Recent Investment Performance
For some time, Ausbil has been positioned to reflect our expectation of sustained global growth.
We forecast modest increases in the US Fed funds rate, higher bond yields and an appreciating USD. Inflation was expected to be well contained, allowing the Fed to pursue a new policy of tolerating “inflation overshoot”.
This view played out through the year with the 10-year bond yield peaking at 3.25% and oil prices trending higher in October.
This spooked global equity markets, as inflationary fears fanned a sell off. Fuelling the decline was the imposition of tariffs on US$200 billion worth of Chinese goods and the escalation of trade tensions. Relatedly, President Trump announced strict terms for any likely engagement with China ahead of the G20 meeting. Compounding the negative sentiment was Federal Reserve Chair Powell’s hawkish comment that “we may go past neutral. But we’re a long way from neutral” triggering speculation of a Fed induced US recession. Simultaneously the IMF and OECD lowered global growth forecasts, citing tariffs as causing a likely slowing in business investment. Separately oil prices collapsed on concerns of over-supply following the imposition of unexpectedly soft sanctions on Iran.
These exogenous shocks to sentiment cascaded into lower equity markets as investors reacted to volatility and re-assessed the growth momentum in global activity. By way of example, US credit spreads widened from their recent lows and bond yields moved lower to 2.85%.
These are the reasons why the Australian equity market experienced sustained selling in October and November with the S&P/ASX 300 Accumulation Index declining 6.2% and 2.2% respectively.
During November, there was a softening in the Fed’s language, with the emphasis on sustaining the economic expansion. Chair Powell calmed investors stating that rates are now “just below the … level that would be neutral for the economy”. This showed an awareness of the negative feedback US rate policy has had on global asset markets and the potential impact of the Emerging Market slowdown on the US. Consequently markets sharply re-assessed expectations of monetary tightening in 2019; one rate hike is now anticipated, compared to three previously.
Despite the US yield curve being at its flattest point, we do not foresee a US recession. It is now clear the Fed will not want to cause an inversion and has signalled this to investors.
With the economic expansion prolonged and a trade truce in the making, the outlook remains positive and supportive of growth. Australia will continue to benefit.
Australian Equity Market Outlook
During this recent bout of market volatility, growth stocks were sold off in favour of defensive positions. Having said that, an elongation of the growth cycle is in prospect, assisted by the recent softening in the interest rate outlook. This extended cycle is supportive for equity markets and the recent volatility has made valuations more attractive. Indeed, it may prove the case that some concerns are overdone in the face of supportive equity market drivers including:
- A recent lowering of the oil price
- Lower inflationary expectations (note the recent pullback in bond yields)
- A combination of continuing economic growth and subdued inflation resulting in an extended business cycle
- The recent G20 meeting produced a 90-day truce and other encouraging signs that the USA and China will move towards some form of accommodation concerning trade
At a broad level, we continue to favour sectors with overseas earnings streams, general insurers, energy producers and real estate – property and development. In recent months, given the various risks and heightened volatility, we have trimmed global and domestic cyclical exposure and lifted exposure to health care.
Ausbil Investment Management Limited
Level 27, Grosvenor Place 225 George Street
Sydney NSW 2000 Australia
Toll Free 1800 287 245
Contactus@ ausbil.com.au
Important Information For Presentation Recipients
The information contained in this report has been prepared for general use only and does not take into account your personal investment objectives, financial situation or particular needs. Before you make any decision about whether to invest in a financial product, you should obtain and consider the Product Disclosure Statement of the financial product. The information provided by Ausbil Investment Management Limited has been done so in good faith and has been derived from sources believed to be accurate at the time of compilation. Changes in circumstances, including unlawful interference and unauthorised tampering, after the date of publication may impact on the accuracy of the information. Ausbil Investment Management Limited accepts no responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Ausbil Investment Management Limited does not guarantee the performance of the Funds, the repayment of capital or any particular rate of return. The performance of any unit trust depends on the performance of its underlying investment which can fall as well as rise and can result in both capital losses and gains. Consequently, due to market influences, no assurance can be given that all stated objectives will be achieved.