The S&P/ASX200 Accumulation index finally put in a surge in October, with a gain of 4.01% in the month, shaking off a 6 month malaise.  Twelve month numbers are back up to 16.13% almost double our expected annual 12 month returns of around 8.5%.

Global Markets

Global markets also had a good month, with gains of 4.29% and a rolling 12 month return that tops the charts at 22.53%. Emerging Markets posted even higher returns with a gain of 5.92% in October, and one year returns of 25.49%. Although vulnerable to negative events in the short term, Emerging Markets remain somewhat cheaper than developed markets, with arguably more to gain from structural reforms and demographic changes.

Bond Markets

Bond markets improved in October, posting a gain of 1.09% on average. However one year gains are still muted at 1.64%, held back by long bond yields that are drifting higher, albeit at a slow pace.  Our preferred exposures in this sector are high grade corporate debt, with short maturities.

Official Cash Rate

The Official Cash Rate as controlled by the Reserve Bank, and affecting term deposit rates, don’t appear to have much potential at all for increases in the next twelve months.  We have some concerns that if US rates do continue higher with the expected 3 or 4 rate rises in 2018, the downward pressure on the AUD will continue, creating some inflation in tradeable goods.

Real Estate Markets

The A-REIT sector (real-estate trusts) saw gains of 2.25% for the month of October. This sector is still feeling the headwinds of potential higher long bond rates, though we think that risk is over-rated presently, and also the onslaught of Amazon which may (or may not) further hollow out the Australian retail sector. Being somewhat contrarian, we feel this sector is shows much better value now than it has for a couple of years.  Real estate has many different sub-sectors and geographical differences, so please don’t mistake our view of fair value in parts of the A-REIT sector for any kind of enthusiasm about residential markets.  We think it is fair to assume that for the most part the residential sector has peaked.