The latest commentary on investment markets and the performance of our investment options.

Highlights

  • Most share markets up… Australia an exception
  • Economic sentiment generally positive
  • Fed likely to raise rates ‘soon’

A good month for shares despite uncertainty over Trump’s policies

Global share and bond markets were generally stronger during May, resulting in all our pre-mixed options continuing their solid run for this financial year.

In contrast to this generally positive performance, Australian shares finished the month in negative territory. The S&P/ASX200 Index fell by 3.4%, with small cap stocks also falling, down 2.1%.

Proposed bank levy hits share prices

The Financials sector was a big drag on performance, with a 9.2% fall largely in response to a proposed bank levy announced in the Federal budget on 6 May. The levy will apply to the four major banks, plus Macquarie, and it is expected to raise $6.2 billion over four years.

This sector was also affected by ratings agency Standard and Poor’s downgrading a number of Australian financial institutions, and a 1.1% fall in consumer sentiment. Commodities also fell, with the iron ore price down 15% and crude oil falling 2%. On the plus side, Industrials were up 4.7% and Telcos were up 3.4%.

Apart from Australia, share markets in the major developed countries rose during May, mainly because of positive economic sentiment.

In the US, the S&P500 rose 1.2%, while the technology-oriented Nasdaq again performed strongly, rising 2.4% for the month and 15.2% for the year to date.

Fed ‘cautiously optimistic’

This solid performance was underpinned by the Federal Reserve’s cautious optimism about improving economic conditions, together with its announcement that it will gradually adjust its monetary policy stance and scale back the 4.5 trillion dollars in securities currently sitting on its balance sheet. The Fed beefed up its balance sheet after the financial crisis by buying Treasury bonds and other securities to inject liquidity into the market and help keep borrowing costs low.

But the US market remains hesitant about the capacity of the Trump administration to execute its political agenda, and the controversy surrounding the President’s interactions with former FBI director James Comey has created further political uncertainty. Impeachment has been mentioned, although most observers view this as improbable. 

European and Asian markets also performed strongly, with the UK FTSE100 up 4.4% and Hong Kong shares finishing 4.3% higher. In the UK, the Brexit-inspired general election gamble appears to have backfired on Prime Minister Theresa May, with the government losing its majority and needing to negotiate with the Democratic Unionist Party of Northern Ireland to form a minority government.

Higher US rates likely

Australian bond yields rose early in the month following comments by the Federal Reserve that further tightening is appropriate ‘soon’. But yields began to slide later in the month and eventually finished lower with the yield on Australian 10-year bonds finishing down slightly at 2.39%.

The Reserve Bank left the local cash rate at 1.50% at its May meeting as expected, although the bank continued to highlight the need to carefully monitor developments in the labour market, house prices, and household debt. The latter two measures, in particular, could present significant risk to household financial stability, and therefore a risk to the economy overall.

Global growth picking up says RBA

The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices are generally higher than they were a year ago, providing a boost to Australia's national income. The prices of iron ore and coal, however, have declined over recent months as expected, unwinding some of the earlier increases.

Source: RBA media release

Our performance
 

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Investment commentary

All our pre-mixed options added to their year-to-date performance, mainly due to generally strong share markets and further small slippages in bond yields in light of ongoing political uncertainties. Barring a major downturn in June, the Growth option is on track to deliver solid double-digit returns to members for the 2017 financial year.
In contrast to global markets, Australian shares declined during the month. The S&P/ASX200 fell 3.4%, while small cap stocks were down 2.1%. Although the month started strongly, the Financials sector detracted significantly (down 9.2%) on the back of a new proposed levy on the major banks announced in the Federal budget. Smaller banks also lagged as ratings agency Standard & Poor's downgraded their ratings on 23 institutions. Consumer sentiment also slipped slightly. On the plus side, Industrials and Telcos performed well (rising 4.7% and 3.4% respectively).
Most share markets finished higher in May. In the US, the broad market index (S&P500) rose 1.2%, while the technology-oriented Nasdaq again performed strongly, climbing an impressive 15.2% for the financial year to date. This solid performance was underpinned by the Federal Reserve expressing ‘cautious optimism’ about economic conditions. European and Asian markets also performed strongly, with the UK FTSE100 up 4.4% and Hong Kong equities finishing 4.3% higher.
Yields rose early in the month following hints from the US Federal Reserve that inflation could be back on the agenda. But yields began to slide later in the month and eventually finished lower, with the Australian 10-year bond yield finishing down slightly at 2.39%. Similar results occurred in the US with some economic data being on the soft side, and further political uncertainty associated with President Trump. The Reserve Bank kept the local cash rate at 1.50% at its May meeting.
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.