April proved to be another solid month for both Australian and international share markets, adding to the strong returns we’ve seen so far this year. The Australian share market returned 2.4% for April but was outperformed by global share markets that returned 4.6%. Global returns came from optimism about the ongoing China/US trade negotiations, good profit reporting in the US and expectations that increases to US interest rates are some way off. Bond markets were slightly positive, returning 0.3%, which was lower than recent months. Global listed property markets had a negative return for the month, but over 12 months have had a very strong 20.0% return.
Evidence that the US economy is in very good shape continues to pile up and pushed markets higher. The US economy is growing at an annualised rate of 3.2% in the first quarter, nearly one percent stronger than expected. The manufacturing and services sectors are continuing to enjoy strong growth, and new jobs are being added at a healthy pace. A continued low inflation outlook has also provided a boost to share markets in 2019. Wage growth has started to pick up in the US (see chart below), but inflation in the US remains low overall which is keeping interest rates on hold for now.
If wages continue to rise, it will likely give the US Federal Reserve some reason to raise interest rates, but for now markets seem content that the possibility of rates increasing soon is quite low. Over the course of the month US shares rose by a little over 4%, bringing the total gains this year to over 18%.
European share markets experienced similar gains overall, with key markets such as Germany returning more than 7%. However, as has been the case in previous months, while the eurozone economy is stable it is looking far less robust than the United States. The manufacturing sector is lacklustre and unemployment remains higher than governments would like. This all leads to the expectation of interest rates in Europe staying very low for some time. As expected the European Central Bank left rates on hold in April.
The flow of Brexit and UK related news died down somewhat since the deadline for Brexit was postponed to 31 October. The economy however continues to show signs of surprising strength, with manufacturing strengthening further and unemployment at a record low 3.9%. Some of these results may be attributed to consumers bringing forward spending in the lead up to the nation’s withdrawal from the European Union, so it will be interesting to see how things develop over the next few months. The UK share market returned 2.3% over the month.
Economic data out of China remained good over the month with the manufacturing sector continuing to strengthen. However, Chinese shares underperformed compared to major developed markets because of concerns about the slowness of trade negotiations with the US and some withdrawal of spending by the Chinese government. Historically one of the main strengths of the Chinese economy is its tendency to receive meaningful government support when necessary, and in a timely manner.
Although markets were spooked in April, it’s worth noting that just as support can be withdrawn rapidly from the economy, so too can it be added back quickly, and overall the economy is still on track to grow at a much faster pace than developed economies.
After a disappointing December quarter, consistent strength and solid returns in share markets over the first four months of 2019 surprised many. This highlights the importance of setting and sticking to a long term investment strategy during bouts of volatility.
Given the sharp rise in share markets so far in 2019, they are susceptible to a correction in the short term, but the longer term picture still looks reasonable with corporate profits in the US remaining strong. The Australian share market may be a bit more volatile leading up to the Federal election, but no matter who wins, it is not expected that it will have a material impact on share markets over the medium term.
1 Bloomberg Finance L.P. Past performance should not be regarded as an indication of future performance.
2 US Bureau of Labour Statistics, Bloomberg Finance L.P.
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