March saw a continuation of the market rally that commenced at the start of the year, though the pace slackened. Accru Financial Planning cover notable developments for the month below in our April financial market review.
Positive news supported the US Equities markets
The extension of US-China trade negotiations and the Muller Report’s vindication of President Trump were well-received. Markets also focused on forecasts by the US Federal Reserve (the US Central Bank), which revised down their previous expectation for two interest rate increases this year to a forecast of no change.
This news bolstered investor confidence, with the US equity market rising 2.1% to finish the quarter up 12.6% – the strongest quarterly rise in nearly 10 years. News of progress being made in US-China trade talks helped to support the Chinese market, with the Shenzhen CSI 300 benchmark rising 5.2% to be up 30.2% over the quarter.
European markets remained sluggish due to weak economic growth
European markets did not fare as well. The second half of last year saw the region’s economy expand by just 0.2%, the slowest pace in four years. The broad EURO Stoxx 50 Index of leading European companies rose 1.6% in March, while the German market fell 0.7%. The weak growth outlook prompted the European Central Bank (ECB) to extend its 0% interest rate policy and announce a new program to encourage bank lending in the region.
UK market rose 1.7%
Across the Channel, the Brexit departure date came and went with still no clarity over the timing and details of the exit. Despite the political upheaval of the Brexit process, the economy continues to grow, with unemployment edging down to 3.9% – the lowest rate in over 40 years. The UK equity market rose 1.7% for the month.
Mixed results in Japan and the emerging markets
Japan, the third largest economy in the world, had a flat performance for the month, returning negative 0.1%. Despite the strength of the Chinese equity market, emerging markets underperformed developed markets, rising by only 1.4% on average. Strength in India, where equities are approaching a 5-year high, was offset by a decline in Brazil.
Australian equities up just 0.7%
Although the March quarter was particularly strong for Australian equities (up 10.9%), the actual month of March was far less noteworthy, with the S&P ASX 200 Index managing a rise of just 0.7%. Smaller companies recorded a 0.1% decline.
- Australian financial and energy sectors were negative performers Financials gave back some of the gains from the previous month’s ‘relief rally’ following less than feared recommendations from the Hayne Royal Commission. The energy sector fell 4.1% for the month, though it should be noted the sector was still 15.4% higher over the quarter. Whilst oil prices rose in March, Liquefied Natural Gas (LNG) shares were negatively impacted by the decline in gas prices.
- Property Trusts the best performer Property Trusts were up 6.2% and supported by the outlook of a softening in interest rates and investors’ hunt for yield. Whilst there is much pessimism around the housing sector, residential property is not heavily represented within the listed property trust sector, which is dominated by shopping centres, offices and industrial property.
Fixed interest & currencies
US policy makers implied they would keep interest rates on hold for the foreseeable future – a stark contrast to their December forecast for two rate hikes this year. The change in view has been brought about by concerns that slowing economic growth is taking hold in the US and globally. Consequently, US 10-year Treasury Note yields fell below three-month treasury bills for the first time since 2007.
Weak growth throughout Europe, in addition to weak manufacturing data in Germany, pushed that country’s 10-year bond yields below zero for the first time since October 2016. There are now nearly $9 trillion of negative yielding assets globally.
In Australia, 10-year bond yields hit a new record low of 1.73% to end the month at 1.78%. Half a percentage point of interest rate cuts by the Reserve Bank is now fully priced in by the futures market, which sees the cash rate at 1% by August 2020. Despite expectations of lower interest rates in Australia, the $A remained relatively stable during the month, finishing at U.S. 70.9 cents.
Outlook and portfolio positioning
The slowing of the equity market rally over March was appropriate given the relatively high valuations now in place across major developed markets. None-the-less, interest rate sensitive equities continued to escalate in price and appear increasingly vulnerable to some reversal of the recent decline in global bond yields.
Economic data released in the US over the next two months will provide an insight as to whether the US Government shutdown and unusual weather conditions have caused a temporary, or more permanent, slowing in key economic indicators.
Given the possibility that bond markets have over-reacted to indications of a change in policy position by the US central bank, we continue to be cautious in relation to bond and equity markets. Valuations on both markets have been pushed to the upper levels of fair value as a result of the Federal Reserve commentary. Emerging markets are becoming less and less vulnerable to an outflow of capital due to rising US interest rates. Consequently, they stand out as one of the few areas of fundamental value across the wider spectrum of equity markets.
The Fderal Government’s Budget Announcement in early April appears to have had little impact on financial markets. Although the swing from a deficit to surplus was newsworthy, the change was expected and the magnitude of any shift in fiscal policy was minimal. No doubt some policy changes will impact the fortunes of individual companies and investors, but from a macro-economic perspective there appeared to be few implications for equity, bond or currency markets.
Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned here should only be made after reviewing the relevant Product Disclosure Statements. Past performance is not a reliable indicator of future performance. No revenue has been received by Accru Financial Planning as a result of this article.
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