International share markets rose modestly during September, further adding to the gains made in July and August. The result was a strong first quarter to the new financial year with international shares being the strongest performer. The US and Japan drove most of the gains in international shares, while strong gains in the Chinese market have been well received following a difficult year in the region. The Australian share market was down 1.3% in September, while listed property and Australian bond markets also had poor months due to rising bond yields. Despite these poor short-term results, longer-term returns remain solid.
The Chinese market is down around 13% this year, despite a recent recovery. The fall in Asian markets generally has been driven by weaker currencies and concerns over the US/China trade tariffs. The trade dispute between the United States and China appears to have some way to go before being settled, so instability in Asian share markets may continue.
September saw more tariffs announced by both countries and the next round of trade talks cancelled. Despite all the discussion about the issue, most investors consider the current tariffs to be relatively minor. It is the potential for far more powerful tariffs (and other trade-restrictive measures) in the coming months that weigh on investors’ minds.
Despite the threat of a full-blown trade war, some major economic regions continue to do very well. This includes the US, which is growing with low levels of inflation and unemployment. The US Federal Reserve’s decision to increase interest rates by 0.25% to 2.25% has not caused any concerns and reflects the strength of the US economy. The Federal Reserve has outlined that it expects to continue to raise rates into 2019, taking interest rates to over 3% by the end of 2019. This is in contrast to Australia where interest rates are expected to remain at 1.5% for another year.
The US share market, specifically the S&P 500 Index, hit yet another high in what has become a reassuring reminder of the strength of the US economy and investor confidence. The chart below highlights the sustained growth achieved by the S&P 500 Index over the past 2 years and has increased by about 10.5% so far this year.
The European economy continues to muddle along with improving unemployment and very low levels of interest rates. The UK remains in tense Brexit (Britain’s exit from the European Union) negotiations, which could affect European markets if Europe continues to reject the UK’s plans to exit.
Overall, the global economy is improving, particularly in the US and movements in most markets were generally modest. Recent share market volatility shows there are some short-term risks given US/China trade discussions, Brexit and concerns in Australia over the finance sector following the Royal Commission. As always, a well-diversified investment approach and long-term strategy are key to riding out any short-term turbulence in markets and avoids locking in losses by over-reacting to headlines.
1 Source: Bloomberg Finance L.P. Past performance should not be regarded as an indication of future performance.
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