October 26, 2017
October 26, 2017 | Investments Insightz
Market Update: Asset Class Outlook
In this month’s Market Update Patrick Noble, Senior Investment Strategist, looks at the latest events driving investor sentiment across the major asset classes.
- The 19th National Party Congress commenced in China. Policy priorities and leadership transition for the next five years will be closely monitored.
- In Japan, Prime Minister Abe wins a super majority following snap elections.
- Tensions remain high in Spain. Prime Minister Rajoy is likely to sack the Catalonian government using Constitutional powers to quash secessionist plans.
- The US is struck by Hurricanes Harvey & Irma but underlying economic activity remains robust.
- The Fed is expected to increase interest rates in December. The ECB is contemplating paring back its QE program with details expected in coming weeks.
- Australia posts weak retail sales numbers. The government announces the National Energy Guarantee to combat rising energy prices.
Global stocks have continued their advance backed by positive economic and earnings news. Financial conditions remain supportive for risk assets but with volatility remaining so low, there is some suggestion of investor complacency.
USA: The prospect of tax cuts and deregulation have pushed US markets to record highs. A key component of the tax proposal is a reduction in the corporate tax rate to 20 per cent which would provide a significant lift to earnings for a number of US corporations. While challenges remain, a budget resolution in the US Senate has paved the way for tax reform that can proceed without the support of the Democrats. Markets are also keenly awaiting news of the next Chair of the US Federal Reserve and whether they will be supportive of Trump’s desire to roll back financial market regulations in the aftermath of the financial crisis.
China: China’s 19th National Party Congress has seen President Xi cement his power base within the party. The target of building a ‘moderately prosperous’ society by 2020 was maintained, with a focus on the ‘great renewal of the Chinese nation’. Separately, China’s third quarter GDP growth slowed marginally to 6.8%, in line with expectations
Japan: Prime Minister Abe has won a resounding victory at the polls securing a supermajority government. Alongside key economic policies (Abenomics) the win may see the Prime Minister push ahead with changes to the post-WWII pacifist Constitution. Japan’s economy has now expanded for six consecutive quarters, its longest period of sustained growth in more than a decade. Japanese equities are currently trading near twenty year highs. .
Europe & UK: Politics are dominating economics in the Eurozone. Tensions remain high in Spain over the Catalonian push for independence. With Italian elections due by May 2018 markets should remain cautious of The Five Star Movement’s strong showing in opinion polls. European stocks continue to deliver healthy revenue and earnings and while financial conditions remain accommodative, the ECB is expected to announce policy changes to its QE program by the end of October.
With 6 months now past since UK Prime Minister May triggered article 50, progress on Brexit talks have been sluggish. However, in a positive development, EU leaders have conditionally signaled a willingness to advance to the next stage of talks on the UK’s future relationship with the EU bloc..
The Australian market advanced modestly over the recent quarter, though underperformed generally solid returns amongst most of its global peers. Sector returns have been mixed, though Energy and Materials have performed well. The Energy sector has benefitted from a rising oil price and strength in reported earnings. The Materials sector also outperformed, having reported strong cash flows and upgraded guidance. Market performance has been held back by weakness in Telecoms as 2 key names cut dividends. Utilities and Healthcare have also lagged.
Over the last twelve months, the Australian market has seen quite a large rotation away from ‘expensive defensives’ and bond proxies in favour of more cyclical and value names. This trend may continue, supported by rising global inflation and earnings growth in the more economically-sensitive sectors. The recent reporting season was helped by resources and banks, though, overall, was a touch muted. Some signs that capital expenditure is increasing was a welcome development. Earnings growth will be an important ingredient for positive market moves from here.
Cash and Fixed Interest
The Reserve Bank of Australia left the cash rate unchanged at 1.50% in October. The RBA remains relatively upbeat on the prospects for global growth but remains cautious on household indebtedness. Macro-prudential measures appear to be keeping a lid on house price growth. Employment data continues to pleasantly surprise but is not being matched by wages growth. Inflation remains benign, however electricity prices may impact the upcoming CPI print. Strong business confidence remains at odds with the consumer. Despite ongoing improvement, rates appear set to remain on hold for some time.
With geopolitical threats subsiding, US bond yields have grinded higher in recent times. The Fed is expected to increase interest rates in December as economic growth remains strong. The gradual reduction of the Fed’s balance sheet could push the longer end of the curve higher however, disappointing inflation numbers have kept a lid on yields for the time being. Meanwhile, credit markets continue to trade at very tight spreads and remain at levels supportive of a neutral to more cautious stance.
Property – AREITs
The underperformance of the retail REITS over the past twelve months remains in focus. Westfield, Vicinity and Scentre Group have each been amongst the worst performers. Westfield has suffered from the extremely poor sentiment towards all things retail in the US over the last 12 months, as retail sales slowed and store closure announcements mounted. The poor sentiment towards the sector has created some value with some key stocks starting to look oversold.
M&A has continued in the AREIT space. Propertylink shares spiked higher as Centuria Group and Centuria Industrial acquired a 17% stake and subsequently made a bid with scrip and cash at an equivalent price of $0.95. The bid was rejected by the Propertylink board.
Whilst underlying property values are close to mature-cycle levels, the AREIT market is now trading at a small discount to Net Asset Value suggesting fair value. Nevertheless, the sector remains subject to moves in bond yields. We remain cautious on the long lease expiry stocks that are trading at large premiums to NTA. Conversely, we continue to find pockets of value in a number of the smaller trusts that offer attractive yield at reasonable valuations and select mall REITs.
For more information on the markets contact your financial adviser.
Important information:The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated October 2017, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Past performance is not a reliable indicator of future performance and should be used as a general guide only. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich.
Past performance is not reliable indicator of future performance. GINN FVHHKJ.00012.ME.036. CSTT-012927-2017