Month in Review – Wall Street lags as yields and $US rise
Global equities rebounded in April, partly unwinding the declines over the previous two months. The rebound came despite a lift in global bond yields and reflected ongoing good growth in earnings and still reasonable valuations that allowed a small drop in the equity-yield-premium over bonds.
The MSCI All-Country Net-Return Index returned 1.8% in local-currency terms, with prices up 1.7%. Forward earnings also rose 1.7%, implying the price-to-forward earnings ratio held steady at 14.9 – down from a recent high of 16.4 at end-January. On a month-end basis, this MSCI Index is now down 4.0% from its January peak.
Reflecting a rise in bond yields, the yield on the Bloomberg Global Aggregate Bond Index rose 11 basis points to 1.94%. Critically, US 10-year government bond yields rose strongly to briefly touch 3% in the month.
Most of the equity gains last month came from outside the US, with the S&P 500 Index returning only 0.4% in the month. A stronger $US – boosted by higher US bond yields – appears to have supported stronger gains in Europe and Japan especially. Australia’s S&P/ASX 200 also outperformed, returning 3.9%, with a weaker $A and stronger iron-ore prices particularly helping resource stocks.
Another notable development last month was a strong 5.6% further gain in oil prices.
Market Outlook – inflation and interest rates trump Trump
Geo-political concerns – regarding US President Trump’s trade and military policies – took a back seat last month to heightened concerns with regard to US inflation and interest rates.
Indeed, fears over a trade war with China have eased somewhat with US officials preparing to engage in talks. At the same time, tensions with North Korea have also eased with new talks pending. Outstanding issues are the final number of countries to be affected by new US steel and aluminium tariffs, and new tensions concerning Iran – of which the latter has recently also helped to boost oil prices. But as I suggested last month, “Trump’s actions are likely more political in nature, and are not meant to seriously change America’s trading relationships”.
In terms of the macro-economy, however, recent US wage and price indicators do suggest inflationary pressure is finally grinding higher, albeit at this stage the lift appears moderate and is coming from still relatively low levels. Accordingly, I retain my view the US Federal Reserve will only lift rates twice more this year (the next move coming in June) and that US 10-year bond yields will end the year at no more than 3.25%.
On that basis, there’s still scope for US equities to rise on the back of ongoing solid corporate earnings – a view underpinned by the current very strong US earnings reporting season. That said, it seems increasingly likely that better equity market gains could come from outside of the US, especially if the $US continues to rebound.
Sector/Regional Themes: Resources back in play
Among our key sector and regional exchange traded funds, stronger oil prices meant our currency-hedged Global Energy Companies ETF (FUEL) had a standout month, returning 10.5%. Our Australian resources sector ETF (QRE) also produced strong returns of 9.8%, while our curency hedged Japanese and European equity ETFs also did well.
Based on a momentum ranking (an average of three and six-month return performance), the top-ranked product performers at end-April were FUEL and QRE, with our NASDAQ-100 ETF (NDQ) slipping back into third place.