Investment update - August 2018

Global economic data for August was generally positive, although it is not consistently strong across developed economies. The American economy continues to prove to be robust, while European economic data has been coming in relatively softer. The Australian economy recorded strong growth, but the country’s property market has continued to soften. Political tensions and trade war concerns continue to plague global market sentiment.

The Australian economy recorded impressive GDP growth over the second quarter of 2018, the data for which was released in early September. The nation posted economic growth of 0.9% for the quarter, bringing the year-on-year growth to 3.4%, above the RBA’s and the market’s expectations. The unemployment rate remained unchanged at 5.3% in August, with 44,000 jobs added, the majority of which are full-time. The participation rate, meanwhile, increased from 65.5% to 65.7%.

Australia’s property market continued to face declines over the month of August, with an eleventh consecutive month of price declines across the five major capital cities. Annual performance across the major cities stands at -3.1%, with Sydney the worst-performing at -5.6%. The declines are predominantly a result of higher borrowing costs as major banks have been passing on rising wholesale funding costs, tighter lending standards as a result of the ongoing Royal Commission, and changing buyer sentiment in Sydney’s housing market. These factors combined have meant that Sydney has experienced its worst annual price performance since March 2009.

The American economy continues to prove to be relatively robust, marked by a strong year-on-year GDP print of 4.2% for the year ending in June. The positive effects of President Trump’s tax cuts approved at the end of 2017 are partially responsible for the strong growth, and have also played a part in a 7.7% annualised increase in corporate profits over the past year. Core inflation cooled by 0.2% in August, falling to an annual rate of 2.7%.

In comparison to the US, the European economy continues to underperform after a stellar 2017. The eurozone’s year-on-year GDP growth to the end of June came in at 2.2%, the slowest growth the economy has experienced in over a year. The region’s unemployment rate has continued to decrease however, falling to 8.2% in August, the lowest the unemployment rate has been since November 2008. It is also well below its peak of 12.1% amid the European debt crisis in 2013. Nevertheless, the tightening labour market has yet to have any notable impact on wage growth and inflation across the eurozone.

Trade tensions continued to dominate economic news in China. In mid-September, the Trump administration announced plans to implement tariffs of 10% on an additional US$200 billion worth of Chinese imports. Should these tariffs be implemented, half of China’s imports to the US will be subject to tariffs. President Trump may go one step further, threatening in early September to apply tariffs on all Chinese imports. After initially failing to flinch at the prospect of a trade war with the US, China’s manufacturing sector finally showed signs of concern in August, with manufacturing levels slowing.

The UK economy continued to record mixed data, with moderate inflation and low unemployment persisting. Inflation for July came in at 2.5% year-on-year, the highest rate so far in 2018. Higher transportation costs, notably rising petrol prices, are a significant contributor to the higher inflation rate. The nation’s unemployment rate continued to remain at historic lows, with the 4.0% rate for the June quarter the lowest the rate has been since 1975.

Developed equity markets had another month of strong performance, led by the US equity market as corporate fundamentals improved. A depreciating Australian dollar supported a strong return of 4.1% for developed overseas equity markets on an unhedged basis. Australian equities also performed strongly over the month, while emerging market equities performed poorly as a number of geopolitical and economic concerns continue to plague several emerging market countries, including Argentina, Turkey, Venezuela and South Africa.

Developed fixed interest markets benefitted from equity market volatility (especially in emerging markets), with investors favouring the relative safety of government and investment grade corporate bonds over the month. Australian fixed interest outperformed over the month, returning 0.8% versus 0.3% for overseas fixed interest. The outperformance was the result of a narrowing in yields, with the yield on 10-year Commonwealth Government bonds falling from 2.71% to 2.53%, the lowest the 10-year yield has been since December 2017. A tempering of an already-low inflation outlook from the RBA contributed to the decline in yields, as did out-of-cycle interest rate increases by the major banks. 

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