Stock Market Wrap-up – January 2019

Australian Equities

Australian shares have shared in the global equity price recovery, and the S&P/ASX200 Index is up 4.6% in capital value, and also up 4.6% in total return including dividends, as it is too early in the year for any significant level of dividend distribution. Similarly, it is too early for sectoral trends to play out, and all sectors have participated in the gains to greater or lesser degree. But for the record the best performers (ex the REITs, considered elsewhere) have been the IT sector (up 9.4%) and consumer discretionary stocks (up 6.0%), while the relative laggards have been the financials (up 3.0%) and resources sectors (up 2.0%).

Australian Cash & Fixed Interest

The 90-day bank bill yield is marginally lower for the year to date, at 2.07%. Long-term interest rates are also a little bit lower, with the 10-year Commonwealth bond yield down 0.1% to 2.22%. The Australian dollar is all square for the year to date: Gains against the euro and the US dollar have been offset by falls against the pound sterling and the Chinese renminbi, leaving the dollar’s overall trade-weighted value unchanged.

Australian & International Property

The A-REITs did not provide much of an absolute return in 2018, with the S&P/ASX200 A-REITs Index delivering a total return including dividends of 2.9%, though it did provide useful protection against the wider weakness of Australian shares: The S&P/ASX200 Index lost 2.8% on a total return basis. Although it is still early days, for the year to date the A-REITs have again outperformed the wider market, with a total return of 6.6% compared with the overall market’s 4.6%.

International property also provided some protection last year, but in the rather bittersweet form of a largish loss compared with an even larger loss. The FTSE EPRA/NAREIT Global Index was down 6.4 % in terms of net return in US dollars, a modestly better outcome than the 8.9% loss from the MSCI World Index on the same basis. For the year to date, listed property has been a beneficiary of the global equity recovery, with a 7.6% net return in US dollars, slightly ahead of the MSCI World Index’s 6.3%. All the main regions participated, with the key North American market up 7.9%

International Fixed Interest

International fixed interest provided a good degree of capital protection in 2018 against the late-year equity sell-off: The Bloomberg Barclays Global Aggregate Index in US dollars, showing the total return from holding international fixed interest, returned only a small loss of 1.2%, which compared well with the 8.7% net loss (including taxed dividends) from the MSCI World Equity Index in US dollars.

For the year to date, however, the converse has been true, with holders of bonds missing out on the equity recovery. The Barclays Global Aggregate Index is up only 0.7%, well behind the 6.3% gain for world shares.

International Equities

The good news for investors is that world shares have been recovering from their sharp sell-off in the final quarter of last year: World share prices reached a low point just before Christmas and have been rising since. The MSCI World Index of developed markets in US dollars is up 6.3% since the start of the year. It has also been helpful that the recovery has not been dependent on just one market: For much of 2018, share outcomes had been reliant on the ongoing good performance of the US market, but this year most markets have been doing better, with the MSCI World ex US Index also up by 5.9%. Emerging markets, which had been especially hard hit in 2018, have also performed better this year, with the MSCI Emerging Markets Index up 6.9% in US dollars and its key BRIC members (Brazil, Russia, India, and China) up 7.6%.

The bad news, though, is that the recovery still has a long way to go to make up the December quarter’s losses. Even after this good start to the year, developed markets are still some 9% below the levels they reached on 21 Sept, before the start of the big sell-off. Emerging markets, which had weakness earlier in 2018 to contend with as well as the final quarter’s weakness, are still 18.9% below the cyclical peak they had reached in late January 2018.

Source: Morningstar Australasia Pty Ltd – Economic Update: January 2019