Global share markets stronger
Arguably the biggest driver of share market gains in November was Donald Trump’s surprise victory in the recent US presidential election. Interestingly, fears of a Trump win in the lead up to the election had caused stocks to fall quite sharply, as investors dumped risk assets amid uncertainty over what a Trump presidency might mean for financial markets. However, this negative sentiment reversed immediately following the election, with investors betting that Trump’s promises to cut taxes, ramp up infrastructure spending and ease regulation will help drive company profits higher. As a result, stocks surged, with financials and materials among the key beneficiaries. Share markets also benefited from increasing speculation OPEC’s members would agree a deal to curb production (which they ultimately did) and further encouraging economic data out of both the US and China. Limiting the advance were expectations the US Federal Reserve (Fed) will raise interest rates when it next meets in December, a sharp selloff in bond markets and some cautionary comments from the European Central Bank regarding the region’s outlook. Stocks were also impacted late in the month by profit taking.
At the country level, all of the major US indexes – the S&P 500, the blue chip Dow Jones Industrial Average and the tech-heavy NASDAQ – hit record highs in November. Japanese and Chinese stocks were also stronger for the month while Europe was relatively flat and the UK was lower.
Australian shares were also stronger in November; the local market benefiting from the general optimism following Trump’s election win, stronger commodity prices and OPEC’s historic deal to cut output. Limiting the local market’s gains was a sharp selloff in the higher-yielding segments of the market, Fed rate hike expectations and profit taking toward the end of the period.
RBA leaves rates on hold
The Reserve Bank of Australia (RBA) left the official cash rate unchanged at a record low 1.50% following its early November board meeting and maintained a neutral stance on monetary policy. The decision came as the risks of a resurgent property market – particularly in Sydney and Melbourne – outweighed the RBA’s concerns over lower inflation; the latter, of course, having been a key factor in the bank’s two previous rate cuts. The RBA also kept its forecasts largely unchanged in November, with economic growth this year expected to be between 2.5-3.5% and headline inflation at 1.5%. Importantly, the RBA believes the economy “is growing at a moderate rate” with “the large decline in mining investment being offset by growth in other areas, including residential construction, public demand and exports.” Taking account of the available information, and having eased monetary policy at its May and August meetings, the bank concluded its meeting by saying that “holding the stance of policy unchanged…would be consistent with sustainable growth in the economy and achieving the inflation target over time.” Pending any significant deterioration in upcoming key economic data, particularly inflation, there’s a good chance we may have reached the bottom of the RBA’s current tightening cycle.
Australian dollar rises
The Australian dollar (AUD) made modest gains in November; the local currency benefiting largely from higher commodity prices – notably iron ore, copper and oil – and the RBA’s decision to maintain its neutral stance on interest rates. Limiting the gains was a stronger US dollar (USD), which rallied on a combination of Trump’s election win and expectations improving US economic data will see the Fed raise rates in December. The AUD rose 5.6% against the Japanese yen and 1.3% against the euro. It fell 4.1% against the British pound and 1.8% against the USD. The broader Australian Trade-Weighted Index1 closed the month up 0.5%.
At Russell Investments, our favoured scenario for global equities at the beginning of 2016 was for mid-to-low single-digit returns and a gradual rise in long-term interest rates. Whilst this remains the case, we believe low single-digit returns are more likely.
Volatility looks set to continue over the remainder of the year and into next as investors grapple with the transition of power in the US, a likely Fed rate hike in December and the longer-term impact of Brexit.
Relative to the US, we currently believe other developed markets represent better value; though we would like to see further signs of earnings growth and more confidence in the economic growth outlook. Emerging markets were thrown a curve ball by Trump’s election victory, as the possible rejection of international trade deals and the threat of higher global yields are both expected to have negative impacts. Although we believe the sector represents the best value of all the regional share markets on a longer time horizon, we’re nonetheless cautious about buying any dips.
We have a neutral outlook for both government and investment-grade bonds as the bond market has become oversold since Trump’s win. However, this view is tempered by the fact that interest rates have remained depressed for quite some time. We feel bonds are still expensive and may face headwinds in the form of potential rising inflation and higher US interest rates. We also believe other expensive defensive assets such as listed property and infrastructure face similar issues due to their greater sensitivity to interest rate movements.
Overall, we expect global growth to remain positive though at a slower pace, with downside risks of further market selloffs. The next three to six months is likely to be a modest growth environment as markets adjust to higher levels of interest rates and potential changes to monetary and fiscal policy (particularly in the US), which is likely to represent new pockets of opportunities and risks compared to the prior 12-18 months.
1 The trade-weighted index for the AUD is an indicator of movements in the average value of the AUD against the currencies of our trading partners.