Australian shares rallied in November. The S&P/ASX 200 Accumulation Index was up 3.28% over the month, with the IT sector (+10.55%) making the biggest gains followed by Telecommunications (+9.45%) and Consumer Staples (+8.10%). The financial sector, (-2.01%) consisting mostly of the big four banks, took a hit as revelations of the Westpac AML breaches and capital raisings made investors even more wary of their near term outlook.
The return on Global shares was also positive (+4.42%) for the month showing that in spite of the concerns over weak consumption figures and the risks of the Trump vs Xi trade war, the market preferred to focus on the few positive signs that the current slowdown may be reaching an end.
Australian listed property (+2.31%) made up some of the losses of the prior two months. Our preference at present is for global REIT’s (-0.90%) where we have engaged a fund manager (within our managed portfolios) that was up 1.09% in a month when the passive index was down 0.90%. The active vs passive debate is alive and well here. So far in this game, passive managers have been kicking downwind to use a sports analogy. We expect the time is arriving soon when active managers will have their turn at kicking with the wind behind them.
|INDEX RETURNS AS AT 30 November 2019 (%)|
|1 month||3 months||6 months||One year|
|Australian Listed Property||2.31||0.75||8.97||26.97|
|Global Listed Property||-0.90||3.47||7.51||14.15|
|Australian Fixed Interest||0.82||-0.16||3.37||10.69|
|International Fixed Int||-0.20||-1.03||3.16||9.04|
|S&P/ASX 200 Accumulation Index|
|MSCI AC World ex Aust TR Index $A|
|S&P/ASX 300 Property Trusts Accum Index|
|FTSE EPRA/NAREIT DEVELOP NR INDEX (A$ HEDGED)|
|Bloomberg Composite 0 + Years|
|BarCap Global Aggregate Index Hedged AUD|
|Bloomberg Aus Bank Bill Index|
Fixed Interest markets have been mixed over the last three months. The Australian ten-year government bond started the month with a yield of 1.15%, spiked to 1.30% on 9 November, and then finished November back at 1.03% which assisted the gain in Australian fixed interest sector.
In global bonds there was a similar spike in the second week, but rates ended the month above the starting point. The US ten year bond started at 1.69% and finished at 1.77% which set the tone for small losses in the global fixed income market. Credit spreads narrowed slightly in November, which also provided a positive tailwind.
Geopolitical risks that dominated headlines in 2019 – such as the trade war – have been subsiding. If this fragile calm can persist throughout 2020, we should see a soft landing for global Gross Domestic Product (GDP) growth. The synchronised wave of dovish central bank policy in 2019, plus a confident consumer buoyed by strong employment markets, should be enough to prevent a global recession in major economies – for now. However, pockets of weakness remain, most notably in the manufacturing and industrial sectors. We believe inflation will re-emerge in 2020, as wage pressures build amid low levels of unemployment and tariffs add to input costs, or their removal triggers a surge in growth.
US Federal Reserve rate cuts in 2019 are helping the US housing market, adding an important support to the economy. Our expectation is for US GDP to grow at 1.9 per cent, assuming that Presidents Trump and Xi sign the ‘Phase 1’ agreement and suspend the escalation in tariffs. While Trump will continue to pressure the Fed to cut rates in the run-up to the election, the state of the economy and stock markets at all-time highs point to a pause in easing for now. Late-cycle dynamics appear poised to last for yet another year. We may well see a rebound in risk sentiment in anticipation of better news from manufacturing and export sectors, strengthening the case for inflation to pick up in the US.
European economies meanwhile should escape recession too, with around 1-1.5 per cent GDP growth. Against this backdrop, negative rates will persist in Europe, with bund yields trading in a range of -20 to -60 basis points. Bunds could move closer to zero if trade talks go exceptionally well, but positive yields seem unlikely while the European Central Bank remains in easing mode. If the trade war escalates again, we expect attention to switch to fiscal stimulus within individual countries. An EU-wide fiscal plan looks unlikely in the short term.
We expect Chinese growth to slow in 2020, but in a managed fashion thanks to targeted stimulus. Even with a resolution of the trade war, risks remain for the Chinese economy. Emerging markets (EM), which feel the impact of trade tensions most acutely, will be vulnerable to dollar strength and a more hawkish tone from the Fed. At present, monetary policy throughout EM remains accommodative and, in aggregate, EM economies are likely to generate solid growth in 2020. Even so, investors in emerging markets will need to remain selective and side-step idiosyncratic risks – in particular, populist unrest which has claimed several heads of state across emerging markets in the last 12 months.
Domestic and international political risks remain the most significant tail risk for 2020, in our view. Central banks, having carried the baton almost as far as they can for the last decade, look increasingly spent. How governments now confront questions of growth, inequality and demographics will be key for investors over the next decade.
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