Upbeat start to the year


  • Positive global sentiment
  • International shares up
  • Aussie shares slightly down


This year started with sentiment about the next twelve months upbeat with PwC’s 21st annual CEO survey finding 57% of respondents expecting global economic growth will improve. We’ve also seen the International Monetary Fund upgrade its global growth forecasts for 2018 and 2019 to 3.9%, reflecting increasing global growth and the expected impact of lower taxes in the US. And the synchronised global growth upsurge we mentioned last month continues.  

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US inflation expected to rise

Markets expect the US Federal Reserve to hike rates three times during 2018. In the wake of Chair Janet Yellen’s comments  that inflation is expected to rise during 2018, odds of a rate hike in March jumped to effectively 100%.

In line with this, global government bond yields rose, with the US 10-year Treasury bond rate rising to its highest level since April 2014. This is cause for concern as faster-than-expected rises in interest rates can have a negative impact on both bond and equity markets. Bond prices are inversely related to the level of interest rates, so higher rates equal lower bond prices. Equity prices are linked to expectations of future profits, and as expected future profits are valued using higher interest rates, their value today moves lower, leading to lower equity prices.

International markets strong

Global equity markets delivered very strong returns in January, with the MSCI ACWI Index gaining 5.6% during the month. Emerging markets delivered stellar returns, with the MSCI Emerging Markets Index rising 8.3%, and developed markets also had a very positive month, with the MSCI World Index up 5.2% over the period.

As interest rates hit record lows in 2015 and 2016, investors searched for bond-like assets which
could provide higher yields, the so-called ‘bond proxies’, which include utilities and real estate shares. As rates move higher, these sectors remain vulnerable, and in January global utilities stocks declined 0.6%.

Locally, share markets fell

In contrast to global peers, the S&P/ASX 200 fell 0.4%, led by bond sensitive utilities shares (down 4.5%) and real estate shares (down 3.3%). The Commonwealth Bank of Australia announced the appointment of Matt Comyn who will replace Ian Narev as CEO in April. Domain Holdings, which was spun off from Fairfax Media in November, plunged 17% when it was announced CEO Anthony Catalano has resigned to spend more time with his family. Cancer treatment developer Sirtex Medical prioce surged 45% when it agreed to a takeover from US based Varian Medical Systems.

Inflation in Australia was 1.9% according to Australian Bureau of Statistics data, and while this was above the Reserve Bank’s 1.75% forecast, it remained below the bank’s 2-3% inflation target.

Our performance

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Investment commentary

All pre-mixed options delivered positive returns for the month as global equity markets continued to rally. The US dollar fell versus peers, including 3.2% against the Australian dollar, dampening returns from offshore, unhedged USD assets. 

Australia lagged global counterparts, with the S&P/ASX 200 falling 0.4% during January. Rising US bond yields affected bond sensitive sectors of the equity market, such as utilities (down 4.5%) and real estate (down 3.3%). While Industrials fell 0.74% during the month, Resources gained 0.80% on the back of rising commodity prices. This contributed to the underperformance of our Diversified Socially Responsible Investment option compared to the Growth option, which has no exposure to energy stocks. 

This month the synchronised global growth upswing continued, investor sentiment remained broadly positive and inflation pressures continued to be muted. This backdrop led to solid returns from global equity markets, with the MSCI ACWI Index rising 5.6%. Emerging markets, which have significant exposure to global growth, posted strong returns, with the MSCI EM Index gaining 8.3%. In the US, the Dow Jones and S&P 500 traded above 26,000 and 2,800 points for the first time in their trading histories. The International Equities option does not hedge foreign currency exposure, and weakness in the USD translated to lower monthly returns in AUD terms but the single sector still performed well overall.

The price of bonds declines if interest rates increase, so as Australian and US bond yields rose during January, the Australian fixed interest and international fixed interest sectors delivered negative returns. Bond markets sold off as US 10-year yields rose to finish the month at 2.71%, while Australian 10-year yields also rose to finish at 2.81%. In Australia, headline inflation rose by 0.6% during the fourth quarter, coming in below an expected rise of 0.7%. This reduced the likelihood of a near term interest rate hike by the Reserve Bank of Australia. In the United States, the Federal Reserve left its benchmark interest rate unchanged at 1.25%-1.50% but is expected to increase this in March.

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.