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

Markets flat as Trump effect wears thin

Investment markets opened the new year looking for some substance to support President Trump’s pro-business rhetoric. With nothing concrete to provide inspiration, markets were relatively flat for the month as the bullish sentiment that ended 2016 began to fade. As a result, our pre-mixed options finished the month only marginally higher.

Aussie shares slightly lower

The local share market (ASX200) fell slightly over the month—down 0.8%—and the downward trend could continue thanks to a stronger Australian dollar and a more risk-averse mood among investors, which is increasing demand for bonds.

The materials and healthcare sectors outperformed while the banks took a breather, falling 2.1% over the month. The real estate sector also fell—down 4.8% for the month—the worst-performing sector in the index.

The new governor of the Reserve Bank, Philip Lowe, has renewed the focus on financial stability. This is supporting the view among a growing number of commentators that the rate-easing cycle may be at an end in Australia. The bank left interest rates on hold, as expected, at its February meeting. 

Late rally in US market

In the US, the S&P500 was largely flat until President Trump’s announcement towards month end that he would approve the completion of two major oil pipelines that had been on hold due to environmental concerns. This late boost pushed the market up 1.8% for the month.

The Federal Reserve met on 1 February and left the US cash rate at 0.75%. Markets are only pricing another 0.5% rate increase from the Fed this year. The US dollar was weaker over the month against most other currencies, which was consistent with concerns over some of Trump’s policies.

Brexit plans continue

In the UK, Theresa May briefly ran into a Brexit-related problem when the country’s highest court found that Brexit must be triggered by a parliamentary vote. The earlier view was that Brexit could be triggered at the government’s discretion. Shortly afterwards, the parliament voted in favour of triggering Article 50, a requirement to begin the process of leaving the EU.

While the Brexit motion must still be approved by the upper house, many commentators say that to oppose the motion would be political suicide given the outcome of the referendum.

The UK share market (FTSE100) fell slightly over the month—down 0.6%—while 10-year UK government bond yields were a little higher. Higher UK bond yields reflect concerns that the falling value of the pound due to Brexit could adversely increase inflation in the UK.

In Europe, the Eurostoxx50 closed the month down 1.8%. A number of Asian markets had a shortened trading month as a result of Chinese New Year, however the Shanghai Composite lifted 1.8% before closing.

In Japan, the Topix also tempered its recent strong run, finishing up only 0.2%, having risen 22% between July and December.

Economy is ‘resilient and flexible...’

At the Australian Economic Forum Dinner in Sydney on 9 February, Reserve Bank governor Philip Lowe described Australia’s economy as ‘resilient and flexible’, with a track record of adjusting to a changing world.

He noted that the economy is in reasonable shape, the mining investment downturn appears to be over, and that while inflation remains low, it is not expected to fall further.

The speech outlined the Bank’s concerns about the complex picture in the housing and labour markets, as well as the relatively high level of household debt.

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Investment commentary

The pre-mixed options had a quiet month in January. While several large share markets finished up during the month, the Australian dollar also strengthened 5.2%, which lowered returns significantly in Australian dollar terms.

Locally, the ASX200 fell 0.8% during January. After a strong December performance, materials was the only sector to have a second strong showing as commodity prices continued to rise.

Towards the end of the month, many investors turned their minds to the upcoming reporting season which gets underway in February.

Market returns across the globe were relatively soft during January. In the US, the S&P500 continued to reach new highs as investor sentiment remained mostly positive, finishing the month up 1.8%.

In Europe, both the UK FTSE100 and Eurostoxx50 finished down for the month following talk by UK Prime Minister Theresa May that a ‘hard’ Brexit was the likely outcome for leaving the EU. The MSCI Emerging Markets index had a positive month, finishing up 5.5%.

Australian 10-year bond yields finished the month slightly lower at 2.71%.

In late January, the quarterly Australian CPI rate came in lower than many commentators expected. Overall, inflation was 1.5% over 2016.

The government issued fewer bonds during December and January and this, combined with comparatively higher yields in Australia, allowed local bonds to marginally outperform US bonds over the month.

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.