|Global Indices||Monthly||Quarter||1 Year||3 Year||5 Year||10 Year|
|MSCI World ex Australia NR Index AUD||–0.4%||-0.4%||16.0%||8.5%||17.2%||8.1%|
|MSCI World ex Australia NR Index (AUD Hedged)||–3.7%||1.1%||14.7%||9.3%||13.8%||8.7%|
|Dow Jones (US)||-4.0%||3.6%||23.1%||14.2%||15.0%||10.3%|
|S&P 500 (US)||-3.7%||3.0%||17.1%||11.1%||14.7%||9.7%|
|FTSE 100 Index (UK)||–3.4%||-0.5%||3.4%||5.4%||6.6%||6.1%|
|Nikkei 225 (Japan)||–4.5%||-2.9%||15.4%||5.5%||13.8%||5.0%|
|HKSE (Hong Kong)||-6.2%||5.7%||29.9%||7.5%||6.0%||2.4%|
The MSCI World ex-Australia Index returned -0.4% in Australian dollar terms and -3.7% in local currency terms as global equity markets were rocked by volatility and a sharp correction early in the month. The US S&P 500 Index was down 3.7% over the month, hitting a low of 2581 points to end at 2714. The VIX spiked to a high of 37.3 to end the month at 19.9—still elevated compared to recent historic lows. IT was the only sector to gain (+0.1%), boosted by Apple (+6.8%) and Hewlett Packard (+13.4%). Energy (-10.8%) was the biggest losing sector, with oil giant Marathon falling 19.9%, while consumer staples (-7.8%) was not far behind, with popular defensive stocks like Walmart (-15.6%) and Kraft Heinz (-14.5%) failing to recover from the broader market correction. The US Dow Jones Index fell 4.0% but was still higher than at the end of 2017.
In Europe, the STOXX Euro 600 Index fell 4.0%, with falls in telecommunications (-5.1%) and utilities (-4.8%) shares. The German federal court paved the way for cities to ban or tax diesel cars, with the price of major auto shares reacting negatively, including Volkswagen (-9.0%) and Daimler (-4.4), whose Mercedes diesel SUVs may be impacted. In Asia, the Chinese CSI 300 Index was down 5.9%, Japan’s Nikkei 225 Index fell 4.5%, and Hong Kong’s Hang Seng dropped 6.2%. Global developed market shares fell 3.5% and emerging market shares fell 3.9% in local currency terms.
The economic and financial news continues to show that the world economy is picking up pace. The OECD, in its just-released update to its Economic Outlook, is of the same view. “Global GDP growth is estimated to have been 3.7% in 2017, the strongest outcome since 2011,” the OECD said, “with positive growth surprises in the euro area, China, Turkey and Brazil.” The OECD’s latest forecasts have also been revised upwards. It said that “The world economy will continue to strengthen over the next two years, with global GDP growth projected to reach almost 4% in both 2018 and 2019.”
Although the economic fundamentals have continued to improve, the outlook still faces some challenges. Despite the February sell-off, share valuations are still high, especially in the U.S.: While they are not as pricey as they were going into the “tech wreck” of the early 2000s, U.S. equities are priced at 17.2 times expected earnings, a reasonably high level by historical standards. Shares are consequently vulnerable to any earnings disappointments.
There is also the potential for unpleasant geopolitical surprises, particularly given the unpredictable outlook for U.S. economic and foreign policy.
The most likely scenario is that the progressively strengthening state of the world economy will underpin ambitious profit expectations, and equities will benefit. But it also seems likely that 2018 will spring more February style volatility along the way as investors periodically reassess the state of the global business cycle and, in all likelihood, confront geopolitical surprises they are not fully prepared for.