Reasonable start to the new year

  • Slight relief but market volatility continues
  • Trade war hits Chinese manufacturers
  • Fed confirms slower rate rises for the near future

Global investment markets rebounded during January. One contributing factor was the US Federal Reserve’s softer policy position on interest rates following four rate rises during 2018. As a result, riskier assets such as shares outperformed more defensive fixed income assets and offered investors some relief from the share market volatility we have seen recently, particularly over the Christmas period.

 

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Growth fair but slowing

Growth in the global economy remains above trend but momentum is slowing. In the US, the rate increases during 2018 have put pressure on the housing market with construction and home sales feeling the impact. The labour market remains strong with the unemployment rate still anchored under 4% and little pressure on wages. Household spending remains robust.

In Europe, the economic environment remains challenging as weaker industrial activity and lower consumer confidence capped spending levels. The European Central Bank has pledged to keep interest rates at low levels to encourage economic activity. 

Tariff war feeds slowdown in China

China’s recent lower growth figures reflect the slowdown in the manufacturing sector. China has signalled that additional stimulus measures will be introduced as the tariff war with the United States continues to take a heavy toll on its trade sector and raises the risk of a sharper economic slowdown. The People’s Bank of China continued to provide monetary support to the market by cutting the amount of reserves banks require for lending.

Domestically, property prices fell further, which is starting to affect household consumption. We saw softer retail sales over the holiday period and subdued activity in home lending. It is likely that the Reserve Bank will respond to the slower activity with a neutral approach to interest rates over 2019.  

Fed confirms less aggressive stance on rates

Central banks and policy makers provided some relief to the market during January and this contributed to a more favourable investment backdrop. In the US, the Federal Reserve confirmed that it will be less aggressive in tightening interest rates. The market is anticipating the chance of a rate rise in 2019 to be less than 15%.

Share markets took advantage of the change in the economic environment and delivered solid returns for the month. Emerging market shares were a highlight as the easier funding conditions produced strong investor inflows.

Bond yields fell over the month and this supported returns from fixed income investments. The slower pace of rate tightening in the US saw the US dollar fall slightly against the Australian dollar, although the $A is likely to remain in the low US70c region as domestic growth continues to slow.

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Investment commentary

Our pre-mixed options made a welcome return to positive territory for January as share markets responded favourably to the more relaxed policy positions of central banks.  

Australian shares rose slightly less than global markets over January. The resources sector generally benefited from a bounce in oil and iron ore prices supported by fiscal stimulus in China. Consumer discretionary fell following signs of reduced household spending. Banks are still experiencing subdued lending growth and concerns over tighter regulatory guidelines.   

Global share markets rose strongly during the month. The US led the way followed by Europe and Japan. UK shares underperformed because of ‘hard’ Brexit concerns. At a sector level, technology shares bounced as revenue growth remained strong. Interest-sensitive sectors including consumer staples were also supported by lower bond yields. 

The Australian fixed interest sector had a strong month as bond yields fell and their market value rose. The decline in property prices and its impact on household spending is likely to cap Australia’s growth at less than 3.0%. The Reserve Bank outlook seems less optimistic and the market is already anticipating a cut to interest rates towards the end of 2019. 

Extract from Reserve Bank media release 5 February 19

The global economy grew above trend in 2018, although it slowed in the second half of the year. Unemployment rates in most advanced economies are low. The outlook for global growth remains reasonable, although downside risks have increased. The trade tensions are affecting global trade and some investment decisions. Growth in the Chinese economy has continued to slow, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, headline inflation rates have moved lower due to the decline in oil prices, although core inflation has picked up in a number of economies.

Source: Source: www.rba.gov.au/media-releases/2019

This information is of a general nature only and is not specific to your personal circumstances or needs. 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 and State Super Financial Services Australia Limited trading as StatePlus (ABN 86 003 742 756 AFSL 238430). StatePlus is wholly owned by FSS Trustee Corporation.