“Choo! Choo!” What’s that you say? We’ll if you looked at the trajectory of the broad based MSCI All Country World index (of major global shares) over the first 6 months of 2017 (heck even the last 1.5 years), you could surmise that that would be the sound of the gravy train, as it continued to steam ahead to even higher all-time highs this June quarter! Never mind the US air strikes on Syria, the North Korean missile launches (what’s that like, one a week or something? we’re losing count with this guy!) or a political version of the “Ripley’s Believe Or Not” circus pitching tent in Washington (with shows all day, every day). On the face of it, the equities bull markets looks to be stampeding on.
American markets, as measured by the Wilshire 5000 index went up another 2.4% for the quarter finishing at another...you guessed it...all-time high! Stocks comprising the tech heavy NASDAQ index once again led the way as the U.S. unemployment rate declined to its lowest level since 2001. Drilling down to a sector level revealed that financials and industrials outperformed the benchmark indices. The fact that the White House is now Goldman Sachs alumni-heavy on the personnel side, might have a little something to with the performance of the former. Energy and consumer staples, meanwhile, we’re hardest hit.
Europe overall, finished flat this quarter but not before it too hit another...do we have to say it again? Investors are continuing to embrace the growth prospects and lower stock valuations across the continent. The establishment friendly outcome of the French presidential elections only served to inject further conviction into the region. It must be noted that during the June quarter, U.S. stock funds experienced their largest withdrawals in more than 18 months while funds invested in western European stocks enjoyed their largest two-week inflows in more than a year!
However, let’s have a quick look at Europe’s “problem children”, who’ve spent the better part of the last couple of years creating all the wrong headlines. For the quarter, the Greek benchmark equities index was up 23% and has now recovered some significant ground since a crash in early 2016. It’s problems though (you know that one about paying up a few loans) have not gone away. It was a similar story with Italian equities despite the very recent collapse of two of its banks. Spain, after years of being in the economic doldrums (with its one-time eye watering 26% unemployment rate), is apparently growing again. And what of America’s favourite poster boys for election hacking? Russia may have dipped 5.8% this past quarter, but that’s not going to take any shine away from its benchmark index soaring 60% in the two years to the start of 2017. Clearly it’s going to take more than silly sanctions to outfox ol’ wily Vladimir and his merry band of billionaire oligarchs!
Bullishness was also rife across equities in emerging regions, Japan and Asia, with gains of between 4% to 7% for the quarter. Markets there shrugged off a downgrade in China’s credit rating and embraced the election of South Korea’s new president and his economic policies (South Korea was Asia’s best performing market during this period). A weak Yen continues to serve Japanese exports well, helping the nation meander on a slow route of growth, though inflation remains very weak.
Commodities, as measured by the Bloomberg Commodity Index, took a 3.2% dip and continued to remain heavily pressured over a multi-year horizon. Just when it looked like crude oil might have some reprieve, that all turned on a dime and went south 9% for the quarter. Oil is being hit further by a lack of market confidence in OPEC’s ability to overpower the resurgent US shale industry. Gold bandied about in a range and settled flat to the end June but was still up 8% for the first half of 2017.
Iron ore copped quite a whacking to the end of June literally shedding more than a third of its value. Nervous times indeed, once again, for our miners and state economies heavily dependent on the stuff in the ground.
Disappointingly, the ASX200 didn’t come down with a case of bullish fever but instead went down 2.4% for quarter and for the first half of the year, has not really gone anywhere (unless you are really wanting to count a 1% overall gain). A recent turn in iron ore and commodity prices and a federal bank levy would have bitten into materials and financial stocks, both very outsized residents of our benchmark index. But step back and look over the past 12 months and ye shall find a gain of just under 10%. Not too shabby.
The local health care sector was, head and shoulders, the star performer for the first half of the year - up 25% alone! Utilities and general industries were next best. On the flip side, discretionary retail and telecommunications were the biggest drags on the overall share market. Fears of Amazon’s arrival may be weighing on the former. Either that or the sector seems to be doing a pretty good job shooting itself in the foot what with many traditional retail models attempting to persist in Australia. BHP went down a bit over 3% while Rio Tinto managed to move up 4.6%. CBA dipped 4.2%, while ANZ and Westpac were down an eyebrow raising 11% and 13% respectively. As for the 2017 financial year, the star performers (for total shareholder return including dividends) were Qantas and Aristocrat Gaming. The beacons of crappy internet, Telstra and TPG, were gouged 15% each. With the unemployment rate now at a four-year low and inflation back into the target band, it seems less likely the RBA will cut rates again later this year.
The Australian dollar (vs. the USD) went for a ride this quarter, dipping 3.5 cents at one point but managing to finish flat at just under 77 cents (to the USD). It remains up 6.7% for the year. A positive carry (the net gain in yield between the interest rates on the AUD vs other currencies), local interest rates in a holding pattern, better than expected Chinese economic data and dampening expectations of further U.S rate rises (thereby weakening the USD dollar) are helping to prop our dollar.
BRPW had pretty positive finishes across the board for the June quarter. Fixed income may have only gone up just under a percent, but infrastructure and healthcare property allocations notched favourable returns of 4.7 % and 5.3% respectively. Global large and small cap share managers came in at about 4% while Asian exposures notched 6% on average. Micro cap share managers were our best performers on the domestic front. The only detractors this time around were our alternative exposures – down nearly 2% - but which only a handful of our higher risk profiled clients have a small exposure to.
If we were simply going by what’s been creating headlines on any given day, then the answer to this question is, unequivocally...Trump! Cue to roll your eyeballs. Who’d blame you. With the world’s biggest economy’s finances increasingly and disconcertingly tied to its government policies and its administration yet to achieve any meaningful legislative progress (against the very many promises made on the campaign trail), investors may be increasingly deterred by the inability of the U.S administration to push through tax reforms, de-regulation and infrastructure investment. Even the failing attempts to push a vote through to repeal and replace an “imploding Obamacare” (as Agent Orange very fondly likes to point out on every other tweet), will continue to have a material impact on America’s massive healthcare and insurance sectors and companies. Though open for debate, one could postulate that a major reason the markets overall have been on a tear since November 2016 was simply the fact these promises would be translated into an expansion of spending and consumption. However, enthusiasm alone never got any one to the top of Everest. At some stage investors will start to separate fact from fiction and when they (typically) do so in droves, it is these moments we need to be prepared for.
Outside of juvenile tweetstorms, we have the China debt bubble rearing its head. With shadow banking credit having grown at an astonishing rate, it remains to be seen how the Chinese government tames institutions that exist outside their purview i.e. in the shadows. This kind of credit growth makes it likely that many loans are going to marginal borrowers or unviable projects. A recent Oxford University study that evaluated 65 major road and rail projects in China concluded that just 28 per cent could be considered "genuinely economically productive"!
Why the sombre overtone you might say? We don’t take lightly, the role of being the custodian of all or part of your family’s wealth. A myopic focus on quality and diversification along with an extra dollop of conservatism in these heady times (even if you are more aggressively profiled), will go a long way to helping with that. Like always, we are at your service to discuss at any time.