Investment Update - November 2019

The global economy saw a continuation of October’s renewed optimism, with equities markets both locally and overseas rising to new record highs following the introduction of fresh stimulus from central banks. Investor confidence was also supported by expectations of an impending trade agreement between the US and China, although negotiations have since continued into mid-December.

Australia’s third quarter GDP disappointed, with year-on-year growth coming in at 1.7%. Tellingly, private demand was underwhelming, with household consumption barely improving despite an uptick in disposable income. The higher savings rate suggests households are, contrary to central bank expectations, using lower rates to reduce indebtedness rather than spending to stimulate the economy.

Australia’s housing market continued its recent rally, with prices surging by 2.0% over November across the five major capital cities. Indeed, the monthly increase was the highest for Sydney since 1988. The increase in housing prices is likely to further stretch household indebtedness and could constrain discretionary spending accordingly.

In late November the Reserve Bank of Australia (RBA) provided clarity around its potential use of unconventional policy tools. The RBA’s governor, Philip Lowe, noted that quantitative easing would not commence until the official cash rate fell to 0.25%, with asset purchases likely limited to government bonds. The RBA kept rates unchanged in December, with markets expecting a 25 basis point cut in early 2020.
In other economic news, Australia’s trade surplus narrowed from record levels following reduced export demand, while capital expenditure data disappointed, with a 0.2% quarterly decline on a seasonally-adjusted basis.

In the United States, economic data continued to be positive overall, with over a quarter of a million jobs added during November and unemployment declining to an equal 50 year low of 3.5%. Average hourly earnings growth came in at a robust 3.1%.

On the political front, articles of impeachment against US President Donald Trump were announced in early December by House Democrats. The President indeed has much to consider at present; ‘Phase 1’ trade deal negotiations with China are ongoing and, should a deal not be struck by 15 December, may see the US introduce previously delayed tariffs on Chinese imports. Additionally (and unexpectedly), Argentina and Brazil entered the President’s trade crosshairs, with the announcement of increased tariffs on their steel and aluminium imports.

The Federal Reserve’s Open Markets Committee (FOMC) reiterated that rates would remain on hold for the time being, with Chair Jay Powell noting that the economic glass was ‘much more than half full.’ The language has led markets to anticipate just a single rate cut next year.

European economic data continued to be subdued. Employment remained robust, while both headline and core inflation for the Eurozone edged upwards – although the latter figure of 1.3% year-on-year still remains well below the European Central Bank’s target of around 2.0%. The first speech from the ECB’s new President, Christine Lagarde, reiterated the need for increased fiscal support in addition to the central bank’s renewed asset purchase programme and record-low interest rates.

In the United Kingdom, Boris Johnson led the Conservative Party to a decisive victory in the general election on 12 December. Up against a very left-leaning Labour candidate in Jeremy Corbyn, Johnson emerged with a projected majority of over 80 seats and, with it, a clear mandate from the public to proceed with his Brexit plan. The result increases the chances that the 31 January 2020 Brexit deadline extension could indeed be the last one.

Increased certainty around Brexit and optimism about Sino-US trade tensions led investors to a distinct ‘risk on’ tilt in November, with equities continuing to rally. Unhedged developed overseas equities led the charge in Australian dollar terms, with the S&P 500 and Nasdaq Composite Indices hitting new record highs. Australia’s S&P/ASX 200 Index also reached a record high in intra-day trading in late November.

Investor optimism also led to a tilt away from fixed interest assets, with ‘safe harbour’ assets such as US Treasury bonds seeing yields increase and the yield curve steepen. Meanwhile, the price of gold declined, while equities market implied volatility measures also fell during the month.

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