Monthly market update November '19
Global markets started the month on a positive note as investors were generally optimistic that the coronavirus would be contained. However, in the last week of February, global markets fell sharply, with the MSCI World ex Australia Index (hedged in AUD) dropping 8.4%, due to the rapid increase in the number of coronavirus cases outside of China, and concerns that the coronavirus will have a greater impact on economic activity than originally expected. China still has the highest number of cases of coronavirus, however the number of countries with reported cases of coronavirus has increased from approximately 20 countries at the end of January, to approximately 50 at the end of February. With the increasing spread of the virus, it is becoming more uncertain whether containment is still possible. On the back of the increased uncertainty, investors flight to safety caused global bond yields to drop over the month. Central banks have shown concern over the impact of the coronavirus, with both the US Federal Reserve and Reserve Bank of Australia cutting rates in early March.
The US equity market fell sharply in February, with the S&P 500 Composite returning -8.2% (in local currency terms) as companies such as Apple and HP issued warnings that their earnings would be hit by the impacts of the coronavirus on sales and supply chains. The Federal Reserve preemptively cut rates by 0.50%, the largest cut since 2008, in response to the increased concerns over the extent to which the coronavirus would impact the US economy. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell slightly to 74 from 75 in January. The Markit US Manufacturing PMI fell to 50.7 in February from 51.9 last month, indicating continued growth, albeit marginally slower.
The Chinese equity market fell during February, however by less than most major equity markets, with the Shanghai Composite Index falling by 3.2% (in local currency terms) for the month. The Chinese Government extended the Chinese New Year holiday and many factories, particularly in Hubei province, have been slow to move back towards full production as the workforce is significantly impacted by the coronavirus and measures put in place to contain the spread. The Caixin Manufacturing PMI plunged from 51.1, in January, to 40.3 as parts of China remain in shut-down as the Chinese government attempts to contain the virus. This is the lowest reading since the survey started in 2004. The USD appreciated against the CNY over the month by 0.80%, now buying 6.99 CNY.
European equities, as measured by the Euro Stoxx 50 Index, returned -8.5% over the month (in local currency terms). The Eurozone PMI Composite Output Index increased to 51.6, up from 51.3 in January. The Eurozone Consumer Economic Sentiment Index was unchanged over the month at -6.6 (-100 indicates extreme lack of confidence, 0 neutrality and 100 extreme confidence).
The Australian equity market fell sharply over the month, with the S&P/ASX 300 Accumulation Index posting a -7.8% return, as investors priced in expectations of the impact on Australia’s economy of the coronavirus, given that China is Australia’s largest trading partner and a key element in Australia’s supply chain for consumer products. All sectors lost ground over the month, the least impacted sectors being Health Care (-4.0%), Utilities (-4.0%) and Financials (-4.9%) and the sectors most impacted being Energy (-17.4%), Information Technology (-16.3%) and Materials (-11.7%). At their meeting in early March, the RBA cut rates by 0.25% to support the economy amidst rising concerns about the impact of the coronavirus and bushfires on the economy. The AIG Australian Manufacturing PMI fell to 44.3 from 45.4 in January, the fourth consecutive month of contraction in the manufacturing sector. The NAB Business Confidence Index improved slightly over January increasing to -1 from -2 in December. The Australian listed property market fell by 4.7%, as measured by the S&P/ASX 300 AREIT Accumulation Index, out-performing the broader market index by 3.1%.
Major global bond yields fell in February, continuing the declines from January. The Australian 10-year Government bond yield fell by 12bps to 0.86%, the US 10-year Government bond yield fell 39bps to 1.13%, and the UK 10-year Government bond yield fell by 9bps to 0.44%. The 10-year German Government bond yield fell further into negative territory with a decrease of 17bps to end the month at
-0.61%. Similarly, the Japanese 10-year bond yield fell by 9bps to finish the month at -0.15%.
The Australian dollar depreciated 2.5% against the USD over the month, finishing at 65.3 US cents, down from 66.9 US cents, providing some protection for Australian investors with unhedged investments. The Trade Weighted Index closed at 57 for the month, down from 58.1 at the end of January, 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.