Market Commentary – December 2018
The ASX200 index recorded a negative 9% this quarter closing at 5,646. The falls have derived from International events including trade war tremors, slowing growth in China and ongoing machinations of Brexit in Europe.
Notwithstanding the local sharemarket movement the Australian economy remains in good shape and is expected to grow more than average this year. Unemployment continues to fall slowly pushing up Australian wages and inflation remains stable, slightly below target levels. The current area of concern in the Australian economy remains house prices with both Sydney and Melbourne house prices retreating to 2016 levels however, the Australian consumers appear to be spending more than ever with Christmas 2018 spending estimated at a record $51 billion.
FirstWrap – investment performance
It was a difficult quarter for the funds with exposure to Australian and global shares with both of these sectors experiencing significant downside volatility. The Bennelong Concentrated Australian equity and BlackRock Concentrated funds underperformed the market. The Penganga Australian equity fund faired better with a conservative approach holding 20% cash within the fund.
In the global sector exposure we took the initiative to remove the Pengana Global Small Caps fund at the end of October and retain these funds in Cash. The additional cash from this sale along with cash held in the managed funds and portfolios took the total cash holding to between 15%-20% percent for the investment strategies.
Cash during this volatile period has assisted the portfolios in outperforming the Australian and global markets. We will look to reallocate this cash across the existing Australian and global funds which we believe are now at an attractive price and expect to recover over time.
The AMP and Australian Unit property funds as well and the AMP Core Infrastructure provided positive returns and continued to provide diversification within the portfolios. These funds equate to a 30% weight of the portfolios. These investments provided positive performance in a quarter in which equities suffered negative returns.
We are comfortable with the selected funds within the investment strategy. We will look to reweight the portfolios in the coming weeks and reallocate the cash into the investments options that have repriced and have the potential to recover the losses experienced over the quarter.
- The Reserve Bank of Australia (RBA) maintained the cash rate at 1.50% p.a.
Markets are indicating this is unlikely to change before 2020
Board Members of the RBA believe the next move is likely to be an increase
- The housing market softened further with Sydney and Melbourne auctions clearance rate below 50%
Banks continue to constrain credit growth through greater information disclosure and larger deposits requirements
House prices on average are equivalent to 2016
- In the labour market the unemployment rate has fallen to 5.1%
- Wage growth remains low and stable increasing 0.2% to 2.1% per year and the conditions are supportive in strengthening the trend
The Minimum Wage increased 3.5% in September and contributed a small boost to growth over the quarter
- The inflation rate fell marginally to 1.9% driven by a Global fall in oil price. RBA board members anticipate a gradual increase to around 2.5% over time
- The Australian dollar fluctuated over the quarter but finished unchanged at AUD$0.72
- US Stock markets recorded heavy falls this quarter with the DOW and S&P down 13% and 14% respectively
- US interest rates continue to increase, up another 0.25% in December to 2.5% p.a. members of the FED board will now take a more flexible approach to further interest rate changes
- A trade war between the US and The Rest of the World continues to destabilise markets with multiple countries increasing tariffs in retaliation to President Trump’s tariffs. The US and China have agreed a pause in tariff escalation until March to resolve the trade issues
- The Trump Presidency suffered a setback at the US mid term elections when the Democrats regained control of the House of Representatives
The Australian economy is performing reasonably well according to available statistics but not without risk. The risk is primarily based around the housing markets and the potential spill over effects particularly on the Australian consumer. The ASX200 has reassessed the economic outlook and Global events in recent weeks and repriced accordingly. However, the market is now trading on average long-term valuation metrics indicating the market is neither expensive or undervalued.