in the MSCI World ex Australia Index over the month (on a hedged to AUD basis), supported by investor optimism after a phase one deal in US/China trade talks, improved economic data in the US and Europe, and reduced political uncertainty regarding Brexit. On domestic turf, off the back of a gentle turning point in economic data and rising house prices, the RBA left the cash rate unchanged in early December to continue to assess the impact of monetary easing delivered over the past 6 months.
US equity market returns were positive in December, with the S&P 500 Composite returning 3.0% (in local currency terms), driven by a phase one trade deal between the US and China that prevented a tariff increase on 15 December from occurring. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) jumped to 76 from 71 in November, the highest reading since June 1999. Whilst the Markit US Manufacturing PMI fell to 52.4 in December, from 52.6 last month, pointing to a small deceleration in factory activity. Chinese equity markets rallied in December, with the Shanghai Composite Index gaining 6.2% for the month (in local currency terms). The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, fell to 51.5 from a previous 3-year high of 51.8 in November. The USD depreciated against the CNY over the month by 0.99%, now buying 6.96 CNY.
In Europe, a partial resolution to the Brexit saga was delivered as the Conservative Party won the UK general election with a large majority, signalling that the country was ready to move ahead with Boris Johnson’s Brexit plan. Subsequently, the British parliament voted in favour of the Withdrawal Agreement Bill, paving way for Brexit on 31 January, alleviating some of the uncertainty pervading the UK and Europe in November. The European equity market, as measured by the Euro Stoxx 50 Index, returned 1.2% over the month (in local currency terms). The Markit Eurozone Manufacturing PMI fell slightly to 46.3 from 46.9 in November, whilst the Eurozone PMI Composite Output Index increased to 50.9 from 50.6 in November.
The Australian equity market delivered a -2.0% return in December (S&P/ASX 300 Accumulation Index). The AIG Australian Manufacturing PMI edged up to 48.3 from 48.1 in November, whilst the NAB business confidence index dropped 2 points to 0, in line with market expectations. Individual sector performance was mostly negative with Materials (1.8%) and Utilities (0.8%) being the only sectors to deliver positive results for the month. Consumer Staples (-7.8%), Telecommunications Services (-5.5%) and Information Technology (-3.9%) were the worst performing sectors. The RBA met at the beginning of December and decided to keep the cash rate unchanged at 0.75% based on expectations that inflation and growth will begin to pick-up following increased infrastructure expenditure, an upswing in housing prices, tax cuts and low interest rates. The Australian listed property market performed negatively over the month, falling by 4.2%, as measured by the S&P/ASX 300 AREIT Accumulation Index.
Major global bond yields rose in December. The Australian 10-year Government bond yield rose by 34bps to 1.37, the US 10-year Government bond yield rose 13bps to finish at 1.91%, and the UK 10-year Government bond yield rose by 13bps to finish at 0.83%. The 10-year German Government bond yield remained in negative territory with an increase of 5bps to end the month at -0.35%. Similarly, the Japanese 10-year bond yield rose by 6bps to finish the month at -0.08%.
The Australian dollar appreciated by 3.4% against the USD over the month, finishing at 70.06 US cents, up from 67.77 US cents. The Trade Weighted Index closed at 60.3, up from 59.0 at the end of November, reflecting a modest appreciation in the AUD against the currencies of its major trading partners.
Note: This investment commentary does not constitute advice. All investment figures quoted relate to before-tax performance of the relevant industry benchmark. © 2020 Willis Towers Watson.