Global economy still moving forward


  • Brexit uncertainty softens UK performance
  • Good month for China
  • Strong rally in resources sector

The global economy continues to expand despite some softening in economic momentum. In the US, March quarter growth translated to an annual growth rate of 2.3%, supported by higher consumer spending and business investment. At the same time, the Federal Reserve continues to raise rates to more ‘normal’ levels following almost a decade of quantitative easing when rates were held at very low levels.

In Europe, the economic recovery is continuing but consumer confidence has softened. At its April policy meeting, the European Central Bank kept interest rates low and is likely to tighten monetary conditions only gradually.

The UK economy expanded at a soft 0.1% over the March quarter as activity was affected by the looming uncertainty of Brexit. This softness has reduced the likelihood of a near-term rate rise by the Bank of England.

China had a good March quarter, with a surprisingly strong growth rate of 6.8% year-on-year. The information technology and consumer spending sectors were the standouts. Growth in the industrial and manufacturing sector was below expectations as concerns of a trade war with the US dampened activity.

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Local conditions stable

Conditions in the local economy have remained stable. The housing market has continued to slow and some decline in construction is to be expected but housing approvals remain quite strong. The labour market has slowed slightly but is still expanding with unemployment falling to 5.5%. The Reserve Bank is likely to maintain broadly ‘accommodative’ monetary policy (low interest rates) to support the economy’s transition away from its reliance on the resource sector and higher household debt.


European markets lead the way

Europe led global share markets, with most markets in the region rallying around 5%, and the UK FTSE posting strong returns on back of a weak pound. Strong earnings by US companies were offset by rising bond yields, and the S&P 500 posted only a small positive return for the month. Energy was the best performing sector against a backdrop of rising oil prices.

April was a positive month for commodities as oil prices moved higher due to strong global demand. Aluminium prices jumped following the US-imposed sanctions on Russian production, and the iron ore price rose on the back of positive economic data from China.

Resources push up Aussie market

The Australian share market fared well relative to global peers, returning 3.8% during April. The twin tailwinds of rising oil and base metals prices helped the resources sector rally nearly 10%, while Industrials returned 2.5%. While all sectors delivered positive returns, Financials lagged the market, finishing essentially flat as allegations of misconduct emerged during the financial services Royal Commission.

Inflation expectations push up yields

The US Treasury 10-year bond yield briefly moved above 3% as positive economic conditions renewed the prospect of rising inflation. Broadly speaking, when inflation expectations rise, interest rates and bond yields also rise, bond prices fall and investors sell their bonds to avoid losses. This happened during April, with global bond markets ‘selling off’ on the back of rising yields. The US dollar strengthened in line with rising yields while the Australian dollar fell slightly as investors reacted to the higher yields on US Treasury bonds over Australian Government bonds.

Extract from Reserve Bank media release

1 May 2018

The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.

Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.  

Our performance

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Investment commentary

All pre-mixed options delivered positive returns as economic growth underpinned positive market sentiment. The Australian dollar weakened while the US dollar strengthened across the board, enhancing unhedged US dollar returns.

The Australian share market delivered positive returns in April. Rising commodity prices underpinned a rally of almost 10% in Resources, well ahead of Industrials, which were up 2.5%. Energy was the best-performing sector, gaining over 10% as oil prices continued moving higher. Financials lagged the market, essentially flat for month, mainly due to allegations of misconduct during the Royal Commission inquiry into financial services.

Global shares delivered positive returns during April, despite marginally negative returns from emerging markets. Developed markets posted modest positive returns as soft performance by US markets weighed on performance. European share markets rallied, with the UK FTSE leading on the back of a weak pound. Rising oil prices fuelled the rally in Energy stocks as Brent Crude oil ended the month at $US 75 per barrel.

Rising yields were the central theme in fixed interest markets, driving the selloff in bonds and negative performance in both our fixed interest options. The US Treasury 10-year bond yield briefly moved above 3% to finish the month at 2.95%, and Australian bond yields followed their US counterparts, with the 10-year Australian Government bond yield finishing the month at 2.76%.

The US dollar appreciated across the board, rising in line with yields, while the weakness in the Australian dollar was driven by the higher yield offered by the US Treasuries over Australian Government bonds. The Reserve Bank left the cash rate unchanged at 1.5%.

Past performance is not a reliable indicator of future performance. This information has been prepared by First State Super Investments on behalf of FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340, trustee of the First State Superannuation Scheme ABN 53 226 460 365.