The share market recovery picked up its pace in February with leading indices across the globe recording solid gains. We cover notable financial market developments for the month below in our financial market review.
Global market rally
Over February, global equity markets continued the rally that commenced at the start of 2019, finishing 3.4% higher in hedged currency terms. The rally came in response to further indications that the U.S central bank was more willing to avoid further interest rate increases than previously thought.
US & China market confidence
News that negotiations between the US and China were progressing towards some form of agreement was also a major impetus to confidence.
President Trump had been threatening to increase tariffs on over U$ 200 billion of Chinese imports from the current 10% to 25% level from the 1 March. The Chinese Shenzhen CSI 300 Index rallied nearly 18% on the expectation this would be avoided. Ongoing Chinese domestic economic stimulus also supported Chinese market sentiment. Chinese economic growth for the fourth quarter was 1.5%, creating an annual growth rate of 6.4% for 2018.
The US market rose a healthy 5.7%, despite reporting a slower than expected 2.6% annualised economic growth rate in the fourth quarter.
European markets remained sluggish
In comparison, European growth remained in the doldrums, at just 1.2% for 2018. Germany, Europe’s largest economy, had a flat December quarter, after a negative 0.2% the previous quarter, and hence averted a recession. Not so Italy, where a negative 0.2% growth in the final quarter confirmed the economy was in recession.
The global rally pushed the German market higher (up 4.8%). In the UK, the Brexit date looms with no clear path to future EU trade integration, but here too the market enjoyed a solid performance, rising 5.9%.
Commodity markets continued to recover
Oil prices continued their recovery during the Northern Hemisphere winter, with West Texas Intermediate increasing to U$ 57 per barrel – a rise of 6.3%. Gold closed at U$1,313 (down 0.5%), whereas base metals all gained. Zinc (up 2.7%), Copper (up 6.3%), Aluminium (up 0.7%), Tin (up 4.1%) and Nickel (up 5.3%) all showed evidence of positive market sentiment. Iron ore, though, eased 1.2% over the month.
Australian share market enjoyed a solid month
Generally strong commodity prices helped support the Australian share market, which enjoyed a solid month in February, advancing 6.0%. After a period of some underperformance, smaller companies outperformed their larger counterparts with a 6.8% gain.
Financials were the big winner off the back of the release of the Hayne Royal Commission report. Though the Commission’s report called for some change in the wealth industry, it stopped short of advocating an end to vertical integration (the practice of advisors and fund managers being ultimately owned by the same institution). The big four banks were the major beneficiaries.
Australian interest rates and dollar
Australian longer term interest rates again moved lower as further softness in the local economy increased the probability of a future cash interest rate reduction. The Australian 10-year Government bond yield declined 0.14% to 2.10%. Conversely, US 10-year Treasuries rose 0.10% to 2.73%, thereby reversing some of the previous month’s decline. The gap between US and Australian interest rates has widened further to 0.63%. This growing spread in longer term rates, along with the strengthening expectation for lower Australian short-term interest rates, saw the $A fall U.S. 1.2 cents to U.S. 71.5 cents last month.
Outlook and portfolio positioning
The ongoing rally across global equity markets has once again pushed valuations to the upper ranges of fair value. These higher valuations increase the vulnerability of share markets to a correction in the months ahead. Potentially, financial markets have become too optimistic that the period of rising U.S. interest rates is behind us. Should further inflationary pressure emerge in the U.S., then the central bank may have little option other than to raise interest rates. Such a course of action would be negatively received by both equity markets and bond markets.
Domestically, the weak growth cycle does contain risks for parts of the local equity market, with the housing down turn also justifying ongoing low valuations for the banks. With the growth in resource sector values over recent months, the opportunity presented by strong demand and prices appears fully reflected in valuations.
Given the global and domestic concerns, our portfolio positioning remains relatively cautious with overweight equity and bond positions being avoided. Holdings of cash and Alternative assets are being maintained, providing a potential source of funding should opportunities emerge to purchase equities and bonds at cheaper prices over the course of 2019.
If you’d like assistance understanding how the developments covered in this monthly financial market review apply to your investments, please get in touch with Greg Newbury, Thomas Heenan or Ben Barker.
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.
Accru Financial Planning Pty Ltd is the holder of Australian Financial Services Licence No. 341864 issued by the Australian Securities and Investments Commission.