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

A strong month for February 

The Australian market (S&P ASX200) rose 1.6% over the month, although share prices were quite volatile mainly as a result of corporate reporting season.

For example, Domino’s Pizza fell almost 14.5% on the day its results were announced, but bounced back 7.7% the very next day to finish the month down almost 6.5%. Both Rio Tinto and BHP fell during the month — down 7% and 6.2% respectively — but Westpac, NAB and ANZ were all up over 5%.

Our pre-mixed options continued their good run for the year as share markets continued to rise.

Trump trade lifts US market

In the US, the S&P 500 had a strong month, rising 3.7%. The ‘Trump trade’, as it has come to be known, continued its momentum with the market closing lower on only four days of the month. Investors continued to push the market higher in anticipation of President Trump providing more details of his spending and tax cut promises in his first address to US Congress on 1 March.

Somewhat in contrast to recent history, the share market has continued to rise even as the prospect of an interest rate rise by the US Federal Reserve grows stronger. The Fed has been quite detailed in its forward guidance regarding rate rises and the market is now pricing an 80% chance of a rate rise in mid-March.

Europe and UK also up

Europe also continued its good run with the Eurostoxx 50 rising 2.8%, while in the UK, the FTSE 100 also rose, up 2.3%.

The MSCI Emerging Markets index rose 3% over the month. Emerging markets typically underperform when US rates start to rise because money that had previously left lower-yielding US assets starts to return. But this shift has largely occurred already, which has limited the underperformance of emerging markets.  

Bond yields moved slightly higher both locally and in the US. The recent selloff in bond markets has reduced market values and affected the performance of options with higher fixed interest weightings, such as Balanced Growth and Conservative Growth.

Local rate cuts unlikely

Following statements from the Reserve Bank and the International Monetary Fund drawing attention to the continued rise of house prices in Australia’s two largest cities, many economists believe that we have seen the last interest rate cuts for a while.

On top of that, Reserve Bank governor Philip Lowe recently suggested that further cuts in interest rates could jeopardise financial stability without having a significant impact on economic growth and inflation.

A number of other economic indicators also point to a better outlook for the Australian economy, adding further weight to the view that further rate cuts are unlikely. In March, the RBA kept rates on hold as expected.

Economic conditions continue to improve...

Conditions in the global economy have continued to improve over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain.

In China, growth is being supported by higher spending on infrastructure and property construction. This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain.

The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia's national income.

Source: www.rba.gov.au/media-releases/2017

Our performance
 

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Investment commentary

Our pre-mixed options continued their good run for the year as share markets continued to rise. Government bond yields changed little over the month.

The S&P ASX200 finished the month up 1.6%, as reporting season wound down. The materials and energy sectors were the worst performers as the price of oil drifted downwards and iron ore fell from recent highs.

REITs (real estate investment trusts) performed well during the month, reversing recent weakness in the sector. The financial sector, which includes the banks, also had a strong month, up 3.3%.

Markets right around the world finished the month mostly higher in February. In the US, the S&P 500 steadily increased over the month as confidence in the market remained high, finishing up 3.7%.

The Eurostoxx50 in Europe and the FTSE 100 in the UK finished higher as well, albeit with more volatility during the month. In Asia, the main share indices in Hong Kong, China and Japan also lifted, although a rising Australian dollar detracted slightly from returns.

The Australian government 10-year yield finished the month marginally higher at 2.72%. Many commentators have all but dimissed the idea of another rate cut by the RBA in the immediate future, with the next move expected to be a rise.

In its minutes in early March, the RBA noted inflation was lower than expected, and that perhaps it would remain lower for longer than initially expected. They also noted the continued increase in investment in property, and the divergent property markets between Sydney and Melbourne and the rest of the country.

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.