By CHRIS RYLANDS
HEAD OF RESEARCH,
PRINCIPAL, WEALTH ADVISORY

Chris.Rylands@williambuck.com

Cash

The Reserve Bank of Australia (RBA) left the cash rate on hold at 1.5% for the three months of July, August, and September.  At its August meeting, the RBA noted that inflation continues to run below the 2% target, however given higher electricity and tobacco prices, the RBA is expecting CPI to boost in the coming months.

As the same decision was handed down in September, it was noted lower petrol prices have contributed to lower inflation, with prices at the pump down 15 cents per litre (nationally) since early June. For the October meeting, the bank acknowledged an improvement in non- mining business investment, as well as positive business sentiment that has led to higher levels of capacity utilisation. However wages growth and core inflation remain low, and housing debt continues to outpace growth in household income – one of the main concerns of the RBA. Amongst this concern, it was good to know that a gradual pick- up in GDP is occurring.

Increase in non- mining investment                                                                                             Increasing household debt 

In the US, the US Federal Reserve left their funds rate on hold at 1.25% for their July and September meetings, also noting below- target core inflation.

Fixed Income

Global yields were mixed in July with long- term yields in Europe rising and spreads narrowing, versus US and UK yields finishing down slightly. In Australia, the 10- year Treasury yield rose from 2.66% to 2.68%. In August we saw some compressing of global yields as geopolitical tensions chased investors into safe haven assets such as bonds and gold. The Australian 10- year Treasury yield was up again, rising to 2.71%. Global yields moved higher in most developed markets throughout Sept; the UK Gilt, German Bund, and US yields all rose. The Australian yield also rose (yet again) to 2.84%.

 

Australian Equities

The Australian stock market had a flat month in July, posting a 0.01% fall. Gains in the Materials and the Financials sectors supported performance, with ANZ gaining 3.17%. Healthcare was down despite adding 23.48% in the first half of 2017.

Australian Equities were flat again in August, however this time returning a positive 0.71% and largely dependent on a price surge in commodities. Energy and Consumer Staples sectors posted gains of 6.07% and 5.94%, respectively.

In September, domestic equities entered its fifth month of flat or negative growth, returning -0.02% as commodity sectors pulled back. Healthcare was the leading performer for the month as it benefitted from a gain from CSL; the heavyweight announced increased capital expenditure in August, investors considering the company well positioned for growth. Telecommunications on the other hand was the worst- performing sector, falling -4.53%. Commonwealth fell 0.73% as it completed the sale of its troubled CommInsure business.

Australian equities have been strong month to date in October, with the key driver being renewed offshore interest rather than a change in the fundamental near term earnings outlook.

International Equities

For the month of July, global equities fell in Australian dollar (AUD) terms with Japanese and German markets being the main drag. US equities gained in US dollar (USD) terms but lost in AUD terms as the USD weakened. The Telecommunications and the IT sectors were the only US sectors to gain in AUD terms. The Eurozone fell 0.77% as gains in the Resources and the Insurance sectors helped stem the tide.

In August global equities made a turnaround and gained 0.85% in AUD terms, supported by Asia. US equities also gained in AUD terms, and so too did European equities, gaining 0.19%. In Europe the Resources sector continued its strong run from the month prior with our own stock holding, Rio Tinto, gaining 7.23%. Conversely Japanese equities fell whilst China was up 4.93%. Emerging markets were supported by Brazil and China.

International equities gained 0.68% in AUD terms for the month of September, supported by US and European markets. European stocks rose 4.28% with strong growth from energy producers, whilst US stocks gained 3.06% in AUD terms. Emerging markets rose 0.68%, predominantly supported by Chinese markets given Indian equities were down -2.3%. Japanese and Chinese equities rose 2.47% and 0.89%, respectively.

Global equites have largely tracked sideways during October, with reporting season in the US gathering steam and European equities supported by continual policy support from the ECB.

Alternative Strategies – Hedge Funds

The HFRX Global Hedge Fund Index $A returned -0.98% during the quarter, driven by gains in Equity Hedge and Event-Driven strategies. Trend following strategies remained in a holding pattern during the quarter, however performance during October has been noticeably stronger.

 

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