Economic Review

Global Equity Markets 
Global shares made a sharp reversal in May after the strong rally in the opening months of 2019. Investors become alarmed that the US-China trade dispute was escalating which would penalise both global economic growth as well as corporate earnings prospects.

Wall Street fell sharply after President Trump announced that tariffs on Chinese imports worth US$200 billion would be raised from 10% to 25%. Trade concerns were then magnified by President Trump’s threat to progressively raise tariffs on imports from Mexico towards 25% unless Mexico stopped aspiring immigrants crossing the US southern border. The S&P 500 Index declined by 6.6 % in May in response to these trade related tensions. There were also concerns that trade issues was starting to weigh on US economic growth prospects with softer business surveys and retail spending results recorded. However the US labour market remains solid with strong jobs growth for April and the unemployment rate is at its lowest level since 1969. Given global concerns as well as muted US inflation pressures, the Federal Reserve (FED) has maintained a “patient” stance on interest rates.

European shares also posted significant falls as the trade tensions intensified as well as heightened concerns over European political risks. Britain’s Prime Minister Theresa May resigned after the failure to gain parliamentary support for a deal involved Britain’s exit from the European Union. The strong performance of nationalist parties in the European Parliamentary elections also weighed negatively on investor sentiment.

Asian share markets recorded large falls in May. Chinese shares slumped with concern that the trade dispute with the US would both penalise export opportunities and threaten China’s economic growth performance. China’s industrial production, exports and retail spending all disappointed in April placing considerable doubt on whether recent stimulus measures would succeed in achieving the government’s 6% to 6.5 % growth target. Japan’s share market (TOPIX) also slipped in response to the trade concerns as well as softer business and consumer surveys.

Table 1: Global share market performance – May 2019
US S&P 500 -6.6%
US Dow Jones -6.7%
Euro Stoxx 50 -5.5%
German DAX -5.0%
UK FTSE 100 -3.5%
Japan Nikkei 225 -7.4%
China Shanghai Composite -5.8%
Source: Factset, IRESS, June 2019

Australian share market review
Australian shares provided a positive counterpoint to global markets with a 1.7% gain. Comments from the Reserve Bank (RBA) Governor highlighting the case for lower interest rates proved particularly favourable for Australian shares. The re-election of the Coalition Government was also seen as a positive for the financial and property sectors given that proposed capital gains, franking credit and negative gearing changes advocated by the Labor Party would not be implemented. The expectations for lower Australian interest rate settings saw strong gains for health care (+3.2%) and REITS (+2.5%) also made strong gains. However this was partly countered by falls for consumer staples (-4.2%) and information technology (-4.1%).

Australia’s economic data releases in May were disappointing. The labour market appears to be softening with the unemployment rate grinding higher to 5.2% in April. Australian house prices also continued to fall which has negatively impacted both housing construction and car sales. The RBA has acknowledged this softer economic activity and mild inflation profile with comments suggesting an interest cut was likely in coming months. Australian government bond yields have declined sharply in response to this softer Australian economic activity data as well as global concerns.

The Australian Dollar (AUD) slipped further in May against the US Dollar, Euro and Japanese Yen given the expectation that the RBA would soon cut interest rates. It finished the month down by 1.6% against the US Dollar to USD0.6938.

Table 2: Australian share market performance – May 2019
S&P/ASX 200 Accumulation Index 1.7%
S&P/ASX 200 Industrials Accumulation Index 1.8%
S&P/ASX 200 Resources Accumulation Index  1.4%
S&P/ASX Small Ordinaries Accumulation Index -1.3%
S&P/ASX 200 A-REIT Accumulation Index 2.5%
Source: Factset, IRESS, May 2019

Large Caps (S&P/ASX100)
Evolution Mining (+21.3%), Fortescue Metals (+20.6%) and Nine Entertainment (+18.9%) were the best performing large cap stocks during April.

• Evolution Mining (EVN) – Gold producers were favoured in a risk-off market. EVN presented to a major investor conference during May and included guidance to FY21and was positively received by the market.
• Fortescue Metals (FMG) – Ahead of the Federal Election, FMG declared a 60c per share fully franked dividend and also provided a performance update as the iron ore price continued to climb during the month.
• Nine Entertainment (NEC) – At the end of April NEC announced the sale of its Community Media and printing business for approximately $115m, before presenting at an investor conference the following day where management reiterated the increased growth profile of the business and expected cost savings.

The worst performing Australian large cap stocks during the month were Reliance Worldwide (-24.8%), BlueScope Steel (-21.6%) and Link Administration (-21.4%).

• Reliance Worldwide (RWC) – RWC provided a trading update during the month which resulted in lower EBITDA guidance. Factors cited included unfavourable weather, inventory reductions by channel partners, product rationalisation and declining housing construction. The market was particularly disappointed as the announcement was only a few months after the Chairman sold his shareholding in the company.
• BlueScope Steel (BSL) – Higher iron ore prices, no fall in coking coal prices and tight margins have seen analysts downgrade forecasts for BSL.
• Link Administration (LNK) – A trading update on the last day of the month saw LNK shares plummet. The company guided to lower 2019 profit than in 2018 due to the negative impact Brexit uncertainly is having on its European operations and the effect of regulatory changes and consolidation in the Australian superannuation sector.

Listed property
The S&P/ASX 200 AREIT Accumulation Index rose by 2.5% in May 2019, outperforming the S&P/ASX 200 Accumulation Index by 0.8%.

Only the Retail AREIT sector posted a decline for the month (-1.5%). Diversified AREITs (+7.2%) led the sector, followed by Office (+2.7%) and Industrial AREITs (+1.8%).

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