Investment Update - October 2019

Global economic confidence improved over the past month, with central bank policy support bolstered by tailwinds from easing Sino-US trade tensions and a growing likelihood of a soft Brexit. Nonetheless, the environment remains challenging, as reflected in the IMF’s latest forecasts which cut global GDP growth in 2019 by 0.3% to 3.0%, with 2020 growth cut 0.2% to 3.4%. With persistently weak inflation despite strong unemployment, questions remain around what is needed to improve global economy’s health.

In Australia, the Reserve Bank of Australia (RBA) kept rates unchanged at the start of November, with its language suggesting less impetus for near-term rate cuts. Governor Phil Lowe highlighted the potential negative impact on sentiment flowing from further rate cuts when the existing rate is so low.

Australia’s September quarter headline inflation came in at a headline annual rate of 1.7%, remaining below the target band, and with core inflation also tepid at 1.6%.

The nation’s housing sector continued its recovery, with prices again soaring over October after three rate cuts this year, pushing the annualised rate of growth over the past three months above 20%.

Sino-US trade negotiations continued to be the focus internationally, with progress on the execution of ‘Phase 1’ of discussions ongoing into November. China has announced a plan to remove tariffs on some US imports and lower barriers on foreign investment in Chinese firms. Meanwhile, the US noted it may drop 15% levies introduced in September on around US$110 billion of Chinese imports. However, as at mid-November, no formal agreement has yet been reached.

Trade tensions have taken their toll on the Chinese economy, with Chinese third quarter GDP growth declining from 6.2% to 6.0%; the weakest rate since 1992. Chinese exports also continued to slide, falling for a third straight month in October to record a -0.9% annual decline in US dollar terms.

In the US, the Federal Reserve’s Open Markets Committee (FOMC) delivered its third consecutive rate cut in late October, taking the rate to a new range of 1.50% to 1.75%. Commentary from the FOMC indicated it was another ‘insurance’ cut, with employment and household spending remaining strong, and economic activity rising at a moderate rate. Accordingly, markets are now pricing the likelihood of a cut in 2020 at below 50%.

US employment data continued to impress, official data revealing non-farm payrolls beat expectations for October to post 128,000 new jobs added, with the unemployment rate at a relatively low 3.6%.
US sentiment data improved, with the ISM non-Manufacturing survey rising from a three-year low of 52.6 to 54.7, and its manufacturing counterpart rising 0.5 points to 48.3, albeit with economic activity declining for a third straight month.

The European economy had a comparatively quiet month, with its third quarter GDP growth beating forecasts but nonetheless remaining at a weak annual 1.1%. Strong growth in France and Spain plus Germany’s likely aversion of a technical recession were all positives. The ECB’s new stimulus programme commenced on 1 November, and Christine Lagarde took the reigns of the ECB. Unemployment again impressed, with the rate for the Euro Area falling to 6.3%; the lowest 2000. Meanwhile, inflation remained tepid, with the core rate edging upward to 1.1%.

As anticipated, the 31 October Brexit deadline came and went, with a second extension to 31 January 2020 granted by the European Union. Prime Minister Boris Johnson had received approval from the EU for his Brexit plan, however had insufficient time (and support) to gain parliamentary approval. The PM has called an election in December and hopes to gain a working majority (and mandate), which should see his Brexit plan adopted. He leads comfortably in polling against his hard-left Labour opponent, Jeremy Corbyn.

Global equities markets continued their recovery, with central bank policy support in a number of developed and emerging markets, diffusing trade tensions, and a lower chance of a hard Brexit all helping buoy investor optimism. The S&P 500 Index and its tech-oriented counterpart, the Nasdaq Composite Index, both reached record highs and US corporate profits surprised on the upside. Healthcare and technology were the strongest sectors, while the US energy sector struggled amid ongoing subdued oil prices.

The ‘risk on’ tilt had the opposite effect on fixed interest, with investors reducing holdings in bonds, pushing yields higher and prices downwards. In a positive sign, the US yield curve steepened from inversion, suggesting a reduced likelihood of looming economic slowdown.

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