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Asset Class Performance – global equities power on
Global equities were the best performing of our seven major asset classes* in April, while Australian equities also posted good returns. Supporting stocks was a better than feared US earnings reporting season, persistent low inflation and continued gradual improvement in the global economic outlook. Higher bond yields, however, constrained fixed-income returns and contributed to a pull-back in listed property after several months of strong performance. Gold eased due to the still firm $US and renewed “risk-on” sentiment.
Across the seven benchmark asset classes, Australian listed property (A-REITs) retained the strongest return momentum rank**, followed by global and then Australian equities. Cash retained the worst return momentum rank, followed by gold.
Global Equity Themes – technology, property and quality
Higher bond yields helped global financials post relatively strong performance in April along with the persistent strong performer of recent months – technology.
More generally, as evident in the performance ranking table below, good growth and low interest rates continued to favour both the cyclically sensitive technology area and yield-sensitive sectors such as property and utilities. US stocks and the tech-heavy NASDAQ-100 in particular have been the strongest performers on a regional basis, while technology and property have shone among global sectors. Among factors, quality and growth have been the strongest performers.
Across BetaShares global equity sector/thematic funds, HEUR (Hedged Europe) and MNRS (global gold companies) have the strongest return momentum among currency-hedged funds, though the latter has suffered in recent months with the easing in gold prices. European equities have benefited from tentative signs of improvement in the Euro-zone economy.
Australian Equity Themes – resources and property
As evident globally, technology and property have been the strongest Australian sector performers in recent months. Across BetaShares Australian equity sector/thematic funds, the yield sensitive RINC (property and infrastructure) has been the strongest performer, followed by QRE (Resources) thanks to the ongoing strength in iron-ore prices.
Market Fundamental Outlook
With global inflation likely to remain contained, global equity markets could continue to grind higher due to modest earnings growth and still favourable valuations, especially given low global bond yields.
At 17 times earnings, the US S&P 500 price-to-forward earnings ratio at end-April was towards the top end of its range of recent years, although below the high of 18 seen earlier last year. With US 10-year bond yields at 2.5%, the US equity-to-bond yield gap at end-April is 3.4%, or only a little below its longer-run average 3.7%, and still above last year’s lows of 2.8%.
Current earnings expectations imply 12-month growth in US forward earnings of around 10%. Allowing for modest further downgrades, my base case is for 12-month US earnings growth of 5%.
One key risk is an acceleration in US wage inflation given the apparent tightness of the US labour market, though recent wage reports have remained reassuringly benign. Another risk to reappear is US-China trade tensions. Indeed, President Trump’s latest decision to raise tariffs on Chinese imports poses at least a short-term risk to markets if this dispute is not resolved soon.
All this suggests a growing level of caution around equities may be warranted 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, subject to the trade wars, a still generally improving outlook for China should favour the resources sector, while the RBA’s easing bias favours yield-sensitive sectors such as property and infrastructure.
*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.
** 6/12 month 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.