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Property gains on lower rates
Australian listed property was the best performing of our seven major asset classes* in March, benefiting from a steep drop in global bond yields as central banks moved back to a more neutral policy stance. Indeed, Australian bonds were the second best performing asset class as expectations grew that the Reserve Bank would eventually cut interest rates, which contributed to a decline in local 10-year bonds yields from 2.1% to 1.8%.
Australian equities posted solid gains, albeit somewhat weaker than in February as financial stocks gave back some of their strong gains following the Hayne Royal Commission.
Global stocks rose, helped by gains in the technology, property and consumer staples sectors.
The risk-on environment saw gold prices retreat further even though the $US remained soft over the month.
Across the seven benchmark asset classes, Australian listed property (A-REITs) retains the strongest return momentum rank**, followed by Australian equities. Cash retained the worst return momentum rank, followed by gold.
Australian Equity Themes – resources and property
Across BetaShares Australian equity sector/thematic funds, the yield sensitive RINC (property and infrastructure) and EINC (high yield equity) Funds enjoyed strong gains, thanks to declining bond yields. Still firm iron ore prices also continued to boost the QRE ETF (resources). Most funds – apart from SMLL (small caps) – are now in outright uptrends, while QRE and RINC have the strongest relative momentum and price trends.
Global Equity Themes – healthcare, gold miners, quality and technology
Across BetaShares Global equity sector/thematic funds, the FOOD and HEUR (Hedged Europe) ETFs were the best performers in March among currency-hedged Funds, while NDQ and QLTY and performed best among our unhedged funds. Considering a range of trend and relative momentum indicators, the DRUG and MNRS ETFs have been the strongest performers among currency-hedged funds, with NDQ and QLTY the strongest among unhedged funds.
Provided global inflation remains contained, there remains a good chance that global equity markets can continue to grind higher due to modest earnings growth and favourable valuations, relative to the still low level of bond yields. Although global growth has slowed, few recession indicators are at this stage flashing red, and sentiment could improve if the US and China finally negotiate a trade deal.
The key risk remains an acceleration in US wage inflation given the apparent tightness of the US labour market. If wage inflation takes off, the Fed would have little choice but to continue raising rates – potentially to recession-inducing levels later this year. Another concern is that US earnings expectations for 2019 have been downgraded somewhat in recent months, and earnings growth this year is expected to be muted. If earnings flatten out, equity markets could soon run into price-to-earnings valuation headwinds.
All this suggests a growing level of caution around equities may be required this year, with increasing focus on defensive thematics such as quality, and areas of the market such as health care and property/utilities. In Australia, a weaker $A and an improving outlook for China, however, might still favour the resources sector.
*Asset Benchmarks Cash: UBS Bank Bill Index; Australian Equities: S&P/ASX 200 Index; Australia Bonds: Bloomberg Composite Bond Index; Australian Property: S&P/ASX 200 A-REITs; International Equities: MSCI All-Country World Index, unhedged $A terms; Gold, Spot gold price per tonne in $US.
** Momentum rank based on equally-weighted average of 6 & 12 month return performance.
***Outright trend is up if the relevant NAV return index is above its 12-month moving average and the slope of the moving average is positive. Relative trend is based on the ratio of the relevant return index to its broader Australian or global benchmark index.