Monthly market update January '20
Global markets started the year positively, despite US-Iran tensions in early January following the US’s assassination of Iranian General Qasem Soleimani and Irani retaliation, however started to fall in mid-January in the wake of the recent coronavirus outbreak. As a result, global equity markets ended the month on a negative note, with the MSCI World ex Australia Index (hedged) dropping 0.4%. China’s economy, the world’s second largest, is set to take a major hit as businesses close during the Chinese New Year celebrations in order to contain the spread of the virus. There was some positive news over the month as the US and China officially signed the “Phase One” trade deal, however this is unlikely to be the end of trade tensions between the two countries. In Australia, the effect of the bushfires and coronavirus is expected to be slower growth in the short term and the Federal Government is hinting that the promised budget surplus for 2019-20 may not eventuate as a result. The RBA left the cash rate unchanged at 0.75% in early February, with previous monetary easing supporting employment and income growth. Globally, central banks maintained current interest rates as global economic data was largely stable, despite the IMF marginally downgrading their global growth forecast for 2020 from 3.4% to 3.3%.
The US equity market was flat in January, with the S&P 500 Composite returning 0.0% (in local currency terms) as the impacts of positive economic data and the Phase One trade deal were offset by coronavirus concerns. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell slightly to 75 from its twenty year high of 76 in December. The Markit US Manufacturing PMI fell to 51.9 in January from 52.4 last month, indicating continued growth, albeit marginally slower.
Chinese equity markets slumped in mid-January as concerns over the coronavirus rose, with the Shanghai Composite Index losing 2.4% (in local currency terms) for the month, before falling nearly 8% on the first trading day of February following the market closure during Chinese New Year. The Chinese manufacturing sector continued its slow expansion, with the Caixin Manufacturing PMI at 51.1, down from 51.5 in December. However, the impact of the coronavirus is expected to materially impact the sector, and China’s GDP, with businesses forced to close during Chinese New Year and the holiday period extended in a bid to curb the spread of the outbreak. The USD depreciated against the CNY over the month by 0.38%, now buying 6.94 CNY.
Britain formally left the EU in the final hours of January, marking the beginning of the end of the three-year Brexit saga. The UK now has until 31 December 2020 to negotiate a trade deal with the EU, with uncertainty expected to remain until the deal has been finalised. European equities, as measured by the Euro Stoxx 50 Index, returned -2.7% over the month (in local currency terms). The Eurozone PMI Composite Output Index increased to a five-month high of 51.3, up from 50.9 in December. The Eurozone Consumer Economic Sentiment Index remained unchanged for the month at -8.1 (-100 indicates extreme lack of confidence, 0 neutrality and 100 extreme confidence).
The Australian equity market rose over the month, with the S&P/ASX 300 Accumulation Index posting a 4.9% return, despite the bushfires and coronavirus outbreak. Growth was positive across all individual sectors, the strongest sectors being Health Care (12.0%) and Information Technology (10.2%) and the weakest Energy (0.6%) and Utilities (1.0%). At their first meeting of the year in early February, the RBA kept the cash rate unchanged at 0.75%, citing a need for an extended period of low interest rates to reach full employment and meet the inflation target. The AIG Australian Manufacturing PMI fell sharply to 45.4 from 48.3 in December, the third straight month of contraction in manufacturing and the fastest contraction since June 2015. The NAB Business Confidence Index fell to its lowest reading since July 2013, dropping a further 2 points from 0 to -2. The Australian listed property market rose 6.3%, as measured by the S&P/ASX 300 AREIT Accumulation Index.
Major global bond yields fell in January. The Australian 10-year Government bond yield fell by 40bps to 0.97%, the US 10-year Government bond yield fell 39bps to 1.52%, and the UK 10-year Government bond yield fell by 30bps to 0.53%. The 10-year German Government bond yield fell further into negative territory with a decrease of 26bps to end the month at -0.44%. Similarly, the Japanese 10-year bond yield fell by 4bps to finish the month at -0.06%.
The Australian dollar depreciated 4.6% against the USD over the month, finishing at 66.94 US cents, down from 70.15 US cents. The Trade Weighted Index closed at 58.1, down from 60.3 at the end of December, signalling a depreciation 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.