Market volatility continued to rise in December with extreme daily share market movements and global share markets recording their largest monthly decline since February 2009. Longer-term interest rates declined producing positive returns for fixed interest investors, but Australian investors avoided the worst of the equity market sell-off. Accru Financial Planning’s monthly market review below looks at recent developments in global markets and what this means for investment portfolios going forward.
International & Australian markets
The S&P500 index fell 9.2%, with higher earnings growth orientated stocks tending to be sold off more heavily than defensively positioned companies and “value” oriented stocks. At least some of the sharp sell-off appeared to be in response to the U.S. Federal Reserve’s announcement of a further 0.25% lift in the interest rate, the prospect of ongoing increases, and continuing trade dispute between China and the U.S. with the arrest of the Chief Financial Officer of the Chinese telco, Huawei, in Canada.
Japan & China
The Japanese share market also recorded a large decline over December. The Nikkei Index finished the month 10.5% lower, to be 17.0% down for the quarter. A strengthening in the value of the Japanese Yen has contributed to the equity market decline as the stronger exchange rate makes it more difficult for Japanese exporters to compete.
The Chinese market continued its decline, falling 5.1%. However, this was partially offset by the Indian market, which was one of the few markets to finish the month in positive territory.
The uncertainty over the Brexit process continued to weigh on investor sentiment. The German DAX Index finished the month 6.2% lower, with the U.K.’s FTSE index down 3.6%. Emerging markets also performed better than the global average with the MSCI Emerging Markets Index falling 2.5%.
Locally, the decline on the Australian market was limited with the S&P ASX 200 Index declining by just 0.1% over the month. A sharp drop in the $A provided some support for export sectors with resource stocks holding up well in posting a 5.1% gain and healthcare rising 2.9%.
The weaker $A failed to boost the energy sector though, which declined by 2.0%, a 21.3% over the past quarter. In an attempt to stabilise prices, OPEC has announced a cut in production to come into effect in January for a period of 6 months.
Also contributing to the Australian market decline was the finance sector, which fell in value by 3.1%. Investors remained concerned over weakening loan volumes, falling house prices and new capital adequacy guidelines announced for the New Zealand banking sector, which may have broader implications for Australia’s banks.
Financial outlook and portfolio positioning
Equity markets attractive but caution recommended
The significant decline in global share prices over the December quarter has placed equity markets in an attractive valuation zone especially compared to bonds yields. Domestically, similar opportunities have emerged from a cheapening in equity valuations over recent months.
Underpinning the attractiveness of current equity valuations remains a reasonably healthy global economy, which despite some softening in growth indicators, remains in an expansion phase. Notwithstanding that the fundamental case for equities appears sound, a cautious approach to any increase in exposure remains appropriate.
Risks remain in the global geopolitical environment
There remains an unusually high number of risks surrounding the global geopolitical environment currently and there is a possibility that U.S inflationary pressures may re-emerge. These risks have created an environment where investor sentiment is vulnerable to negative news, causing excessive market volatility.
Unhedged currency and diversification offers continued protection
With Australia in a weaker economic growth cycle, subject to a housing market downturn and its own set of political risks, it is far from being a safe haven for investors. Holding global investments on a currency unhedged basis continues to be a feature of our portfolios to provide increased diversification and some protection against Australian specific risks.
Diversification across both emerging and developed economies has also been embraced in order to minimise portfolio exposure to any one particular geopolitical risk driver.
If you’d like assistance understanding how the developments and potential opportunities covered in this monthly 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.