Monthly Market Update May '19
Global equity markets largely sold off in May, halting the upward trajectory experienced since the start of the year. With the exception of Australia, all major equity markets posted negative returns for the month. The performance of global equity markets was reflective of renewed trade war concerns, following the breakdown of trade negotiations between China and the US, whilst falling government bond yields continued to signal a negative outlook for the global economy looking forward. On the domestic front, a shock election result – Scott Morrison and the Coalition being re-elected to power – was seen as a positive for the Australian economy by markets, with local equities performing positively as a result, against the trend of market falls.
US equities declined in May with the S&P 500 Composite falling by 6.4% (in local currency terms), as the US increased tariffs from 10% to 25% on US$200 billion worth of Chinese goods, to which China responded with their own set of tariffs on US imports. While the Federal Reserve kept the Federal funds rate on hold when they met early in the month, the Fed have now indicated that they are willing to cut rates, if required. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) increased to 66 in May, from 63 in April, however, the Markit US Manufacturing PMI fell from 52.6 to 50.5, indicating weaker growth in the manufacturing sector.
Failure to reach a trade agreement with the US was a blow for the Chinese stock market, with the Shanghai Composite Index declining by 5.8% (in local currency terms), with the tariffs, and the trade tensions more broadly, having serious implications for China’s growth outlook. The RMB fell accordingly against the USD, by 2.5% over the month, whilst the Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, remained unchanged at 50.2 in May.
In Europe, UK Prime Minister Theresa May announced her resignation, having ultimately been unsuccessful in pushing her Brexit deal through British Parliament. The process to appoint May’s successor will begin in mid-June and is likely to be finalised by the end of July, with pro-Brexit campaigner Boris Johnson the current favourite, in a crowded field, to take over. May’s exit has provided further uncertainty as to the final outcome of Brexit and, under the new leadership, there is now the likelihood of harsher Brexit terms if an exit can in fact be negotiated.
European equities, as measured by the Euro Stoxx 50 Index, declined by a significant 6.7% over the month (in local currency terms). The Markit Eurozone Manufacturing PMI showed continued weakness for the month, decreasing to 47.7 from 47.9 in April, whilst the Eurozone PMI Composite Output Index rose slightly to 51.6, from 51.5 in April. The MSCI World ex Australia Index declined by 5.9% (in local currency terms), whilst the equivalent unhedged AUD index declined by only 4.4%, due to the depreciation of the Australian dollar.
The Australian share market reacted strongly to the Coalition Government’s re-election on May 18, with the S&P/ASX 300 Accumulation Index rising by 1.7% over May, despite falling late in the month. The surprise victory contradicted polling results and removed investors’ fears over the Labor Party’s proposed changes to tax policies that would have impacted negative gearing on investment properties, and the removal of cash refunds to some investors via franking credits. Individual sector returns for May were mixed, with Telecommunications (7.1%), Healthcare (3.5%) and Materials (3.1%) the best performing sectors, whilst IT (-3.1%), Energy (-3.8%) and Consumer Staples (-4.2%) were the worst performing sectors. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, rose by 2.3%, outperforming the S&P/ASX 300 Accumulation Index by 0.6%. In a result expected by market participants, the RBA officially cut interest rates in early June – for the first time in almost three years – to a new record low of 1.25%, in an attempt to stimulate the slowing economy and return inflation to within the 2%-3% target range.
All major global bond yields declined substantially over May, with the US 10-year Government bond yield closing at 2.12%, 38 basis points lower than at the end of April. The Australian 10-year Government bond yield fell by 33bps to end May at 1.46%, the UK 10-year Government bond yield fell by 30bps to 1.19%, and the 10-year German Government bond yield returned to negative territory, declining 22bps to end the month at -0.20%.
The Australian dollar depreciated during the month against the USD, finishing at 69.38 US cents, from 70.48 US cents at the end of April (representing a fall of 1.6%). The AUD also fell against the currencies of major trading partners, with the Trade Weighted Index closing the month at 60.0, from 60.5 at the end of April.
Note: This commentary does not constitute advice, all investment figures quotes relate to before-tax performance of the relevant industry benchmark. Copyright 2019 Willis Towers Watson.