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

Global growth reaches pre-GFC level

The global economy continues to expand. The International Monetary Fund (IMF) predicts global growth to reach 3.6% in 2017, and 3.7% in 2018, levels not seen since before the 2008 global financial crisis.

In the IMF’s assessment, however, while short-term risks appear balanced, medium-term risks are becoming more noticeable. In their October 2017 World Economic Outlook, the IMF states "Over the medium term, dealing with financial sector challenges will be essential. Minimising the risk of a sharp slowdown in China will require the Chinese authorities to intensify their efforts to rein in the credit expansion. Many other economies need to guard against a buildup of financial stability risks in a global environment of easy finance."

In global equity markets, the emerging markets sector outperformed developed markets with the MSCI Emerging Markets Index rising 3.5% while the MSCI World Index rose 1.8%. Oil prices also moved higher during the month.

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Local rates left on hold

At its monthly meeting in October, the Reserve Bank of Australia (RBA) left the cash rate unchanged at 1.5%. Consumer prices in Australia rose by 0.6% during the September quarter, and by 1.8% over the past 12 months. Both numbers were lower than expected. Key contributors to the inflation figure over this period were increases in electricity and tobacco prices, while key detractors were vegetables and automotive fuels.

The RBA targets an inflation rate of between 2% and 3%, which means the current inflation rate remains comfortably below the level at which the central bank may look to raise interest rates.

The price of fixed income securities is inversely related to interest rates (i.e. lower rates imply higher prices and vice versa), so the lower than expected inflation outcome reduced the likelihood of future rate increases. This in turn led to an increase in the market value of Australian fixed income assets over the month.

Good month for Aussie shares

The Australian share market (S&P/ASX 200 Index) had a strong October, rising 4% during the month. Resources gained 4.6%, ahead of Industrials, which were up 3.9%. Two of the Big Four banks—ANZ and NAB—settled with regulator ASIC over allegations of interest rate manipulation at various times during 2010-12. Despite this, banks still rallied with the financials sector increasing 3.2%.

Trump’s tax proposals boost market

The Trump administration’s proposed tax reforms, which include lowering US corporate tax rates, helped drive US share markets higher, with the S&P 500 Index rising 2.2% during the month. US technology giants Amazon, Alphabet (Google’s parent company) and Microsoft all beat analysts’ expectations with strong sales, pushing their respective share prices to near record highs.

Inflation in the UK reached 3% during October, its highest level in more than five years, driven by more expensive food and fuel. The pickup in inflation led the Bank of England to raise its benchmark interest rate by 25 basis points to 0.5% in early November.

Extract from Reserve Bank media release 7 November 2017

The Australian economy is expected to expand at a solid pace over the next couple of years, and labour market developments have been quite positive. The drag on growth from the end of the mining investment boom has eased and … the non-mining sector has been increasing but growth in consumption has been below average.

In most cities, housing prices have shown little change over recent months, although they are still increasing in Melbourne. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.

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Investment commentary

All our pre-mixed options delivered positive returns for the month as global share markets climbed higher. The Australian dollar fell 2.3% against the US dollar, adding to returns from offshore, unhedged US dollar-denominated assets.

The local share market (S&P/ASX 200 Index) had its best month so far for calendar 2017, rising 4%. Resources were up 4.6% while the Industrials sector was just behind, up 3.9%. Energy stocks led the market, rising 6.5% on the back of higher oil prices. The price of Brent Crude finished above $US60 a barrel for the first time since July 2015. Woolworths shares rose 2.8%, reporting a 4.9% increase its September quarter food sales compared to just 0.4% for its Wesfarmers-owned rival, Coles.

The synchronised uptick in global growth and subdued inflation pressures have supported corporate earnings. Global share markets rose 1.8% during October led by the tech sector, which was up 7%. In the US, more than half the companies making up the S&P 500 Index have reported, and September quarter earnings are expected be around 6.7%, well ahead of consensus expectations of 5.9% at the start of the month.

Markets continue to watch the Trump administration's proposed tax reforms, including the rules around capital repatriation for US corporations.

Australian bond markets rallied (rates fell slightly and bond values increased) and outperformed the US market. Australian 10-year bond yields fell marginally during October to finish the month at 2.67%, while US 10-year yields rose slightly to finish at 2.38%. In Australia, the September quarter CPI figure came in below expectations at 0.6%, lowering expectations of an interest rate increase in the immediate future.

With inflation at 3.2% in the UK, the Bank of England (BoE) hiked its benchmark rate for the first time in more than a decade, from 0.25% to 0.5%. Rates hikes traditionally boost the currency, but the pound fell due to the BoE's comments about the likelihood of future rate increases.

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.