Global share markets stronger
Global share markets made strong gains in November.
Contributing to the gains were yet more encouraging US earnings results, with the likes of Apple, Cisco and retail giant Wal-Mart all providing updates which beat analysts’ lofty expectations.
Stocks also benefited from an upward revision to third-quarter US economic growth, fresh hopes over Donald Trump’s proposed tax reform and news US consumer confidence jumped to its highest level in almost 17 years. The latter is particularly important given the US consumer accounts for around 70% of all US economic activity.
Sentiment was further boosted by a series of improving economic data in Europe and Japan, stronger oil prices and expectations Trump’s nominee to lead the US Federal Reserve (Fed), Jerome Powell, will maintain his predecessor’s path of gradual interest rate hikes. Limiting the advance was some softer Chinese economic data, political uncertainty in Germany and an element of profit taking in the wake of recent strong gains.
Stocks were also negatively impacted by renewed missile testing in North Korea; the rogue nation claiming it has successfully developed an intercontinental ballistic missile that puts the US mainland firmly in range of its nuclear weapons.
At the country level, US stocks continued to hit record highs in November with the Dow Jones Industrial Average in particular cracking the 24,000-point mark for the first time in its history. Japanese and Chinese stocks were also up for the month, while share markets in the UK and Europe were lower.
Australian shares were also stronger for the month. The local market benefited in part from a series of encouraging domestic economic data that included a strong rise in business confidence and a drop in the unemployment rate to just 5.4%; its lowest level since 2013. Sentiment was also buoyed by stronger commodity prices, some upbeat comments from several Reserve Bank of Australia (RBA) officials on the domestic growth front and another positive lead from major overseas markets.
Limiting the gains was some disappointing Chinese economic data, fresh geopolitical concerns and weakness in three of the ‘Big Four’ banks following the announcement of a Royal Commission into the banking, superannuation and financial services industries. CBA was the exception.
Interest rates on hold
The Reserve Bank of Australia (RBA) left the official cash rate on hold at a record low 1.50% in November while maintaining a relatively upbeat assessment of the local economy. There were no material changes to the Bank’s post-meeting statement. Officials still expect annual growth to average around 3.0% over the next few years, the labour market to continue to strengthen and inflation, which remains below the RBA’s 2-3% target range, to remain low for some time; though it is expected to pick up gradually as the economy strengthens.
Meanwhile, the Bank maintained its view that subdued wages growth and high levels of household debt are likely to impact household spending, and that a stronger Australian dollar (AUD) would likely result in a slower pick-up in economic activity and inflation than is currently forecast. The RBA concluded its latest meeting by saying that, “taking account of the available information, the Board judged that holding the stance of monetary policy unchanged…would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
At Russell Investments, we believe the RBA is underestimating inflation. We expect the Bank to raise interest rates once in the first half of 2018 and then again toward the end of next year. This makes us more hawkish than the market consensus, which currently is for just one rate hike in 2018.
Australian dollar falls
The AUD fell for a third consecutive month in November, driven largely by speculation softer wages growth and inflation data will mean interest rates stay lower for longer, a further narrowing in the yield differential between Australian and US bonds, and the political uncertainty stemming from the ongoing MP citizenship fiasco. Limiting the currency’s decline were stronger commodity prices and some upbeat RBA rhetoric.
The AUD fell 3.1% against both the euro and the British pound, 2.2% against the Japanese yen and 1.1% against the US dollar (USD). Meanwhile, the broader Australian Trade-Weighted Index1 closed the month down 2.0%.
We expect volatility to continue through the rest of 2017 and into 2018 as investors contend with Donald Trump’s aggressive policy agenda, potential further Fed rate hikes, and potential normalisation of monetary policy outside the US.
Europe has benefited from improving earnings and receding political risks involving the spread of populism. Relative to the US, we still 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 last November, as the possible rejection of international trade deals and the threat of higher global yields were both expected to have negative impacts. However, emerging economies have shown resilience, even in the face of recent Fed tightening.
Whilst we believe emerging markets represent superior value relative to their developed peers on a longer time horizon, we nonetheless remain cautious about buying any dips.
Though bond markets have retraced some of their losses following the US election, we nonetheless maintain our neutral outlook for both government and investment-grade bonds. With interest rates still at historically low levels, we feel bonds are expensive and may face headwinds in the form of potential rising inflation and higher US yields; which could be amplified if the Fed decides to raise rates at a faster pace than expected over the remainder of this year and next, and if global central banks shift away from their accommodative monetary policy stances.
In terms of currencies, the prospect for US tax cuts, deregulation and increased fiscal spending, together with potentially higher US interest rates, could still lead to a rebound in the USD, however the timing and implementation of reforms is uncertain. Meanwhile, the future direction of the AUD is likely to continue to be influenced by movements in commodity prices, especially with the RBA expected to keep interest rates on hold in the foreseeable future.
Overall, we expect global growth to remain modestly positive through the end of the year and into next, with downside risks of further market selloffs as markets continue to adjust to potentially higher levels of interest rates and changes to monetary and fiscal policy, especially in the US.
Importantly, though, we believe financial markets will continue to provide further investment opportunities for our active management approach.
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.