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

Low growth and low inflation continue

The global economy remains in a low growth environment. Recent indicators from the OECD continue to show stable growth momentum and subdued global inflation pressures. In addition, recent data suggests some softening of growth and inflation in the US.

Global share markets generally positive

Global share markets initially fell during August in response to escalating Korea-related tensions. But markets recovered towards the end of the month as the tensions in this region began to subside.

In the US, the Dow Jones and S&P 500 indices posted positive returns for the fifth consecutive month.

Emerging markets had another strong month led by Russia (+8%) and Brazil (+7%). China continues to rein in excesses in their domestic credit markets. Both the Hong Kong and Shanghai indices returned around 2.5%. Despite record corporate profit growth, the South Korean share market fell 1.6%.

Australian market flat

The local share market (S&P/ASX 200 Index) finished down 0.1%. Financial transactions regulator AUSTRAC announced legal action against the Commonwealth Bank for failing to report suspicious transactions, which sent the bank’s shares sharply lower.

Telstra shares also fell on news of a dividend cut. Meanwhile, the Resources sector rallied 5% on the back of rising energy and metals prices. And BHP overtook the Commonwealth Bank as the largest company in the index by market capitalisation.

The August reporting season was marginally negative, with most company results in line with expectations. Key factors affecting profits included rising electricity prices, increasing capital expenditure forecasts (the first since 2012), softer revenue growth for banks, and lower consumer spending.

The Reserve Bank left the cash rate unchanged at 1.50% in August and September. In its quarterly Monetary Policy Statement, the bank forecast the domestic economy to grow between 2% and 3% during 2017, down slightly from its May forecast of 2.5% to 3.5%.

Inflation remains low across the economy, reflecting spare capacity and low wage growth. Other factors keeping inflation in check include the low pace of rent growth and heightened competition in retail prices.

The Australian dollar fell slightly over the month to finish at $US 0.795, providing a slight boost to returns from unhedged offshore investments.

Australian 10-year bond yields were flat over the month, closing at 2.7%. The yield fell to 2.59% at the beginning of the month, broadly in line with the US market, but increased over the rest of the month.

In contrast, the US bond market rallied as demand increased due to the risk-averse sentiment around geopolitical issues and 'dovish' comments from Federal Reserve Chairwoman Janet Yellen. (‘Dovish’ comments tend to indicate broad support for lower interest rates to stimulate the economy, and little concern about inflation.)

Extract from Reserve Bank media release

5 September 2017

The bank expects that growth in the Australian economy will gradually pick up over the coming year. The decline in mining investment will soon run its course. The outlook for non-mining investment has improved recently and reported business conditions are at a high level. Residential construction activity remains at a high level, but little further growth is expected. Retail sales have picked up recently, although slow growth in real wages and high levels of household debt are likely to constrain future growth in spending. The low level of interest rates is continuing to support the Australian economy.

Source: RBA media release

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Investment commentary

All our pre-mixed options generated positive returns for the month as share markets continued to rally. The Australian dollar was marginally weaker against the US dollar, falling from $0.80 to $0.795 and providing a slight boost to returns from unhedged offshore assets.

The S&P/ASX200 Index delivered a marginally negative return of -0.1% during the month. Company reporting season took place during August, and most results were in line with expectations. Resources companies rallied 5% with energy, industrials and precious metals rising over the month. Iron ore (7%) and thermal coal (6%) both increased.

Financials were significantly weaker due to the lower Commonwealth Bank share price which dropped sharply on news the regulator AUSTRAC was launching legal action against the bank for failing to report suspicious transactions.

Developed markets were mostly flat for the month, with softening US inflation and growth data weighing down the S&P 500. Nonetheless, both the Dow Jones and the S&P500 finished in positive territory for the fifth month in a row. Emerging markets continued to deliver strong returns with data indicating synchronised global growth.

Generally, share markets fell early in the month due to escalation of Korea-related tensions, but recovered by the end of the month. The exception was South Korea which, despite record corporate profit growth and being a key beneficiary of the global growth uptick, declined 1.6%.

Australian 10-year bond yields remained mostly flat over the month at 2.7%. The 10-year bond yield fell to 2.59% at the beginning of the month in line with the US market, but increased through the rest of the month. In contrast, the US market rallied further later in the month, due to risk-off sentiment caused by geopolitical issues and 'dovish' (lower growth-lower inflation) sentiments expressed by Federal Reserve Chairwoman Janet Yellen. Locally, the Reserve Bank left the cash rate unchanged at 1.5%, indicating a reluctance to further reduce the cash rate to avoid stimulating the housing market.
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.