Markets continued their upward trend in February. Investors shrugged off concerns about trade wars and political instability in Europe and were optimistic that China’s continued growth would support the Australian economy. International share markets did very well thanks to a broad-based rally in both emerging and developed markets, while weakness in the Australian dollar helped boost returns for international shares to 5.6% over the month. Australian shares returned 6.0%, with the financial sector gaining more than 9.0% following the release of the Royal Commission final report. Fixed income also performed well, returning 0.9%.
Share markets continued to grow throughout February, resulting in gains of nearly 10.0% so far this year. During February, the US share market gained more than 3.0%, Europe over 4.0% and Australia 6.0%. The most spectacular gains however were seen in mainland China markets which rallied by more than 14.0% (see chart below), recovering much of last year’s losses.
Easing tensions with China and their major trading partner the United States (including the delay of tariff increases that were scheduled for March) was the main driver of the strong Chinese market. Another influence was expectations of government stimulus which arrived in early March in the form of a reduction to the value added tax (VAT). Although the Chinese economy is growing at roughly 6.0% per annum, a pace which is the envy of major markets such as the US and Europe, growth is now at its lowest level in decades and is expected to slow further. The Chinese government has been quite effective at minimising the impact of slowing growth by stimulating the economy to boost share markets.
Based on the dramatic rally so far this year, it seems investors have forgotten the issues which caused anxiety in the December quarter. The rally has been driven by the US Federal Reserve indicating it will hold off on raising interest rates, more positive news on the US-China trade negotiations and a ‘Hard’ Brexit outcome looking less likely. All these issues were positive for future corporate earnings, but of course investors remain somewhat cautious as this could change in the coming months.
For well over two years the impending exit of the UK from the European Union (EU) has been part of the landscape, but the deadline to leave on 29 March is edging closer. Trade terms, including the question of what to do about the Irish border have not been resolved and it seems likely the exit will be delayed until they are. The EU has indicated support for extending the deadline, provided it delivers a better outcome, but negotiations will continue right up to the end of March. Despite the drama surrounding Brexit the UK economy is in surprisingly good shape, particularly compared to continental Europe. UK unemployment has remained steady, inflation remains low and corporate profits are solid.
2019 has started with spectacular returns across global markets, following a disappointing end to 2018. This highlights the volatility that comes with investing in share markets and acts as a reminder to look through short-term fluctuations and focus on your longer-term goals. The final report from the Royal Commission was taken well by the share market with the ‘big 4’ banks enjoying boosts to their share prices. Domestic economic data remains reasonable with unemployment remaining low at 5.0%, inflation under control and business still investing for growth. The housing market in Sydney and Melbourne remains a concern, but a gradual fall in prices can be managed adequately.
There will continue to be bouts of uncertainty with Brexit and the US-China trade negotiations coming to a head soon, but the current environment remains positive overall for investment markets over 2019. Well diversified investments remain a good way of reducing risks and can provide opportunities to take advantage of any weakness in markets going forward.
1 Source: Bloomberg Finance L.P. Past performance should not be regarded as an indication of future performance.
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