April saw a strong start to the final quarter of this financial year with global equities rising a solid 4.6%. Accru Financial Planning cover key developments for the month in their May 2019 financial market review below.
The International Monetary Fund (IMF) has revised its forecasts, which suggest a downgrade to growth across most of the developed world, including Australia. Overall global economic growth in 2019 is now expected to be 3.3%, compared to 3.6% in 2018.
- US market – Despite the weaker growth forecasts, the US economy has confounded sceptics and enjoyed its strongest first-quarter GDP growth in four years (3.2% est. per annum), notwithstanding the long government shutdown at the beginning of the year. US employment continues to look promising with nearly 200,000 new jobs added in March and jobless claims setting a new 45-year low. This positive data, along with an estimated $US3 trillion cash sitting nervously in money market funds on the sidelines, saw the US S&P 500 Index, climb 4% during April – the best start to a calendar year in at least three decades.
- China-US tariff negotiations – China remains in negotiations with the US seeking to deliver a new trade agreement. China’s trade surplus for March was US$ 32.7bn with exports up 14% and imports declining 8%. The Chinese (Shenzhen CSI 300) market rose 1.1% while the neighbouring Hong Kong (Hang Seng) rose 2.3%. Economic stimulus put in place by Chinese authorities appears to be helping to neutralise the negative impact of U.S. trade tariffs.
- European markets – were stronger in March, particularly Germany which, after falling in March, rebounded to be up 7.1% for the month. The UK (FTSE) market rose 1.9% despite no agreement being reached on BREXIT and the final date for a negotiated outcome being extended to the end of October.
On the commodity front, base metals finished lower with copper (down 0.6%), Aluminium (down 4.8%), Tin (down 8.1%) and Nickel (down 5.0%) all weaker. Iron ore continues to defy the trend (up 8.6%) as mine supply constraints in Brazil continue to keep prices elevated. Gold was flat at US$1,283 and West Texas Intermediate (WTI) oil rose to U$63.91 a barrel (up 6.3%) on political concerns over Venezuela and Iran.
Following a fairly lack lustre performance in March, the S&P ASX 200 Index rose a respectable 2.4% in April. The Federal Budget on the 2nd of April focused on tax relief which positively impacted consumer sentiment. Consistent with this improved sentiment, Consumer Staples and Consumer Discretionary stocks led the market higher.
Support for consumer stocks was also helped by the announcement that retail sales in February jumped 0.8%, following the modest gain of just 0.1% in January. Financials had a rebound (up 4.4%) with most banks reporting quarterly results in line with forecasts; while Macquarie delivered a very strong result with revenues and profits up 17% for the year.
The property trust sector was down for the month following a prolonged period of very strong performance. Similarly, the resource sector, which has also rallied strongly over recent months, was the only other sector to record price falls last month, with weaker base metal prices leading to an average 2.5% decline in the sector.
Fixed interest & currencies
There was much speculation as to whether the Reserve Bank of Australia (RBA) would cut interest rates prior to the May Federal election. This no doubt led to a softening in the Australian dollar, which fell below the US 70 cent level but managed to close out the month at US 70.4 cents.
The increased focus on Reserve Bank policy was triggered by Consumer Price Index data that showed inflation falling to 0% in the March quarter. Although the central bank kept rates on hold in May, money markets are still forecasting a cut later in the year.
Australian Government 10-year bonds finished the month virtually unchanged, yielding 1.79%; while the US equivalent rose from 2.41% to 2.51% following large declines over the March quarter.
Outlook and portfolio positioning
News in early May that the US Government was planning another round of tariff increases on Chinese imports has heightened risks associated with global equities and global economic growth. Further imposition of tariffs on imports into the US could also create additional inflationary pressure at a time when markets have assumed that low inflation will facilitate continued low interest rate policies.
A soft economic outlook domestically is yet to significantly impact the local share market, which has benefited from global strength and high iron ore prices. In contrast, the bond market has fully factored in a very subdued outlook, with the 5-year Government bond yield now below the cash interest rate.
As is the case globally, low inflation forecasts are firmly baked into interest rate settings. However, with interest rate and inflation expectations so low, any unexpected increase in inflation would have negative impacts on interest rate sensitive assets such as bonds and listed property.
Given these global and domestic concerns, our portfolio positioning remains relatively cautious with overweight equity, property 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.
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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