Overview – global equities stage a modest comeback
Global equities returned a modest 1.3% in local currency terms during November, partly unwinding their sharp 6.9% slump in October. An easing back in global bond yields supported both bond and equity returns in the month, reflecting persistent low US inflation reports and signals from the US Federal Reserve that it may be getting closer to a pause in its rate hike campaign. Also supporting equities were growing hopes around US-China trade talks at the G-20 meeting.
Across the seven benchmark asset classes, gold produced the best performance in November, albeit with a modest 0.5% gain. Although global equities rose by 1.3% in local currency terms, a rebound in the $A hurt performance in unhedged $A terms. Australian equities produced the worst asset class return of negative 2.2%, not helped by weaker iron-ore prices and a stronger $A dragging down local resource stocks. By momentum rank, Australian bonds are the best performing asset class, followed by international equities – while gold remains the worst performer.
As evident in the summary chart below, global equities are still yet to reclaim their month-end highs of earlier this year, while global interest rates and the $US are still trending up. Led by weaker oil prices, commodities overall continue to trend down.
Australian Equity Themes – rotation back to defensive exposures
Across BetaShares Australian equity sector/thematic funds, QFN was the best performer in the month with a 1.4% return – perhaps reflecting relief that the Banking Royal Commission was nearing an end. Income focused RINC also produced another relatively good performance, while QRE was hit by the decline in resource stocks. In terms of relative momentum, however, QRE still remains in the top 3 Funds, along with RINC and the value-orientated QOZ. Recent heavier declines in small cap stocks now means SMLL lags the most in terms of relative performance.
Global Equity Themes – health care takes top spot
Across BetaShares Global equity sector/thematic funds, DRUG was the best performer in the month with a 5.6% return. HACK also produced a solid return after a large fall in October, while unhedged QUS and NDQ were hurt by $A strength. Weaker prices also continued to take their toll on FUEL. In terms of relative momentum, however, DRUG is now the strongest performer, while NDQ has slipped to second place, followed by the value- orientated QUS.
The Fed’s dovish tilt and signs of progress in US-China trade talks have been positive market developments of late, suggesting some of the risk factors that weighed on global equities in recent months could be dissipating. Also heartening is the fact that recent US inflation reports have remained fairly benign, helped by still reasonably low wage growth and falling energy prices. At current interest rates levels, moreover, global equities valuations still don’t appear overly demanding, while earnings are still expected to post slower, but still decent, growth over the coming year.
That said, the key risk remains a faster 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 restrictive levels next year. At this stage, however, this remains only a risk – rather than my base case.
*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; Commodities: S&P GSCI Light Energy Index, $US terms.
** Momentum rank based on equally-weighted average of 6 & 12 month return performance.