By CHRIS RYLANDS
PRINCIPAL, WEALTH ADVISORY
Chris.Rylands@williambuck.com

Cash

At its August 2nd meeting, the Reserve Bank of Australia (RBA) decided to lower the cash rate by 0.25% to 1.50%, marking yet another record low. Since it began its cutting cycle in November 2011, the RBA has brought the cash rate down from 4.75%, and has kept it below 3.00% for 38 consecutive months.

The cash rate was left unchanged at 1.50% at the September meeting. While economic growth remains ok, the Consumer Price Index (CPI) / Inflation figure for the June quarter recorded an annual increase of only 1.0%. This reading was below the 2% target rate and reinforced the RBA’s concerns about weak price growth following the March quarter figure of 1.3%. September’s rate decision was the last with Glenn Stevens at the helm, with incoming Governor Philip Lowe to taking over as of 18th September.

Source: Reserve Bank of Australia

The RBA again decided to leave interest rates unchanged on October 4th, with markets effectively pricing no chance of a cut. On the housing front, the RBA appeared relatively relaxed, noting the slowdown in lending growth and turnover, as well as the new supply of apartments coming online which is expected to slow prices and rents.

The RBA was again unmoved at its November meeting, once again leaving the cash rate unchanged at 1.50%. Financial markets had all but priced out the chance of a cut, anticipating that the board would hold tight following its two cuts in May and August.

The highest term deposit rates we currently have available are 2.65% across 3 months, 3.00% across 6 months and 3.00% for 12 months.

Fixed Income

Global bonds, as measured by the Barclays Global Aggregate TR Index, returned 0.05% in August as yields remain at low levels throughout the world. Australian bonds, measured by the Bloomberg Ausbond Composite 0+ Year Index, returned 0.42% in August.

In September, global bonds returned 0.07%, with long-term yields easing from their mid-month highs. Early in the month, investors might have had every reason to anticipate a United States rate hike after comments by the Federal Reserve (Fed).  Come 21st September, there were enough excuses to remain on hold, although the Fed’s statement reiterated that the case for a hike had strengthened. Australian government bonds returned -0.31% in September as the 10- year yield pushed higher from 1.82% to 1.91%, hitting a mid-month high of 2.17%.

Global bonds, returned -0.90% in October in Australian dollar ($A) terms. Yields had begun to climb from their record lows, prompting investors to ask if the turning point in historically low bond yields had finally arrived. Australian bonds returned -1.28% in October as the 10-year yield broke out from 1.91% to 2.35%.

Australian Equities

The Australian market took an early stumble in August following the RBA’s rate cut; with investors concerned about what message low rates were saying about the health of the economy. The S&P/ASX 200 Index was down -2.18% following the announcement, before sliding further late in the month to finish at 5415 points. Returns on Australian shares were -1.55% in August, taking the 12-month return to 9.30%. Small cap shares were -1.56% in August, in line with large cap results, with returns over 12 months reaching 26.55%.

The Australian market continued its slide into the start of September, before recovering strongly in the second half of the month. Returns on Australian shares were a modest 0.48%, supported by large gains in mining shares, as well as the OPEC oil deal, which had a significant impact on energy market sentiment. Smalls cap shares were 1.53% higher during the month.

The Australian market sold off in October in anticipation of the upcoming US election uncertainty. The S&P/ASX 200 followed US markets down, with the index ending the month at 5229. All sectors suffered, with the exception of materials, which was able to add to large gains over the past five months. Small caps returned -4.72% in October, underperforming large cap shares, with the 12- month return moving down to 14.90%.

International Equities

Global equities were generally calm in August, providing investors with the opportunity to pause for breath in the lead up to the US election. Equity indices were mostly flat as investors took time to assess the economic situation and to await guidance from central banks. Global shares, measured by the MSCI World TR Index (AUD), returned 1.27%, which was matched by the US market.

Global indices were down in September as volatility made a brief comeback, driven by monetary policy uncertainty. Global shares returned -1.22% whilst the US S&P 500 Index returned -1.77%. Market reaction to the first debate between presidential nominees Hillary Clinton and Donald Trump saw the former come out on top. Financial markets remained nervous about the possibility of a Trump presidency.

Global shares were also down in October, with a gradual sell-off in the US placing renewed pressure on European markets. The US election also replaced Brexit as the geopolitical event to watch. Despite the media frenzy, markets were remarkably stable in October, however this would soon change in the lead up to Election Day.

Alternatives – Hedge Fund strategies

Hedge Fund strategies tracked sideways over the September Quarter. Hedge Fund strategies are included in a portfolio for diversification and for the traditionally low correlation to other asset classes, particularly shares.  It was no surprise to see these strategies post somewhat mixed results in September amongst a choppy quarter for global share markets.  Over the September quarter, a basket of diversified hedge fund strategies provided a return of 2.4%, with indicative performance for October of 0.62%.

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