Share markets defy economic data

Highlights

  • Positive trade headlines and central bank policy boost markets
  • Investors eye the RBA’s 2020 policy options

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Markets had a generally positive month through November and US shares hit record highs, despite a raft of geopolitical and trade concerns.

The key US highlights were: 

  • Risk assets were supported by the US Fed’s 0.25% interest rate cut on 30 October
  • US companies delivered a solid earnings season
  • Large M&A deals buoyed investors
  • US economic data including the labour market remined strong. 

Trade tensions initially appeared to have eased, with a phase one agreement between US and China looking more likely at one stage. However, tensions flared again late in the month.

The impacts of the trade war continue to be felt globally, and the uncertainty is clearly having an impact on American businesses and consumers.

Continuing slowing economy in UK, Europe and China

In the UK and Europe, Brexit continues to be a key focus. UK data has been weak, with consumer confidence and retail sales growth below expectations although the focus has been regular opinion polls and the potential implications for Brexit negotiations. 

For the Eurozone, business surveys continue to be weak, although consumer and labour markets look better. Export dependent Germany’s growth appears to have stalled amid the trade uncertainty. 

Chinese economic data generally weakened over the month and the narrative of a slowing economy continues. Given the ongoing protests, HK retail sales were reported as falling almost 25% on the same period last year. This has the potential to ripple to other parts of the region. 

What will be the RBA’s next move?

In Australia, economic data continued to be weak. The unemployment rate increased to 5.3% with the number of new hires falling – the first time since May 2018.

As such all eyes have been on the RBA’s potential response. With three rate cuts delivered this year, and the cash rate at a historical low of 0.75%, the market is questioning future RBA policy options and whether 2020 will see them follow other central banks down the path of unconventional monetary policy or Quantitative Easing (QE). This speculation saw the Australian dollar drop 1.9% against the USD in November to $0.67.

Fixed income returns remain steady

Fixed income yields moved broadly sideways over the month, although Australian bonds outperformed (yields falling relative to other contries given the RBA outlook). A trade resolution will see yields move higher, although low inflation globally mean rate rises are not likely in the near future. 

Our investment performance to 30 November 2019

View our investment returns

Investment commentary

All pre-mixed options delivered a positive return in November as equity markets rose strongly, domestic fixed income rose on RBA easing debate and offset the small negative return from bonds.

Australian fixed interest performed strongly as growth remains sub-trend and the market considers further easing options available to the RBA. The central bank continues to see a ’gentle turning point’ however it appears the growth backdrop is too weak to deliver their desired employment and inflation outcomes.

Global shares moved higher in the month as an earlier apparent easing in global trade tensions and strong earnings season supported risk appetite. Low rates also support this positive equity outlook and the trend of cyclical companies outperforming defensive stocks also continued through November.

Australian shares underperformed against global shares despite positive expectations for US-China trade. Banks were a drag on performance as Westpac’s CEO departed amid intense media and regulatory scrutiny in the wake of their money-laundering scandal. Growth sectors such as technology, telecommunications and healthcare outperformed.

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.