While not quite as strong as October, both share and bond markets performed well in November. In fact, all asset classes had a positive month. International share markets returned 3.2% in Australian dollar (AUD) terms, however individual markets were mixed. For example, the US was 3.1% stronger, while Europe was 2.8% weaker. The Australian share market underperformed compared to international markets but was a healthy 1.6% stronger over the month. Global property markets were strong, returning 4.5%, while the Australian bond market returned 0.9% due to slightly lower bond yields resulting in capital gains.
November proved to be yet another encouraging month on the economic data front, and overall share markets responded accordingly. That’s not to say that it was all smooth sailing however, as the European market had a negative return mostly due to uncertainty caused by Brexit (Britain’s exit from the European Union (EU)) negotiations. However, with interest rates in Europe remaining near zero and the European Central Bank continuing with its quantitative easing program (essentially a program of increased spending designed to stimulate economic growth) well into 2018, it is expected that this will be a temporary set-back for European shares.
Other economic news out of Europe showed that French and German manufacturing indicators look solid, with Germany, in particular, looking well placed to continue its strong economic growth of recent years. Inflation in Europe remains low and the region arguably has plenty more ‘fuel in the tank’ in terms of potential growth in the medium term. Certain issues (e.g. Italian bank weakness) may cause some volatility in the short to medium term, but overall we believe there are many reasons to be optimistic about the region. In the UK, inflation hit 3.0% for the year to October in line with Brexit-induced weakness in the British pound. Much is still unknown about the impact of Brexit and as expected this is having a negative effect on both business and consumer confidence.
The US economy continues to go from strength to strength with job creation remaining positive and the unemployment rate falling to a very low 4.3%. The US Federal Reserve is expected to gradually increase interest rates over the coming year to control inflation, but this should not have a negative impact on share markets in the near term.
In Australia, the Reserve Bank (RBA) left the cash rate on hold at 1.5% for the 16th month in a row, as expected. Markets continue to factor in one rate hike late next year, but the likelihood of this remains very uncertain at this stage and will depend on the employment and inflation data over the course of 2018. The RBA’s ‘steady as she goes’ path saw bond yields dip, and the Australian fixed income market perform well. Retail sales were weaker than expected, adding to anxiety over the arrival of retail giant Amazon. Pleasingly, unemployment fell by 0.1% to a four year low of 5.4%, and the NAB Business Survey saw business conditions at their most favourable since the survey started in 1997.
A very interesting development during the month was the spectacular appreciation of Bitcoin, a so-called cryptocurrency which is gaining in both relevance and value. During November, the price of one Bitcoin increased by over 50%, and then another 66% in the first week of December. Whether Bitcoin continues to appreciate or not remains to be seen, but it is a classic sign of an asset bubble and investors should be wary of such incredible appreciation. EISS Super does not invest in Bitcoin, but it makes for an interesting case of investor behaviour. The chart below shows just how far it has risen in such a short period.
Most developed economies continue to show significant signs of strength and provide little cause for concern. The US and Germany are great examples of economies which are particularly strong, but markets are forward looking and it is expectations which are key to market movements. We continue to believe that relatively high valuations in the US share market mean a correction is overdue, but this does not mean the start of a bear market. Also, Australia’s unique relationship with China necessitates a particular focus as the Chinese economy transitions to lower, but likely more consistent and sustainable growth. As we move into 2018, all of our investment options remain well diversified, and although we don’t expect share markets to repeat the spectacular returns of the past year, we are optimistic about the year ahead.
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