Market update: December 2017 Quarter

February 27, 2018

The global economy experienced further growth over the December 2017 quarter, with developed and emerging market equities experiencing strong absolute returns.

The S&P/ASX Small Ordinaries index increased 13.7%, the largest increase over the quarter, while unhedged emerging market equities and domestic property securities experienced the second highest growth, increasing 7.8% over the period.

Another tumultuous quarter, starting off with conflict in Spain surrounding the Catalonian referendum for independence, a Japanese election, as well as continued tension between the United States (US) and North Korea, failed to put a dampener on the synchronised global growth that has characterised the global economy in 2017.

In the US, President Donald Trump’s much anticipated tax reforms were given the approval by the Senate in November, providing a positive boost to growth over the quarter. Furthermore, manufacturing indicators showed consistent continued expansion across the US, Europe and China over the quarter, providing further support to economic growth.

The US Federal Reserve (Fed) had a busy period of transition over the December quarter, with the departure of four board governors, also noting the appointment of Jerome Powell, replacing Janet Yellen as Chair of the Fed in February 2018 as well as another rate hike in December, from 1.25% to 1.5%.

The rate hike comes off a solid period of growth in labour and US gross domestic product (GDP), supporting its aim to ease back to 2% inflation along with sustained growth. The rate hike was unsurprising following US non-Farm payrolls increase of 211,000 in October, 252,000 in November and 148,000 in December combined with a US GDP estimate for Q3 2017 revised to 3.2% quarter on quarter (QoQ) annualised.

Domestic markets experienced a strong quarter, as the S&P/ASX 300 rose 7.7%, outperforming its hedged global counterpart by 2.2%, and with small caps leading the market, rising 13.7% for the period.

Energy and IT were the strongest performing equity sectors over the period, while Domestic Real Estate Investment Trusts (REITs) also contributed to domestic performance, increasing 7.8% over the period.

The Australian dollar (AUD) was relatively stable over the quarter, depreciating slightly to US$0.782, from US$0.785 in September. The Reserve Bank of Australia (RBA) has kept a close eye on the AUD, continually expressing its view that a strong AUD will be counter-productive to economic growth, as well as affecting policy decisions with no expectations for a rate hike in the short term.

 

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