The major asset classes performed well in March, with the local equity market delivering a return of +3.3%, outperforming international markets by a considerable margin. International equities posted a healthy +1.8% return as investors were encouraged by positive data out of the major economies. The local equity market rally was fairly broad based, however a handful of sectors including the Australian listed property sector (+0.6%) missed out. Nonetheless, this sector outperformed the international listed property market which returned -1.2%. Australian bonds performed positively, outperforming the global bond market which was near flat for the month.
The US took the limelight again in March. President Trump introduced a Bill designed to replace Obamacare which was then withdrawn late in the month. Combined with the recent cancelled travel ban, this caused investors to question Trump’s ability to deliver on his key campaign promises. Much of the equity market rally seen in the December quarter was driven by expectations of fiscal stimulus in the form of tax cuts and infrastructure spending, making the market sensitive to signs of disappointment on this front. Offsetting this was strong employment and GDP data which exceeded expectations.
Consumers are also unusually upbeat about the economy. This is evidenced through the Conference Board Consumer Confidence Index which rose to 125.6 at the end of the month. As can be seen from the chart over the page, this index is now well above pre-GFC levels, and at its highest index level since December 2000. These factors bolstered the equity market, the S&P 500 returning +0.1% over the month and 17.2% over the year.
Still in the US, the other major news item in March was the Federal Reserve’s decision to increase the interest rate by 0.25% to a range of 0.75% to 1%. This move was well anticipated, however the tone of the Federal Open Market Committee’s (FOMC) media release provided investors with confidence that the FOMC was in favour of maintaining low interest rates, resulting in bond yields falling. At the end of the month, 10 year US government bonds traded not far from where they did at the start, however there was considerable volatility during the month.
In Europe, estimated inflation in February hit the European Central Bank’s (ECB) 2% target for the first time since 2013, up from the January reading of 1.8%. The ECB held their interest rates unchanged and raised their GDP and inflation forecasts for the year, signalling that they are becoming more concerned about inflation and may increase rates in the future. On the political front, UK Prime Minister Theresa May has formally triggered Article 50 (the legal document concerning withdrawal from the European Union (EU)). The UK now has a period of up to two years to negotiate deals (including trade) with the EU. Also in Europe, the Dutch general election was held which resulted in Prime Minister Mark Rutte’s party losing seats but remaining the largest party in the House of Representatives. As late as last month, Geert Wilders’ Party for Freedom had been expected to secure the most seats, however February and March saw a waning in popularity. The Dutch election was watched closely, with many seeing potential success by the Party for Freedom as continued support for ‘populist’ politics. European equity markets performed very well over the month, with the Euro Stoxx 50 up by 5.7%, dramatically outperforming the US market.
In Australia, fourth quarter GDP growth was up by 1.1%, avoiding a technical recession after the negative third quarter result. Retail sales rebounded in January from the prior month, driven by strong growth in hardware, building and garden supplies. Setting a more sombre tone was the unemployment rate which unexpectedly jumped 0.2% to 5.9%. The number of employed persons fell for the first time since September, dropping below the high of 12 million achieved last month. On the policy front, the Reserve Bank of Australia (RBA) kept the Cash Rate at 1.5% as expected. The RBA remained mildly optimistic on the domestic economy as a result of the recent recovery in commodity prices, but remained concerned about the domestic residential housing market.
Although equity markets remain buoyant, the underperformance of US equities during March signifies a cooling in investor sentiment and an acknowledgement that President Trump’s ability to influence economic outcomes is not boundless. Thankfully, fundamentals in most developed and developing economies remain strong, providing a partial basis for the relatively rich valuations in most markets. The Australian economy also remains strong, however the recent softening in the job market leaves it more exposed to external risks such as a potential weakening of the Chinese economy. We look forward to providing you with an update on markets and economic conditions next month.
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