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Key Market Trends – trade tensions return
August saw a return to ‘risk-off’ sentiment in global markets, reflecting a resumption in US-China trade tensions, growing signs that these tensions are impacting on global growth (especially in Asia and Europe) and related fears associated with the renewed inversion of the US yield curve.
The MSCI All-Country World Equity Index declined 2.2% in the month, while the US S&P 500 fell 1.8%. Australia’s S&P/ASX 200 dropped by 3.1%, giving back some some of its global outperformance of recent months.
The most notable move in the month, however, was the sharp decline in bond yields, with the US 10-year bond yield dropping by 52 basis points to 1.5%. Despite this yield decline, the $US remained relatively firm – as did gold prices. All up, bonds, gold and the $US all acted as ‘safe havens’ during the month.
The $A dropped 1.6% to US$0.67, not helped by a 25% slump in iron-ore prices.
In terms of major trends, the $US, gold and iron-ore are still pointing up while bond yields, the $A and oil are pointing down. Global stocks overall lost their positive trend reading in August, though the US and Australian equity markets managed to retain their positive trend signal.
Asset Class Performance – gold shines again
Despite the hefty decline in bond yields last month, gold managed to produce a stronger return than either domestic or international bonds, with the $US spot bullion price rising 7.5% to $US1,520/ounce. Gold has now increased 26.6% over the past year and has the strongest return momentum rank** among our seven major asset classes.
Supported by the decline in bond yields, A-REITs were the only growth asset to produce a positive return in August.
Across the seven benchmark asset classes we track, the relative momentum ranking among growth and defensive assets has become more mixed. Gold is now the strongest-performing within defensive assets and among asset classes overall in terms of momentum rank – while cash remains the worst-performing. Among growth assets, A-REITs are performing most strongly.
Global Equity Trends – gold, quality and technology
As seen in the table below, across BetaShares currency-hedged global equity sector/thematic funds higher gold prices contributed to further strong returns for gold mining stocks (MNRS). In terms of relative trends, MNRS, European equities (HEUR) and food producers (FOOD) are the strongest performers, and both MNRS and HEUR have a positive relative trend.
Despite the weakening Euro zone economy, European equities appear to be holding up to a degree thanks to Euro currency weakness (relative to the $US) and the growing prospect of further stimulus from the European Central Bank. FOOD, meanwhile, is displaying its defensive qualities.
Across unhedged global equity sector/thematic funds, Indian equities (IIND) and US technology and global quality exposures (QLTY and NDQ) held up relatively well in August, while other emerging economy and Asian equity exposures weakened. NDQ, QLTY and IIND have the top three relative performance ranks.
Australian Equity Trends – yield
Reflecting their defensive income qualities, property and infrastructure stocks (RINC) held up relatively well in the Australian equity market in August. Indeed, RINC, along with another income-focused exposure EINC and fundamentally-weighted QOZ had the highest relative performance ranks as at end-August.
Cash, Bond and Hybrid Trends
Across BetaShares Australian cash, fixed-income and hybrid funds, the steep decline in local bond yields produced a solid 2.3% return for our long duration government bond ETF (AGVT). The long duration corporate bond ETF (CRED) was not far behind with a 1.8% return. Each has provided solid double digit returns over the past six and twelve months. A slight lift in credit spreads meant QPON produced a small negative return in the month.
Market Fundamental Outlook
The on-again off-again trade wars, weakening global growth and hopes of further policy stimulus continue to buffet global markets. The good news is that low global inflation means that policy stimulus is available if need be, though already low global interest rates and lingering fiscal deficits leave question marks over how effective such policy support might be.
At the same time, while the apparent market urgency to conclude a US-China trade deal has eased, the risk is that ongoing uncertainty could lead to a gradual sapping of business sentiment and investment plans – with negative implications for earnings growth.
Outright US equity valuations appear reasonable at around 16.5 times forward earnings, especially given very low bond yields. A lingering concern, however, is a possible further weakening in the US economy and the corporate earnings outlook if trade uncertainty prevails.
All up, my base case view remains that a trade truce will ultimately be reached before it leads to a serious global bear market or economic recession – if only because this could threaten US President Trump’s re-election chances next year.
*Trend: 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, and down if the index is below this moving average and the slope of the moving average is negative. No trend is displayed in all other cases. Relative trend is based on the ratio of the relevant return index to its broader Australian or global benchmark index.
**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.