Monthly market update February '19
February saw global equity markets continue their recovery, with the Australian share market in particular having a very strong month, despite continued concerns over the growth of the economy. Overall globally most of the losses from the December quarter have now been reversed following two strong months of gains. Despite this, a number of geopolitical issues continued to linger, with uncertainty regarding Brexit building, albeit there were some positive signs in relation to the trade war between the US and China.
US equities were positive in February with the S&P 500 Composite rising by 3.1% (in local currency terms). The Federal Reserve did not meet in February, however, in minutes released during the month, the Fed did indicate that they intend to finalise the unwinding of their balance sheet (quantitative tightening) at some stage this year, which should provide some stability to financial markets. Whilst President Trump and Xi Jinping are believed to be close to a trade resolution, the temporary reprieve deadline has now past, but been extended further. Both parties are likely to be keen to seal a deal soon to limit any more damage to their respective economies. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 62 in February, from 58 in January, whilst the Markit US Manufacturing PMI fell to 53, from 54.9 in January.
As March 29 draws closer – the date the UK is scheduled to leave the EU – we remain no closer to knowing what the conclusion of Brexit will be, as Theresa May continues to try to garner support for her Brexit deal. The slight possibility of another referendum rose during February, with Labour leader Jeremy Corbyn declaring his party’s support in sending the British people back to the polls, if required to avoid a “no deal” Brexit. Italian GDP data for the fourth quarter of 2018 confirmed that the country had fallen into technical recession, with marginal falls in GDP in two consecutive quarters. The Markit Eurozone Manufacturing PMI continued its decline, falling to 49.3 in February, from 50.5, whilst the Eurozone PMI Composite Output Index rose to 51.9 (from 51.0 in January). European equities, as measured by the Euro Stoxx 50 Index, rose by 4.4% over the month (in local currency terms). More broadly, the MSCI World ex Australia Index rose by 3.3% (in local currency terms), whilst the equivalent unhedged AUD index rose by 5.6%, due to the depreciation of the Australian dollar.
The Chinese stock market, as measured by the Shanghai Composite Index, rose sharply by 13.8% in February (in local currency terms), whilst the Chinese RMB was flat against the USD over the month, finishing at 0.15 CNY per USD. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, rose to 49.9 in February (from 48.3 in January) in a result that exceeded market expectations. Emerging markets also offered positive returns, with the MSCI Emerging Markets Index increasing by 1.1% over the course of the month (in local currency terms)
The Australian share market, as measured by the S&P/ASX 300 Accumulation Index, rose by 6.0% during the month. Most individual sector returns were positive, with Financials (9.1%), Energy (7.8%) and IT (7.5%) the best performing sectors, whilst Utilities (4%), Healthcare (1.3%) and Consumer Staples (-1.4%) were the worst performing sectors. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, rose by 1.8% in February, underperforming the S&P/ASX 300 Accumulation Index by 4.2%. The Reserve Bank of Australia met in early March and again left the cash rate unchanged at 1.5%. Although no rate changes are expected in the next few months, market participants have priced in at least one rate cut by the end of the year, with early indications that the economy is slowing on the back of falling house prices.
The Australian 10-year government bond yield fell to its lowest level since 2016, falling 14bps to 2.10% at the end of February. After declines in recent months, global bond yields largely rose in February, with the US 10-year government bond yield rising by 9bps to 2.72%, the UK 10-year government bond yield rising by 8bps to 1.30% and the 10-year German government bond yield also rising, by 3bps, to 0.18%.
The Australian dollar depreciated against the US dollar in February, finishing at 70.94 US cents, compared to 72.73 US cents at the end of January (a fall of 2.5%). The AUD also fell against the currencies of Australia’s major trading partners, with the Trade Weighted Index closing the month at 60.7, down from 61.6 at the end of January.
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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