|1 mth (%)||3 mth (%)||FYTD*||1 yr % (pa)||3 yr % (pa)||5 yr % (pa)||7 yr % (pa)||10 yr % (pa)|
Note: The 1, 3 and 5-year figures are rolling, reflect an annualised compound rate and are after tax and fees. Past performance should not be regarded as an indication of future performance.
After a disappointing end to 2018, the March quarter saw share markets rise significantly. Trade tensions eased between the US and China and fears of US interest rate hikes subsided. Investors now think the US Federal Reserve and the Australian Reserve Bank’s next move will be to cut rates.
International share markets largely regained the ground lost in the December quarter, while the Australian share market surpassed its previous level. Bond markets rallied strongly on the back of expected rate cuts with the Australian share market returning 10.9% for the quarter and 12.1% for the year. Although the share market has rebounded quickly, it is not expected to rise as quickly going forward. Near-term softening in markets would not be surprising, but long-term conditions still look positive.
With the deadline for the UK to leave the European Union (EU) on 29 March first extended to 12 April and now 31 October, we still await a final outcome. The UK parliament has had numerous discussions and votes without any clear majority for a plan to exit the EU and negotiations are expected to continue right up to the deadline. Another deferral of Brexit is still a possibility, but requires the EU to agree to it.
Trade terms, including the question of what to do about the Irish border, need to be resolved before a deal can be reached. Another referendum remains a possibility as does a UK election, but at this stage the final outcome remains too uncertain to predict. Regardless of the result, we don’t believe Brexit will have a significant lasting impact on global markets. Despite the drama surrounding Brexit, the UK economy is in surprisingly good shape – unemployment has remained steady, inflation remains low and corporate profits are solid.
During the March quarter, a statement by the Federal Reserve indicating that it will be “patient”, caused investors to push back their estimates of when the next rate hike will occur. A strong labour market which has been steadily adding jobs, strong earnings growth and low inflation all added to positive sentiment for markets.
During the quarter, investor speculation on the timing of the next interest rate hike in the US turned to the anticipation of the next rate cut. The rather quick change in focus meant bond yields fell quickly. The rate on a 10 year government bond is now almost the same as the current cash rate. This is unusual as normally investors demand a higher return for investing for 10 years compared to investing cash at the bank. This is generally a sign that investors are worried about the future stability of the US economy and expect the central bank to cut rates in the future. We will be keeping a close eye on the US rate as it influences global markets and can increase the rate at which Australian banks borrow, which could mean higher Australian mortgage rates. The RBA will be influential here also, and speculation has grown that the Australian cash rate will be cut some time in 2019.
Easing tensions with the United States (including the delay of tariff increases that were scheduled for 1 March) helped Chinese shares rise over the quarter. Although China’s economic growth slowed in the December quarter, it’s important to note it’s still significantly higher than developed markets, and the government is stimulating the economy in an attempt to boost it further.
The US-China trade negotiations continue with any satisfactory outcome being positive for global share markets.
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