Global equity markets made a strong recovery over January, reversing around half of the December quarter decline. There was a significant bounce back across all major world share markets. Bond yields drifted lower and resulted in significant gains on listed property and infrastructure markets. Commodity prices strengthen and reversed the oil price slide. Our analysis of these market movements is below.
The US led a global market rally
In a strong post-Christmas global share market rally, equity markets averaged gains of 7.1% over January. Once again, it was the US market that led the direction of other markets. Financial markets interpreted commentary from the US Federal Reserve as implying a softer commitment to raising cash interest rates over 2019. As a result, positive sentiment returned to the US equity market, with the S&P 500 Index jumping 8.0% over the month.
Developed markets advanced strongly
Other developed markets also advanced strongly, although not to the same extent as the US. The continued uncertainty around the United Kingdom Brexit process may have weighed on sentiment across Europe, as the UK market was a weaker performer with a 3.6% increase. Japan’s Nikkei Index also continued to lag the global average, rising by just 3.8%. Over the past quarter, the Japanese market has performed relatively poorly, with its strong currency contributing to 5.2% decline.
Emerging markets in Asia & South American performed well
Asia – Chinese authorities announced they were implementing various forms of economic stimulus following a string of weaker economic data was well received. The Shenzhen CSI 300 Index increased 6.3%. Other Asian markets followed China’s lead with Korea posting a strong gain of 10%. India was the exception, however, finishing flat for the month.
South America – A tragic dam collapse in a Brazilian iron mine dominated the news. Shares in Vale, the company operating the mine (and world’s largest iron ore miner), fell 25% in the days following the dam collapse. Despite this, the Brazilian share market still finished the month 10.7% higher. The mine collapse also led to a spike in the spot price of iron ore, which finished the month 21% higher.
Australian commodities strong on the ASX
Commodities were also generally strong over the month. Oil reversed half of its 38% decline from the December quarter, posting a rise of 19% last month. Overall, the Reserve Bank’s Commodity Price Index advanced 1.2% over January.
Higher commodity prices contributed to the 3.9% increase in the local S&P ASX 200 Index last month. Energy (up 11.5%) and resources (up 9.2%) were the two strongest sectors. In contrast, the market’s largest sector, financials, finished in slight negative territory ahead of February’s release of the Royal Commission recommendations.
The stronger Australian dollar may have negatively impacted export orientated stocks. Healthcare, for example, marginally lagged the broader market with a 3.8% rise. Against the $US, the $A rose by US 2.1 cents to finish the month at US 72.7 cents. The $US dollar was weaker against most currencies as the softer outlook for interest rates made the currency less attractive to global investors.
Lower bond yields led to a rally in listed property and infrastructure
Bond yields fell around the globe for the third consecutive month. The US 10-year Treasury Bond yield fell from 2.69% to 2.63%, with Australian bond yields dropping 0.08% to 2.24%.
The ongoing fall in bond yields triggered a significant rally in listed property and infrastructure investments.
Because yields on these asset classes became more attractive on a relative basis, valuations on global listed property markets jumped 10.0%, with global listed infrastructure rising by 7.5%. Domestically, listed property trusts were 6.2% higher, bringing the annual gain to 9.5%. Australian listed property is now the best performing major asset class over the past year.
Outlook and portfolio positioning
The strong rally across global equity markets over January was in response to a change in the outlook for interest rates, rather than being associated with any change in the outlook for economic growth or earnings. With the global interest rate outlook unlikely to continue to soften, further growth in equities will likely require some improvement in the general earnings outlook.
Should interest rates revert to an upward trend, this would potentiallly negatively impact equity markets. With labour market conditions in the US still tight, inflationary pressures may re-emerge. Should inflation pick up from current levels, this may lead the US central bank to raise cash interest rates, which are still slightly shy of a longer term neutral position. Given the possibility of this scenario, we continue to remain cautious around net exposure levels to equities and interest-rate-sensitive assets more broadly.
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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