Investment update - November 2018

After the worst month in equities markets in several years, November was by comparison a subdued month for the global economy, albeit with further market tremors in early December.

The Australian economy continued to feel the effects of the slowing housing market. House prices in Sydney have now fallen 9.2% year-on-year and are also materially down nationally. Third quarter GDP growth came in at an annual 2.8%, which was both under government and RBA forecasts and attributable to slowdowns in construction, infrastructure investment and consumer spending. Sentiment indicators were somewhat more optimistic, with lower interest rates and a dovish tilt in the RBA’s language suggesting less pressure on borrowers in the near-term as rates remain low.

November saw further political turmoil for the coalition government, with another MP defection meaning the coalition must rely on crossbenchers for confidence and supply. With the Liberal Party also suffering a voter backlash in Victorian state elections, Prime Minister Scott Morrison is expected to call a federal election in May.

In the United States, economic data remained strong, although signs of weakening have emerged. Inflation fell to its slowest pace in nine months, with falling fuel and energy prices being the main contributors. The unemployment rate remained at a multi-decade low, however net jobs growth fell below forecasts.

Perhaps reflecting the softening data, the Federal Reserve’s Chair Jay Powell delivered a speech in November noting that the current target rate is ‘just below’, its neutral level. Odds of more than one hike in 2019 have now slimmed considerably.

After months of sabre rattling, trade tensions between the US and China were tempered in early December by an announced ceasefire between the two superpowers prior to the G20 summit. The truce only extends to some tariffs, and the parties have a 90-day window to reach consensus on a range of issues.

The European economy continued to stumble. Eurozone inflation edged downward as fuel costs fell, while PMI gauges were led downwards by poor survey results in Germany. Italian sentiment, meanwhile, remained in contractionary territory. Nonetheless, there were some positive signs, with the Italian government softening posturing over its planned budget deficit. In France, by contrast, there were serious protests against fuel tax increases, sending President Macron’s popularity plummeting.

Brexit uncertainty continues in the UK, with Prime Minister Theresa May having a challenging month. Following ratification of her Brexit plan by the EU, May now has to obtain the approval of parliament. However, hardliners within her party continue to oppose the deal and the parliamentary vote on the deal on 11 December was postponed when it became clear it would not be passed. May then survived a no confidence vote in mid-December, but only once she assured her party she would stand down before the 2022 election. The economy remains tepid; car sales and manufacturing demand continued to fall, while retailers had underwhelming sales.

Global equities had a subdued month. In the US, dovish Federal Reserve signalling and a temporary truce in Chinese trade tensions tempered investor concerns. Globally, equities were impacted by plummeting oil prices, with Brent Crude falling to under US$60 per barrel compared to US$85 in mid-October. Australian equities were less positive than their overseas counterparts, with fears of a slowing economy due to the housing downturn leading to a -2.2% total return for November and a 9.3% fall over the past three months. The S&P/ASX 200 price index continued to stumble into December, falling to its lowest point in nearly two years.

Fixed interest continued to benefit from ‘risk-off’ sentiment, with US 10-year treasury yields falling over the month from a peak of 3.24% to under 2.85% by early December. A decline in near-term inflation expectations and the dovish Federal Reserve signalling also helped drive yields downwards.

November was also a critical month for cryptocurrency, with concerns about future regulatory intervention seeing Bitcoin and Ethereum plummet to their lowest levels in over a year, and over 80% down on their peaks in December 2017.

You can download the full report here.