Taken from the CBA Global Markets Research report, ‘January Month in Review’; first published on 1 February 2019

Summary: Financial Markets in January

• Money markets showed elevated yields that have only contracted marginally in January.
• Bonds have rallied (yields lower) in Australia as markets increased the chance rate cuts.
• Global credit spreads retraced a good portion of the late 2018 widening, while A$ credit spreads remain on the sidelines and range bound.
• Equities rose strongly in January after a battering in December. Materials and miners performed well as commodities rose.
• The AUD was supported by higher commodity prices.

Money Markets (Cash)
The Australian data has been mixed over the past few months. And dwelling prices continue to fall. The bright spot is the labour market, where jobs growth remains strong and the unemployment rate is inching lower. The Australian OIS rates have moved to price in an even greater chance of a rate cut in the coming year. However, these expectations remain more of a late 2019 or early 2020 story.

Australian and Global Fixed Interest
Across the developed market rates world, yields have finished near their lows in January. Markets have pushed back on the bounce in equity markets and have been firmly forward looking on a view that the rate hike cycle in the US has come to an end. As January closed, the more dovish Fed meeting justified the market pricing. The expected inversion of US rate curves has stalled for now. Carry trades may well move back in vogue given the Fed position.

This is also important for other markets. Global macro type trades have favoured a paid US rates vs received other markets. Cross market traded might start to lose favour given this new backdrop.

The US 2Y yield closed the month at 2.46% which was a rally (yields higher) of 2bp, though the range was a high of 2.616% and a low of 2.38% The US 10Y closed the month at 2.63% which was a rally (yields higher) of 5.5bp. The US curve finished the month modestly flatter, much of the move was undone in the last day as the curve steepened post FOMC. Front curves, which have been watched closely stayed in negative territory.

USD swap spreads, which have largely been benign in recent months, narrowed in the 10Y sector, flattening the spread curve. In the Australian market, OIS pricing continued to lean against RBA views that the next move in policy rates will be higher. Further out of cycle rate hikes by the banks as funding cost increases were passed on as well as soft housing data are trumping the RBA’s optimism. Both labour force and CPI data did not provide a reason to consolidate pricing and indeed CPI reduced market pricing for cuts, albeit until the FOMC delivered its coup de grace.

Australian rates have also rallied (yields higher) and flattened once again. The 3Y physical bond has rallied (yields higher) 15bp to 1.7325%, while the 10Y physical has rallied 7.75bp to 2.2425%.

Global Credit Markets (Cash)
January was dominated by the continued impasse on the funding of Trump’s wall between the US and Mexico and consequently all bar the last couple of days, the US government was shut for the month. A problem that may resurface given the temporary nature of the re-opening. Brexit and trade headlines continued to occupy the narrative, but the tactical impact on A$ credit appeared negligible. At month’s end the Fed released its latest statement, which carried with it a noticeably more dovish tone than previous statements.

January saw 44% of the S&P 500 reported Q4 results, with aggregate sales of +6.2% on the pcp and aggregate earnings of +13% on the pcp. Optically reporting season so far has seen solid growth numbers, however there has been pockets of stress surface, mainly on the back of bell-weather names disappointing, which gave markets moments for pause. Despite the persistent headlines and lack of tangible progress in the prevailing risk points, markets (risk) continued to rally nonetheless. The S&P 500 and DOW closing the month up around +7.9%, the strongest monthly gain in three years.

After a horrendous month or two of spread widening, January saw offshore credit spreads partially retrace lost ground. USD credit spreads outperformed EUR credit spreads by a factor of 4:1. USD Non-Financials ended the month -28 bps tighter compared to -6 bps tighter in EUR Non-Financials. It was a similar story in Financials, -24 bps vs -6 bps across USD and EUR respectively. A$ spreads also lagged, but A$ materially outperformed on the way out. While USD Non-Financial spreads were +50 – 70 bps wider over Q4’18, A$ Non-Financials were just +10 bps wider. On the January retracement, we’re seeing USD Non-Financials half way back to their prior inflection point, around the beginning of October 18. EUR Non Financials have retraced perhaps a third of their widening.

Equity Markets
After slumping in December, global sharemarkets began recoveries from their lows in early January with gains extending over the month. Investors continued to be fixated on developments in the US-China trade dispute as well as UK Brexit, US bank earnings reports and the US Government shutdown. Higher oil prices provided support for companies in the energy sectors.

In the first week of January, global markets were mixed in volatile trade. The US Dow Jones slumped 660 points on January 3 after Apple’s first sales warning in 12 years. But the Dow rebounded 747 points on January 4 in response to data showing a 312,000 lift in US non-farm payrolls for December. US markets rose 0.5-1.6 per cent in the first week of January, and Europe also lifted (German Dax up 2 per cent) but the Australian ASX 200 fell 0.5 per cent.

In the second week, global sharemarkets posted healthy gains on optimism about US-China trade negotiations. And on January 10, US Federal Reserve chief Jerome Powell reiterated that the Fed can be patient on future rate hikes. The Dow rose on four of the five days, lifting 2.4 per cent while the ASX 200 was up by 2.8 per cent.

In the third week of the month, global markets posted more gains, generally between 1.5-2.0 per cent. The Dow Jones again rose in four of the five days, lifting 3 per cent, while the ASX 200 rose 1.8 per cent and the German Dax lifted 2.9 per cent. On January 15, the UK Parliament rejected the Brexit deal but Australian and US markets rose. Over the week shares in US global investment banks were generally higher in response to earnings results.

In the fourth week of January global sharemarkets were generally flat, except the UK FTSE, down 2.3 per cent on uncertainty about Brexit. US shares fell by between 1-2 per cent on January 22 as investors digested a downgrade in IMF economic growth forecasts and weaker Chinese economic data. But US shares rebounded the next day on good earnings data.

In the final four days of the month, (January 28- 31) global sharemarkets were mixed. But on January 30, US sharemarkets posted solid gains in response to positive earnings results from Apple and Boeing and the rates decision from the Federal Reserve. The Fed left rates unchanged but pledged to be patient in deciding the next move in rates. The Dow rose 435 points or 1.8 per cent.

Over January, all major sharemarkets were higher. The US Dow Jones rose 7.2 per cent with the S&P 500 up 7.9 per cent and Nasdaq up 9.7 per cent. In Europe, the German Dax rose by 5.8 per cent and UK FTSE rose 3.6 per cent. And in Asia, Japan rose 3.8 per cent while the ASX 200 lifted 3.9 per cent – the best January gain in five years.

In January, all of Australia’s 22 sub-industry sectors posted gains except Banks (down 0.6 per cent). The Energy sector rose the most (up 11.5 per cent) from Software & services (up 9.3 per cent) and Consumer services (up 8.3 per cent). The Small Ordinaries out-performed, up 5.6 per cent, with big companies (ASX50) up 3.5 per cent and mid-cap stocks up 4.5 per cent.

Australian dollar

After the CAD, AUD was the strongest performing G10 currency in January seeing its tradeweighted index rise by 1.5%. Rising Australia commodity prices helped initiate the January move and would remain a consistent theme throughout. However the more important catalyst was a 4 January speech by the Fed Chairman Jerome Powell which appear to emphasise downside risks to US inflation.

AUD buying reached a peak on 11 January on growing optimism regarding US-China trade talks as US Treasury Secretary Mnuchin announced an official trade meeting for end-January. The AUD was also helped by a surprise improvement in December retail sales, and further comments from the Fed’s Clarida emphasising a more ‘patient’ policy approach.

AUD outperformance was not a one-way trade however. While played-down by the RBA monetary policy statement 8 January, investor concerns regarding the Australian property market were beginning to impact the policy rate outlook. Such concerns were confirmed by weaker investment and owner occupied house lending on 12 January undermining AUD. Tumbling consumer confidence, US-China trade tensions, and weaker China data all added to the more AUD gloomy tone seeing AUD/USD reach a 3 week low on 24 January.

Thereafter however, iron ore’s rally, and growing fears of a more dovish Fed seeming to outweigh RBA policy concerns. Indeed AUD/USD ignored soft Q4 inflation, preferring instead focus on still stronger Iron prices and confirmation at the 31 January FOMC meeting that US rates were effectively ‘on-hold’ for now.

Commodities
The CBA commodity price index decreased ~6.0% in January on the back of higher iron ore and oil prices.

CBA’s Terms of Trade (ToT) tracker indicates a ~3% increase in Australia’s ToT in QI, if spot AUD and commodity prices are maintained until the end of March. Given the tracker is using only one month of actual data, there are still notable risks associated with our forecast. Our tracker is pointing to a ~1-1.5% q/q lift in Australia’s ToT in QIV.

Commodity prices finished mostly higher in January, led by iron ore and oil. Easing US-China trade tensions helped commodity prices generally, but commodity specific factors were particularly positive for iron ore and oil prices. Iron ore prices rose sharply towards the end of last month following a tailings dam collapse at Vale’s Feijao mine in Brazil. While the mine only accounts for ~0.5% of the seaborne iron ore market, the ramifications could be larger. The company has already outlined plans to decommission 10 of its upstream tailings dams over three years, sidelining ~2.5% of the seaborne iron ore market in the process. However, Vale believes it has enough spare capacity to partially offset any lost output. Despite Vale’s guidance, markets are justifiably concerned that Vale’s iron ore production could remain lower for longer. Those concerns stem from the imminent response of Brazil’s regulators, who will take into consideration that the dam collapse at Feijao is the second such disaster Vale has been involved in since late 2015.

Oil prices outperformed other major commodities for most of January. Prices rose on demand hopes as US-China trade talks showed positive signs. However, oil prices also gained on evidence of ongoing compliance with the OPECled supply deal to sideline ~1.2% of global oil supply in 1H19. The most recent bullish data print was US oil imports from Saudi Arabia, which fell to the second lowest level since 2010 last week.

Coking coal was a notable underperformer last month. Subdued steel margins in China combined with weak buying and restocking demand before the Chinese New Year holiday (4-10 February) were the major drivers.

Gold also saw a late rise in January. Prices gained sharply following the FOMC removed its policy guidance of “some further gradual increases” and replaced it with a statement that they will be “patient” in assessing its next change to the Funds rate. The dovish tone increases the appeal of gold relative to US-interest bearing securities.

Australian house prices
The CoreLogic data showed that dwelling prices continued to fall in January, with a 1.2% fall across the eight capital cities. Prices fell in seven out of the eight capital cities in the month, with Canberra the only capital city where prices rose (see Table below). It’s worth noting that sales volumes are seasonally low in January, so the prices data is little less reliable than normal.

Sydney and Melbourne experienced the largest price falls in January. The rate of decline in Sydney and Melbourne dwelling prices have picked up over the past three months.

Dwelling prices in Sydney are now off 12.3% from their peak in mid-2017, taking prices back to mid 2016 levels. The current Sydney downturn is now one of the largest experienced, with the size of the price fall only larger for the 1982 downturn. In Melbourne, prices are off 8.7% from the peak, taking values back to early- 2017 levels.

The leading indicators of dwelling prices are pointing to further falls. Auction clearance rates are very low, the flow of credit has slowed to both owner-occupiers and investors, and foreign buyers have stepped back from the market. We expect further dwelling price falls this year, with prices in Sydney and Melbourne expected to drop by the most. We also expect small decline in Brisbane, Perth and Darwin in 2019.

Dwelling sales volumes are low which has implications for the broader economy. Firstly, low sales volumes and lower sales prices are reducing stamp duty revenues for the state governments. Secondly, lower sales volumes tend to reduce the amount that people spend on new furnishings, fittings and white goods. Growth in sales volumes has declined for these items and there is also heavy discounting in these goods as retailers try to keep their market share.

When we last heard from the RBA back in December they seemed fairly relaxed about how the dwelling price downturn was playing out, with the broader economy looking in good shape. Since then we have seen the labour market continue to improve but we are expecting only a modest rise in consumer spending in Q4 after a soft outcome the previous quarter. Our analysis here shows some tentative evidence of a negative wealth effect.

Next week’s RBA communication with provide an important update on their thinking related to the housing market. In particular, Wednesday’s speech by Governor Lowe and the Statement on Monetary on Friday will give the RBA chance to outline their views.

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Global Markets Research has given Colonial First State its permission to reproduce its information, opinions, and commentary contained in this document. This information was first made available to CBA clients on 1 February 2019 in a CBA Global Markets Research report publication titled, ‘January Month in Review’. Colonial First State is a wholly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is the issuer of super, pension and investment products. The Bank and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital from any investments. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State, Global Markets Research, or any member of the Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This document provides information for the adviser only and is not to be handed on to any investor. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of Global Markets Research at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units, other interests, or to enter into an investment agreement. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without Colonial First State’s express written consent. Copyright © Commonwealth Bank of Australia 2019. Want more information? Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

Taken from the CBA Global Markets Research report, ‘December Month in Review’; first published on 2 January 2019.

Summary: Financial Markets in December

• Money markets now pricing an RBA cut
• A strong risk off tone saw large rallies (falls in yields) in US and Australian bonds. There was widening in credit spreads.
• Falling underlying yields ensured credit finished the month with largely positive total returns.
• The US Dow Jones fell by 8.7 percent and the S&P 500 was down 9.2 per cent in December– their worst December performances since 1931 and biggest monthly losses since February 2009.

The dominant story of markets in December was the significant risk-off move – most obvious was the collapse in US equity prices. The US S&P Accumulation index was down 9.03% in December and that was after a strong recovery late in the month. (The intra-month result was as bad as -15% on 27 December.)

The Australian equity market outperformed massively by only falling 0.12% (accumulation) or 0.37%.

US bond markets reflected the risk-off tone and rallied strongly with yields falling.

On the FX side the risk-off move resulted in a 3.44% fall in the AUD against both the USD and an even larger fall of 4.11% on a trade-weighted basis.

The overall performance of commodities was relatively good (one reason that the materials sector could rise 5.29%) but oil prices fell sharply. Oil closed December at $US45.41 a barrel, down 10.84% on the month (and 40.6% from the peak in October).

Money Markets (Cash)

Market pricing for a move in cash rates by the Reserve Bank of Australia shifted course in December, as measured by Overnight Indexed Swap (OIS) rate. It’s only small, but for most of December the OIS rates were pricing a small risk of a rate cut and by month end the priced expectation of a rate cut had risen to 40%. In November there was a 60% chance of a rate hike priced. At end-December there was a 40% chance of a rate cut.

The move was noteworthy that the market was pricing a risk of a rate cut despite the RBA insisting that they felt it was likely that the next move in rates was higher. The Australian data was on the weaker side in December, but not particularly poor. The weakest print was the GDP, which had been expected to rise 0.6% on the quarter but only managed 0.3%. That saw the annual rate fall to 2.8%. The labour force result was better, though not across the board. There were +37.0K jobs created but split as – 6.4K full time and +43.4K part time. The unemployment rate ticked up to 5.1% on the back of an increase in the participation rate to 65.7%.

Australian and Global Fixed Interest

December was again a volatile month in markets.

While underlying economic developments were fairly typical, the US equity markets had two appalling weeks and one solid recovery very late in the month. Volatility was the order of the day, but the deterioration in sentiment was marked too. US bonds rallied each time there was a wobble in equity markets but have not sold-off far (if at all) in the late equity recovery.

There has also been major flattening pressure at some points.

The US 2Y yield closed the month at 2.52% which was a rally (fall in yields) of 29bp. The US 10Y closed the month at 2.725% which was a rally (fall in yields) of 29.5bp. The US curve finished the month unchanged, but had flattened abruptly mid-month (from 20bp to 10bp), only to recover back late in the month as the 2Y rallied to steepen the curve.

The second of the two large risk-off weeks appeared to be triggered (or at least worsened) by the FOMC’s decision to raise interest rates on December 20.

The market behaved as if there were widespread fears the FOMC was making a policy mistake. The bond yields rallied (fell) on a rate rise that was only 75% priced.

The local market had to contend with a weak GDP result (only +0.3% compared to 0.6% expected) and a mixed labour force (+37K but a rise in unemployment to 5.1%). At the same time, the fall in house prices continues in multiple data series.

Australian rates have also rallied (yields fallen) and yield curve flattened. The 3Y physical bond has rallied 23.75bp to 1.8275%, while the 10Y physical has rallied 27.75bp to 2.3350%.

As well as the financial volatility there were still ongoing developments of a geopolitical nature that added to the movement in markets.

In Europe, UK Prime Minister May has failed to pass her Brexit legislation through parliament (yet). She survived a leadership challenge, but it seems very hard, at this point, to see how she can pass the deal she has made with the EU through the UK parliament. The other European story was the disagreement between the Italians and the EU about the Italian deficit. Negotiations were progressing well at month-end, but there was definite agreement yet.

In a side-meeting at the G20 Presidents Trump and Xi agreed a 90 day cease-fire in the US China trade war. The Chinese have also deemphasised some of the elements of the Made in China 2025 policy that were causing the most consternation in the US. However, the overall stability of the Trump Presidency remained in question throughout the month as the potential Government Shutdown dominated news. The potential became the actual and the Government shut on 21 December. At month-end, there was no clear sign of the Government re-opening.

The Democrats take control of the House on 3 January following last November’s election.

The Federal MYEFO on December 17 showed a significant fall in the budget deficit of $9bn and an improved trajectory across the forward estimates.

Chart 1: Australian vs US 10Y bond yield

Source: Bloomberg, CBA

Chart 2 – Main Australian Yields

Source: Bloomberg, CBA

Global Credit Markets (Cash)
The December G20 meeting ended on a positive note with China agreeing to purchase a substantial amount of products from the US in exchange for the US not to increase tariffs in January. Yet there is a general lack of confidence that a meaningful deal will be reached by the end of the agreed 90 day ceasefire period. The arrest of Huawei CEO on US criminal charges was seen by markets as a signal that the US will not back down easily from its campaign against Chinese tech firms seeking global dominance.

US non-farm payrolls expanded by only 155,000 in November vs consensus of 198,000, but growth in average hourly earnings met expectations of 3.1% YoY. Despite weak data and market jitters, the Fed hiked rates at the December FOMC meeting and signalled another two hikes in 2019. A deadlock over funding for the wall on the US/Mexico border led to a partial shutdown of the US Federal government with the second half of the month witnessing heightened market volatility with VIX spiking at 36%.

Offshore credit spreads continued to widen, although US$ spreads across Financials and Non- Financials were the standout underperformer, +18 bps wider on the month. EUR Financials and Non-Financials were +1 bps and +3 bps respectively wider. A$ credit spreads continued to feel widening pressure from offshore, +5 – 6 bps across Non-Financials and Financials. Liquidity was subdued because of the holiday season, which exacerbated widening pressures.

Equity Markets
In 2018, global sharemarkets recorded their worst annual performance since the Global Financial Crisis. The US Dow Jones (-5.6 per cent), S&P500 (-6.5 per cent) and Nasdaq (-3.9 per cent) indexes all fell. In Europe, Germany’s Dax (-18.3 per cent) and the UK FTSE (-12.5 per cent) bourses tumbled. In Asia, Japan’s Nikkei fell by 12.1 per cent and the Australian ASX200 index was down 6.9 per cent – its worst year since 2011 – led lower by Telecom (-17.4 per cent) and Banks (-15.5 per cent) shares.

Global equities commenced December positively after US President Donald Trump and Chinese President Xi Jinping agreed to a trade war truce at the G20 summit in Buenos Aires. However, investors quickly became pessimistic that a broader trade agreement would be secured in the 90-day period beginning January 1. Such a broader agreement is necessary to stop President Trump’s threat to raise tariffs on US$200 billion worth of Chinese goods from 10 per cent to 25 per cent. And the arrest of Huawei’s chief financial officer Meng Wanzhou in Canada on allegations that she violated US sanctions against Iran lowered market expectations for a trade deal even further. US sharemarkets were down by as much as 4.9 per cent in the first week of December, but the Aussie ASX200 index was up by 0.3 per cent.

In the second week of December concerns over the lingering US-China trade dispute, weaker Chinese economic activity data and continued flattening of the US Treasury yield curve (often considered a US recession indicator) dampened market sentiment. Reports that China was considering removing US car tariffs, watering down its ‘Made in China 2025’ plan and restarting US soybeans purchases, failed to sway sceptical investors. US sharemarkets fell by up to 1.3 per cent. However, the London FTSE lifted by 1.0 per cent as British Prime Minister Theresa May survived a leadership challenge over her proposed Brexit deal.

The sell-off in global shares intensified during the third week of December. US shares fell by up to 8.4 per cent, led lower by the technology-focused Nasdaq index. And the US S&P500 index posted its worst weekly performance since August 2011, down by 7.1 per cent. The US Federal Reserve’s interest rate hike, the looming US government shutdown over budget funding and weaker US company earnings forecasts dragged shares lower. The European Commission reached a deal with Italy over the 2019 budget. And China’s annual Economic Work Conference signalled additional fiscal and monetary stimulus in 2019. But Germany’s Dax (down 2.1 per cent), Japan’s Nikkei (down 5.7 per cent), the UK FTSE (down 1.8 per cent) and the ASX200 (down 2.4 per cent) all fell.

There were more declines for global sharemarkets ahead of the Christmas holiday period as the US government was partially shutdown. US shares fell on Christmas Eve as investors were rattled after US Treasury Secretary Steven Mnuchin announced that he had called US bank heads in attempt to shore up confidence in the US financial system. US President Trump also tweeted that the US Federal Reserve was “raising interest rates too fast”, increasing investor concerns that Federal Reserve chair Jerome Powell could potentially be fired. The S&P500 index fell by 2.7 per cent, dipping within a couple points of a bear-market correction. Japan’s Nikkei index fell by 5 per cent on Christmas Day.

US sharemarkets, however, posted their biggest post-Christmas Day rally ever and best day in nearly a decade with the Dow Jones up by 1,086 points on Boxing Day – its largest one-day gain in history. The S&P500 (up 5.0 per cent) and the Nasdaq (up 5.8 per cent) both lifted by the most since March 2009. The S&P500 retailing index rose by 7.4 per cent after data released by Mastercard showed that holiday sales were the best in six years. Amazon shares rose 9.5 per cent after it sold a record number of items. The Dow rose by 449 points in its final three trading sessions of the year.

In December, the US Dow Jones fell by 8.7 percent and the S&P 500 was down 9.2 per cent – their worst December performances since 1931 and biggest monthly losses since February 2009. The US Nasdaq Composite declined by 9.5 per cent. In Asia, Japan’s Nikkei fell by 10.5 per cent, but the Australian ASX200 fell by just 0.4 per cent. In Europe, both the German Dax (-6.2 per cent) and the London FTSE (-3.6 per cent) declined.

For the December quarter, the US S&P 500 and Nasdaq dropped 14.0 per cent and 17.5 per cent, respectively, their worst quarterly performances since the fourth quarter of 2008. The Dow Jones recorded its worst period since the first quarter of 2009, falling 11.8 percent. The ASX200 was down by 9.0 per cent.

In December, seven of Australia’s 22 subindustry sectors posted gains. The Materials sector rose most (up 5.3 per cent) from the Pharmaceutical & Biotech sector (up 3.9 per cent). But the Media sector fell by 10.9 per cent and Automobile & Components fell by 9.6 per cent. The ASX50 index was up by 0.3 per cent, while the Small Ordinaries fell by 4.5 per cent. Smaller companies were the worst performer in 2018, with the Small Ordinaries down by 11.3 per cent.

Chart 3- Smaller Companies underperformed: Rolling performance: percentage change, Annual 2018

Source: IRESS, CommSec

 

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State).

The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Global Markets Research has given Colonial First State its permission to reproduce its information, opinions, and commentary contained in this document.

This information was first made available to CBA clients on 2 January 2018 in a CBA Global Markets Research report publication titled, ‘December Month in Review’.

Colonial First State is a wholly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is the issuer of super, pension and investment products. The Bank and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital from any investments.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State, Global Markets Research, or any member of the Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

This document provides information for the adviser only and is not to be handed on to any investor. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of Global Markets Research at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units, other interests, or to enter into an investment agreement.

Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks.

This document cannot be used or copied in whole or part without Colonial First State’s express written consent.

Copyright © Commonwealth Bank of Australia 2018.

Want more information?
Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

Taken from the CBA Global Markets Research report, ‘October Month in Review’; first published 1 November 2018

Summary: Financial Markets in October

• There was a sharp sell-off in global shares in October.
• US Bond markets sold-off (yields rose) early inthe month, but rallied back (yields fell) in therisk-off tone late in the month. Australianbond yields fell on the month.
• In credit markets, A$ cash credit was resilientto offshore widening.
• Australia’s trade-weighted index eased by0.5% in October. AUD was mixed against thecross rates.
• In commodity markets, iron ore and cokingcoal prices rose in October.

There was a large fall in equities this month and the risk-off tone from that move dominated bond markets. The US SPX accumulation was down 6.84% while the Australian version lost 6.05%. The falls were widespread, with the financial sector losing 5.96% and the materials index lost 5.18%.

The risk-off tone caused rallies (yields fell) in bond markets.

In an unusual occurrence there has been rises in commodity prices (other than oil) and falls in the AUD.

Offshore credit spreads succumbed to widening pressure with US$ and EUR Corporate spreads both widened over the month. A$ spreads across both corporates and financials however held firm.

Money Markets (Cash)
The pressure in short term funding markets eased slightly in September but remain very highly elevated compared to normal levels.

Once again, the RBA remains completely on hold.

The Australian data this month was a continuation of themes that have been clear for a while now. The Labour Force result on 18 October was fairly strong, with a fall in the unemployment rate to 5.0%. There was a small rise in jobs of +5.6K, but a large fall in the participation rate to 65.4%.

However the October 31 CPI confirmed that the RBA is on their hands for a good period yet. The headline CPI rose only 0.4% on the quarter and 1.9% on the year, while the underlying CPI recorded 0.35% on the quarter and 1.75% on the year.

The difficult month in equity markets was felt in bond markets (see below) but largely didn’t affect the Australian money market.

Australian and Global Fixed Interest
The US bond market actually sold-off over October (yields rose). Although the latter part of the month was full of doom and gloom in equity markets and a major bond rally (yields falling), there had been a strong sell-off in the first week of October. Overall, US yields finished marginally higher, with the US 2Y selling-off 4bp to 2.865 and the US 10Y sold-off 9bp to 3.14%.

The Australian market didn’t match the early sell-off in the US, so when the late-month rally got going the Australian yields have rallied overall on the month. The Australian 3Y and 10Y both fell to 1.99% and 2.63% respectively.

Not surprisingly, the Aus-US 10Y spread has continued to invert consistently and had reached -50bp at month-end (a 12bp inversion over the month).

For most of the month the bond markets were volatile, but largely at the whim of equity markets. The US S&P fell 6.9% over the month with a worse performance avoided thanks to a mild recovery in the last couple of days. The peak-to-trough loss was 11.4% between October 4 and October 30 (intraday).

The cause of the correction in US equities isn’tentirely clear but is an amalgam of the following factors. In the US, the equity correction came after a major run-up in prices. The market has a growing fear that the FOMC will over-tighten and trigger a reversal of the US economy. The USChina Trade war has been simmering along in the background. Finally, the US mid-terms have been identified as a concern given the hyperpartisan US political situation.

The global political situation continues to throw up market relevant stories. The global shift toward populism intensified in October with Brazil electing right-wing candidate Jair Bolsonaro and German Chancellor Merkel announcing she will not contest the next election. Brexit is closing in on the end-game with no clear resolution yet.

Global Credit Markets (Cash)
October has always been a ‘black cat’ month for equity markets with many a crash through history occurring in the month that contains Halloween. October 2018 was not different. There was no new news flow per se, or any specific catalyst to trigger the sell-off, rather it was a culmination of themes and events coming together, causing investors to universally question the validity of valuations. Themes remain Brexit uncertainty, US vs China trade war, Italian fiscal policy, fear of Fed policy error, and upcoming US elections. The month was dominated by heightened volatility and a minicorrection across global stock markets, which saw key indices down 8% – 10%.

Offshore credit spreads succumbed to widening pressure with US$ and EUR Corporate spreads both +14 bps wider on the month. Financials offshore also widened some +7 bps and +13 bps across US$ and EUR respectively. Unlike the last equity volatility inspired spread widening in March earlier this year, this correction didn’t come with a steady stream of primary activity. A saving grace that muffled spread widening pressure. A$ spreads across both corporates and financials however held firm, remaining resolutely unchanged over the month (plus or minus half a basis point).

Two thirds of US Q3’18 reporting season is behind us as at the end of October, with 65% S&P 500 companies now reported. Aggregate sales growth has reached just over 8.0% YoY, while aggregate earnings growth is north of 23.0% YoY. Most sectors at this stage are exhibiting solid sales and earnings growth momentum, however there is some doubt on growth sustainability without further stimulus – a contributor to recent market malaise.

Equity Markets
Global shares were sold down in October as investors reacted negatively to ongoing US-China trade tensions, rising US interest rates, slowing global growth and worse-than-expected September quarter earnings results of some US technology giants, prompting a reassessment of asset values.

Global sharemarkets began the month on the back foot. The new US-Mexico-Canada trade agreement was overshadowed by rising global bond yields. The US 10-year Treasury yield hit a 7-year high at 3.25 per cent during trading onOctober 5. The yield lifted by 17 basis points inthe first week of October after US FederalReserve Chairman Jerome Powell signalled thatUS interest rates “may go past neutral” – thepoint at which the rate neither helps nor hurtseconomic growth.

US economic data releases were mostly positive. The US unemployment rate fell to a 48-year low of 3.7 per cent and annual average hourly earnings rose by 2.8 per cent in September, supporting market expectations for a rate hike in December. Global sharemarkets generally fell by 1-3 per cent in the first week of October, ledlower by the US Nasdaq (-3.2 per cent) onchipmaker cybersecurity concerns.

In the second week of October, risk sentiment deteriorated after the IMF downgraded its global growth forecasts for the first time in two years due to intensifying US-China trade tensions. And investors continued to fret about the impact of rising borrowing costs on economic activity and company profits. High-flying technology shares came under acute selling pressure after investors appeared to scale-back their expectations for continuing double-digit revenue growth in 2019.

Over the second week of October, US shares fell by 3.7-4.2 per cent. The Dow Jones lost 1,378 points and the Nasdaq fell by 409 points on October 10-11. Germany’s DAX index was the worst performer, down by 4.9 per cent. The Japanese Nikkei (down 4.6 per cent), London FTSE (down 4.4 per cent) and Australia’s ASX200 (down 4.7 per cent) indexes all declined.

During the third week of October, US investors focused on corporate earnings results. The Dow Jones surged by 548 points on October 16 after banks Morgan Stanley and Goldman Sachs’ profits beat market expectations. Health care companies Johnson & Johnson and UnitedHealth also posted better-than-expected earnings.

Global share markets finished the week broadly flat, but the Nasdaq fell 0.6 per cent and the ASX200 was up 0.6 per cent.

Global shares continued to fall in the final week of October following the release of the weakest annual Chinese economic growth data in 9½ years in the September quarter (6.5 per cent). But annualised US economic growth remained strong, up by 3.5 per cent in the September quarter.

Sharemarket volatility increased amid mixed US earnings results. Over the week, global shares fell by 1.6-4.6 per cent. The ASX200 was the worst performer falling to its lowest level in 12 months on October 25. The Nasdaq fell by 329 points on October 24 – its biggest decline since November 24 2008.

To-date, almost half (48 per cent) of the companies in the US S&P 500 have reported earnings for the third quarter. Of these companies, 77 per cent have reported actual Earnings per Share above the mean estimate, which is above the five-year average of 71 per cent, according to FactSet.

In October, the US Dow Jones fell by 5.1 percent and the S&P 500 lost 6.9 per cent – its biggest monthly fall since September 2011. And the US Nasdaq Composite posted its worst monthly pullback since November 2008, down by 9.2 per cent. In Asia, Japan’s Nikkei fell by 9.1 per cent and the Australian ASX200 fell by 6.1 per cent – the biggest monthly drop since August 2015. In Europe, the German Dax fell by 6.5 per cent and the London FTSE declined by 5.1 per cent.

All 22 sub-industry sectors in Australia fell in October. Media fell by the most (down 16.2 per cent) from Auto & Components (down 12.1 per cent). Transportation was the best performer (down 2.5 per cent). The Small Ordinaries underperformed, down by 9.7 per cent.

Australian Dollar
Australia’s trade-weighted index eased by 0.5% in October. AUD was mixed against the cross rates.

AUD/USD dropped by about 2 US cents in the first week of October. More evidence the RBA is in no rush to raise the cash rate weighed on AUD. In its post-meeting statement, the RBA highlighted that “credit conditions are tighter than they have been for some time”. Softer global economic activity also weighed on AUD/USD. The global manufacturing PMI fell to near a two-year low in September. And the IMF cut its global GDP growth outlook in its October World Economic Outlook.

Also weighing on AUD was increased volatility in emerging market asset prices. The Australia-US two year interest rate spread decreased heavily to 90bps in early October, the most negative since October 1997.

AUD/USD consolidated in the middle of October before mounting a modest recovery. Firmer commodity prices helped AUD. Iron ore swaps increased almost continuously in October from $US68 per ton at the start of the month to $US73 per ton by the end of October. But capping the recovery in AUD were falls in global equity markets.

Commodities
Commodity prices finished mostly lower in October as demand concerns escalated on the back of falling global equity markets and rising US China trade tensions. A strengthening US dollar also weighed on commodity prices. Iron ore, coking coal and gold were notable exceptions.

Iron ore prices rose significantly through October as rising steel prices encouraged steel mills to purchase the steel making ingredient. Mills also looked towards medium grade ores (62% Fe) as higher grade ores (65% Fe) proved too expensive. Steel prices lifted on the back of actual and proposed cuts to steel output as policymakers look to ensure cleaner air. Steel mills in northern China are facing potential output restrictions from 1 October 2018 to 31 March 2019. While the restrictions are expected to be more severe and widespread than last year, authorities have chosen to be more selective in their capacity cuts. Mills, for instance, that have met environmental standards should be exempt from any curtailments. In any case, iron ore prices will likely be supported over the next few months, like they were when the cuts were enacted last year.

Stronger steel prices prompted coking coal prices higher too, but to a lesser extent than iron ore.

The lift in the gold price was a surprise last month as it occurred alongside a rise in the US dollar. Over the last year, the strengthening US dollar has proven the most accurate predictor of falling gold prices. We think safe haven demand, triggered mostly by falling equity markets, helped keep gold prices supported more than otherwise.

Oil prices declined over 10% in October as demand concerns combined with oversupply fears. Compliance with an accord to sideline 1.8% of global supply amongst OPEC and allies fell to its lowest level in September. That is expected to only have worsened in October. Saudi Arabia and Russia have led production higher, in hopes of offsetting lower production in Iran, Venezuela and Angola. US production also looked stronger than expected, with rising US crude oil stockpiles signalling oversupply.

In the agriculture commodity space:
• Wool prices, continue to fall in October, by about 7%, but still leaves prices at very high levels;
• Cattle prices jumped 10% because rainfall in some dry weather stoked some optimism about more feed being available; and
• And, in the largest move, sugar prices jumped 27% as the worst fears of a heavily oversupplied market receded and investors exited their hefty short futures positions.

Australian house prices
Taken from the CBA Global Markets Research report, ‘CoreLogic Dwelling Prices – October 2018’; first published 1 November 2018.

Dwelling prices in the eight capital cities fell by 0.6% in October. Prices have fallen for 12 straight months and are down 4.6% from their peak.

The falls were driven by Sydney (-0.7%), Melbourne (-0.7%) and Perth (-0.8%) (see table 2). Prices were flat or higher in the other capital cities. Hobart was the standout with prices up 0.9% in the month and 9.7% over the year. Sydney dwelling prices are now down 8.2% from their peak in mid-2017. This takes prices back to where they were in late 2016. Prices in Melbourne are down 4.9% from the peak in November 2017, taking prices back to early 2017 levels.

An interesting feature of the latest dwelling price decline is that prices are falling much faster at the top end of the market. Prices for the most expensive quarter of properties are down 6.9% from their peak late last year. Prices in the middle quartile are down 1.7% from their peak in April and the prices for the least expensive quartile are down just 0.9%. An increase in first home buyer activity is supporting the lower end of the market. The fact that cheaper property prices are falling less than the most expensive is a positive for consumer spending. Households in cheaper properties tend to have lower incomes and their spending is more sensitive to dwelling price falls.

Sales volumes have dropped off sharply since late last year. Sydney sales volumes are back at levels last seen in the early 1990s. This is weighing on state government stamp duty revenues. The auction clearance rate has fallen sharply too and is currently just under 50%.

The RBA don’t seem too concerned about the falls in dwelling prices so far. The falls are occurring alongside a favourable backdrop of above trend global growth and a falling unemployment rate. In a speech earlier this week, Assistant Governor Michele Bullock suggested that steady falls in dwelling prices over a year or more, as we are currently experiencing, is preferable to a short and sharp drop. So far households are taking things in their stride and we haven’t seen signs of a pullback in spending.

In terms of monetary policy, below target inflation and falling dwelling prices mean that the RBA is in no hurry to raise interest rates. CBA economists don’t expect a rate rise until November 2019.

 

 

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Global Markets Research has given Colonial First State its permission to reproduce its information, opinions, and commentary contained in this document. This information was first made available to CBA clients on 1 November 2018 in a CBA Global Markets Research report publication titled, ‘October Month in Review’. Colonial First State is a wholly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is the issuer of super, pension and investment products. The Bank and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital from any investments. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State, Global Markets Research, or any member of the Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This document provides information for the adviser only and is not to be handed on to any investor. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of Global Markets Research at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units, other interests, or to enter into an investment agreement. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without Colonial First State’s express written consent. Copyright © Commonwealth Bank of Australia 2018.

Want more information? Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

Economics overview

• US: The Federal Reserve tightened monetary policy again in September, raising official US interest rates by 0.25 percentage points, to between 2.00% and 2.25%. This was the eighth time borrowing costs have been raised in the past two years.
• US interest rates are now at their highest level in more than a decade, but most observers suggest they will go higher still. Consensus expectations suggest the Fed Funds rate will be raised by a further 0.25 percentage points before the end of 2018 and by at least a further 0.75 percentage points in 2019.
• The ongoing improvement in economic conditions is being reflected in the labour market; more than 200,000 new jobs were added in August. At 3.9%, unemployment is close to its lowest level since the early 1970s.
• At the very end of the month, the US, Canada and Mexico agreed on a trade accord that will replace the former North American Free Trade Agreement.
• The new trade pact was well-received by financial markets, which had been concerned about a potential slowdown in activity – particularly in the US – if a new deal was not agreed.

• Australia: The latest data confirmed the Australian economy expanded by 0.9% in the June quarter, taking the annual pace of growth to 3.4%. This is the fastest rate since 2012.
• Growth data for the March quarter was also upwardly revised.
• These data releases provided some respite from recent currency weakness and helped push local bond yields higher.
• In spite of the favourable economic backdrop, business confidence has fallen to its lowest level in more than two years.
• This may reflect political uncertainty following the recent change of Prime Minster and in anticipation of a Federal Election within the next year.
• Consumer confidence has also declined recently, perhaps owing to rising mortgage costs and moderating house price data.
• Prices in Sydney and Melbourne have been falling for several months, but the national average has now dipped into negative territory too, following six years of unbroken growth.

• New Zealand: The New Zealand economy grew by 1.0% in the June quarter, taking the annual pace of growth to 2.8%.
• The improvement did not affect interest rate forecasts. Few observers are expecting borrowing costs to move before 2020.
• In spite of ongoing house price growth, consumer confidence levels have dipped to their lowest level in six years.
• Business confidence levels are also subdued, which could dampen activity levels in the medium term.

• Europe: Ongoing Brexit-related headlines continued to attract a fair amount of scrutiny. UK and European lawmakers are still yet to reach agreement on the UK’s proposed withdrawal from the European Union.
• The UK’s ruling Conservative Party and opposition Labour Party held their annual conferences during September, which helped keep Brexit and political considerations in the spotlight.
• In economic news, strong UK retail sales data brought forward expectations of the next increase in borrowing costs. For now, official interest rates are 0.75%, but consensus expectations suggest they will be raised again in mid-2019.
• UK inflation has come off the boil over the past few months, reducing the need for the Bank of England to consider more significant policy tightening.
• Headline inflation in the Euro Area has risen to 2.1%; the highest level in five and a half years. This is partly attributable to sharp increases in energy prices – the Core CPI measure, which excludes energy, actually moderated to an annual pace of 0.9%.
• The European Central Bank remains committed to withdrawing its Quantitative Easing program at the end of 2018. From there, investors will be keeping a close eye on inflation to gauge the likely timing of interest rate increases. For now, no movement is anticipated until the second half of 2019, at the earliest.

• Asia/EM: News flow in China continued to be dominated by trade; specifically how the introduction of import tariffs by the US might affect demand for exports and, in turn, the global supply chain.
• In September, the US introduced new tariffs on a broader range of goods imported from China – albeit at a rate of only 10%, versus the 25% feared. Semiconductors, chemicals, plastics and motorbikes are among cargoes that now face tariffs. China was also measured in its retaliation when imposing tariffs on goods such as steel and medical equipment imported from the US.
• In Japan, there was an unexpectedly sharp increase in inflation. Headline CPI quickened to an annual pace of 1.3% in August, driven by increases in food and transport prices. More persistent inflation might be required for the Bank of Japan to withdraw its stimulus program and consider raising interest rates above zero.
• Concerns about emerging markets receded in September, following extreme caution and widening credit spreads that had been seen in August.

Australian dollar

• Favourable Australian economic data releases enabled the currency to arrest recent declines against the US dollar.
• The Australian dollar gained 0.5% again the ‘greenback’, after falling in value by more than 10% between the end of January and the end of August.

Commodities

• Commodity prices generally rose during September as concerns eased around the impact of US trade tariffs and the associated impact on global economic growth.
• Zinc (+2.8%) and Copper (+2.7%) both rose, while nickel (-4.1%), aluminium (-4.8%) and lead (-2.9%) finished lower.
• Oil rose 6.9% to four year highs on expectations of tightening supply ahead of US sanctions against Iran and major oil producers’ decision not to increase production.
• Expectations of more stringent checks and controls on China’s coking coal production during the winter season supported coking coal prices (+9.2%). Thermal coal (+2.4%) also rose.
• Iron ore (+6.5%) had another strong month amid elevated steel production levels and a rising Chinese steel rebar price.
• Precious metals were mixed. Gold (-0.7%) was lower on continued strength in the US dollar, while silver (+1.3%) and platinum (+4.2%) both rose.

Australian equities

• Australian equities declined for the first month since March 2018, with the S&P/ASX 200 Accumulation Index falling -1.3%.
• Eight of the 11 GICS sectors delivered negative returns; the only positive performers were Energy (+4.3%), Materials (+4.2%) and Communication Services (+2.7%).
• Most resources-related stocks rose; Whitehaven Coal (+14.3%) and Beach Energy (+10.3%) were among outperformers as energy prices rose.
• Materials stocks were boosted by Northern Star Resources (+20.0%) after the company announced the acquisition of the Pogo Underground Gold Mine in Alaska, partially funded by a capital raising. The issue was heavily oversubscribed, indicating the market’s strong approval of the acquisition.
• Health Care stocks (-7.7%) struggled, driven by sector heavyweights CSL (-11.0%) and Cochlear (-6.3%) and the announcement of a royal commission into the aged care sector. Investors appeared to focus on CSL’s and Cochlear’s high price-to-earnings ratios and whether elevated valuations were justified.
• Small caps outperformed their large cap counterparts, but nonetheless lost ground (-0.3%). The Small Cap Health Care sector (+3.6%) performed well, driven by gains in Mesoblast (+31.1%) and Pro Medicus (+22.7%).
• Small Financials (-3.1%) underperformed, with insurance and brokerage companies caught up in the negative sentiment associated with the royal commission into banking behaviour and the potential for increased regulation into the future.

Listed property

• A-REITs had a weak month in September, returning -1.8%.Diversified A-REITs (+0.2%) was the best performing sub-sector, while Industrial A-REITs (-3.2%) was the weakest.
• Outperformers included Growthpoint Properties (+4.0%) and Investa Office Fund (+3.6%). While Growthpoint did not release any material news, it benefitted from recent M&A activity among peers. Canada’s Oxford Properties is in a bidding duel with Blackstone for Investa Office Fund (IOF). The IOF Board is allowing Oxford Properties to begin due diligence on a potential takeover.
• The weakest performers were Scentre Group (-3.4%) and Vicinity Centres (-5.4%). Scentre Group was one of only two REITs whose June 2018 results were viewed as “credit negative” by credit ratings agency Moody’s.
• Many overseas property markets struggled too. The FTSE EPRA/NAREIT Developed Index returned -2.0% in USD terms. In local currency terms, Japan (+3.3%) was the best performing market, while the UK (-2.5%) was the worst.

Global equities

• Global equity markets recovered from being more than -1% down on a deteriorating trade outlook at the start of the month, to end September in positive territory with the MSCI World Index up 0.6% in AUD terms.
• Solid economic data in the US and more measured tariff increases than initially feared helped both the S&P 500 and the MSCI World (in both local currency and AUD terms) out of the red and to establish all-time highs later in the month.
• The strongest performer, however, was the Nikkei 1000, which returned 4.7% in Japanese Yen. The improved trade outlook helped, as did Abe’s re-election as leader of the ruling LDP party. This effectively gave Abe another three years as Prime Minister and the chance to become Japan’s longest serving premier.
• Among major developed markets, Australia was among the weakest performers.
• Emerging market equities bounced back from being down as much as -3.5% mid-way through September, but not quite enough to get back into the black. The MSCI Emerging Markets Index ended the month down -0.5% in AUD terms.
• Having been the strongest performing region last month, the MSCI EM Asia Index sold off in September, down -1.7% in AUD.
• MSCI India was down -7.1% in local currency terms (and -9.1% in AUD) as a number of its financial stocks sold off heavily on concerns about further defaults in the sector and the Reserve Bank of India’s order for Yes Bank’s CEO to resign after finding that the bank had under-reported its bad loans.

Global and Australian Fixed Interest

• Bond market investors appeared to refocus on economic drivers, after emerging market risks had dominated attention in August.
• Global markets once again took a lead from the US, where the yield on 10-year Treasuries rose 20 basis points to 3.06%. The Fed Funds rate was increased by 0.25 percentage points to between 2.00% and 2.25%, as anticipated.
• More importantly, investors appeared to reassess their longer-term expectations for US monetary policy.
• There is some evidence that tightness in the labour market is being seen in wage growth, which is now running at a pace above Headline inflation; a trend the Federal Reserve will be watching.
• Government bond yields rose in other major markets, too.
• 10-year yields closed the month 15bps and 14bps higher in the UK and Germany respectively, for example, and by a more modest 2bps in Japan. As well as the upward move in US Treasury yields, there was optimism that UK and European lawmakers were making some progress in Brexit negotiations. Final details of the UK’s proposed withdrawal from the European Union are yet to be finalised, but investors were reassured that both parties appear willing to negotiate.

Global credit

• Credit markets were supported by the general improvement in economic indicators and a healthy risk appetite among investors.
• Issuance increased as anticipated following the seasonal lull during the summer holiday season in the northern hemisphere. Encouragingly, this increased supply was met with solid demand and did not result in any spread widening.
• In fact, credit spreads narrowed in both the investment grade and high yield sectors. Energy-related sectors were among the best performers, buoyed by the rising oil price. It will be interesting to see how issuers in sectors are affected by persistently higher energy prices, specifically whether they are able to pass higher costs on to customers through higher prices, or whether they will be forced to accept narrower margins.

Chart of the Month – Which Equities to Hold as Inflation Increases?

In these bulletins, we aim to share interesting observations from global investment markets. This month we look at the relative merits of different equity sectors assuming inflationary forces remain entrenched.

At its September Open Market Committee meeting last week, the Federal Reserve decided to increase US interest rates for a third time this year. According to Fed chairman, Jerome Powell, “Inflation is low and stable”, but given that “growth is running at a healthy clip…and wages are up” the Fed is clearly anticipating rising inflation and is tightening monetary policy accordingly. So, how should equity investors respond to higher inflation?

The chart below shows the relative performance of various equity categories during discrete inflation regimes since September 2001. The so-called “listed real assets” of listed property, listed infrastructure and resource equities tend to perform in line with, even slightly ahead of, broader global equities during inflationary periods similar to what we’re seeing currently (2-3%). Over the past four months, the annual inflation rate in the US has crept up towards the upper end of this range. But as the chart demonstrates, listed real assets have more clearly outperformed the MSCI World Index when inflation exceeds 3%. Could this be a sign of things to come, and what drives this behaviour?

Source: FTSE Global Core Infrastructure Index, FTSE EPRA/NAREIT Developed Index, S&P Natural Resources Index, MSCI World Index, US CPI (Urban Consumers Non-Seasonally Adjusted). All in USD and sourced from Bloomberg. Sep 2001 to Sep 2018

Many infrastructure assets have explicit links to inflation through regulation, concession agreements or contracts. Toll roads provide a good example of this. Their concession terms typically reference the inflation rate, with scope to negotiate further compensation for additional capital expenditure. Australian toll road company, Transurban Group, for example, can increase prices on many of its roads by the greater of inflation or 4% pa. Similar concession agreements where tolls are linked to inflation exist throughout Europe, North America and even across emerging markets.

The regulated pricing of water, electricity and gas utilities across the US and Europe are also often connected to inflation rates. Even infrastructure assets without specific links to inflation can have the pricing power to deliver a similar (or better) outcome, reflecting a strong strategic position. The track networks of North America’s two main freight rail companies are examples of unique infrastructure assets that can’t be replicated. Significant numbers of captive customers, such as grain handlers and auto producers, give them strong pricing power over long haul routes.

The connection between rental growth on properties and the rate of inflation varies across property type and jurisdiction. For a purpose- built logistics asset, tenants could negotiate 12-15 year leases with annual rental increases based on inflation. For retail property in Australia, specialty tenants pay base rent with increases each year (either a set increment or linked to inflation) over a typical five year lease. In contrast, larger tenants in these assets usually pay flat contracted rents plus a percentage of their sales turnover, which is clearly related to rising prices.

Finally, the relative performance of resource equities is often influenced by commodity prices, which feed into headline price inflation. This is particularly relevant currently, with oil prices rising to four-year highs in September. If energy prices continue to rise, it is worth looking out for even higher, albeit less likely in our view, inflation environments when price growth moves above 4%. Resource equities perform particularly well in this scenario and listed infrastructure continues to deliver solid returns. Even listed property might be expected to outperform the MSCI World over these periods. However, during the Global Financial Crises, when US inflation was initially running above 4%, listed property uncharacteristically underperformed the MSCI World as broader share prices fell heavily. Property could offer a better inflation hedge during similar periods in future.

MARKET WATCH DATA SHEET

                                             Source: FactSet, as at 31 September 2018

 

Disclaimer
This document is directed at persons of a professional, sophisticated or wholesale nature and not the retail market. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document. References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere. Past performance is not a reliable indicator of future performance. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. In Australia, this document is issued by Colonial First State Asset Management (Australia) Limited AFSL 289017 ABN 89 114 194311.

Copyright © Colonial First State Group Limited 2018

All rights reserved

Want more information?
Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

Economics overview

• US: Economic growth for the June quarter was revised up to 4.2% yoy, from 4.1%. This was partly attributable to the impact of government stimulus and is unlikely to be sustainable over the long term, particularly if trade tensions affect export volumes.
• Encouragingly, there was optimism that revised terms of the North American Free Trade Agreement with Canada and Mexico were close to being agreed, although no deal had been struck by month-end.
• 157,000 new jobs were created in July. This was slightly below consensus expectations, but sufficient to see the official unemployment rate fall to 3.9%, from 4.0%.
• At 2.9% yoy, headline inflation was unchanged in July. Wages remain stagnant, however, meaning Americans are not seeing any improvement in real wages.

• Europe: Data confirmed that the UK economy grew at an annual pace of 1.3% in the June quarter. With inflation in the middle of the target band, the Bank of England deemed this sufficient to warrant tighter monetary policy. Official interest rates were raised by 0.25 percentage points, to 0.75%.
• There were conflicting headlines on the Brexit front; some suggested progress was being made; others focused on disagreement between UK and European lawmakers on important post-Brexit policies like immigration and customs.
• In the Eurozone, both business and consumer confidence levels continued to weaken. There has been particular concern over the introduction of US import tariffs on European autos and other manufactured goods and how this will affect industrial production.
• Headline inflation in the Eurozone also moderated, retreating to 2.0% yoy in August from 2.1% yoy in the previous month.
• Against this background, investors are questioning when the European Central Bank will start to raise interest rates after its Quantitative Easing program is withdrawn at the end of this year. For now, it appears unlikely that policy will be amended until the second half of 2019 at the earliest.

• Australia: Political developments attracted significant attention during the month. There was an unsuccessful leadership challenge in the ruling Liberal Party mid-month, which was swiftly followed by another. The second resulted in Scott Morrison being installed as Australia’s new Prime Minister.
• Business and consumer confidence seems likely to be affected by ongoing political uncertainty in the next few months. It will take time for investors to assess the likely market impact of the leadership change, particularly with the next Federal election less than a year away.
• Employment data for July showed a small net decrease in jobs, although a lower participation rate resulted in a decline in the official unemployment rate, to 5.3%. This is the lowest level since late-2012. Other economic data has been mixed and insufficient to significantly influence interest rate deliberations.
• While official rates were again left on hold at 1.50%, rising short-term funding costs prompted a number of lenders to raise variable mortgage rates. These moves might reduce the need for the RBA to increase official interest rates over the next 12 months.

• New Zealand: Investors were surprised by comments from the RBNZ Governor. In a speech in the US, he suggested the Bank will be in no rush to raise interest rates from 1.75% and that cuts cannot be ruled out if growth decelerates. It now appears that interest rates are unlikely to be raised until 2020, at the earliest.
• The New Zealand dollar struggled against this background, weakening to its lowest level since early 2016.
• Meanwhile, business sentiment deteriorated to its lowest level in more than 10 years. This was perceived to be due to the introduction of new employment laws and general displeasure with the relatively new government.

• Asia/EM: Trade talks between the US and China do not appear to be progressing well. Time will tell to what extent tariffs affect export volumes on the two sides, although buoyant PMI data suggests disruptions are not currently having a significant impact on activity levels in China.
• Elsewhere, there was significant focus on Indonesia, where the central bank intervened in bond and currency markets in an attempt to contain a selloff in the rupiah.
• We saw significant currency weakness in other emerging markets, too. The Turkish lira and Argentinean peso, for example, both lost more than 25% of their value over the month.
• In Turkey, the government appears reluctant to tighten policy settings even though inflation exceeds 15%. As a result, international investors have lost confidence in the sovereign.
• In Argentina, the President requested speedier disbursement of an IMF funding package, which did nothing to support ailing confidence. Interest rates were also raised by 15 percentage points, to 60%, in an attempt to stem currency outflows.

Australian dollar

• The Australian dollar is being driven by a combination of offshore geopolitical developments, risk appetite and deteriorating domestic economic drivers towards month-end.
• In particular, deteriorating sentiment towards emerging markets and a general ‘risk off’ tone weighed on the Australian dollar.
• The currency weakened by 3.2% against the US dollar in August, falling to its lowest level since January 2017.

Commodities

• Commodity prices were mixed during the month. Metals were mostly lower on concerns around global economic growth, while energy prices moved higher on both sharply falling inventories in the US and supply threats in the Middle-East.
• Zinc (-4.8%), lead (-4.3%) and copper (-3.1%) all fell, while aluminium (+2.5%) bucked the broader trend. Precious metals were also mostly lower. Gold (-1.9%) continued to lose ground on a strengthening US dollar, while silver (-6.8%) and platinum (-6.5%) also fell.
• Oil (+4.3%) reversed last month’s dip. Thermal coal (+2.9%) and coking coal (+3.0%) also halted losses in July. Iron ore (+4.4%) gained on stable demand and a rising Chinese Rebar price.

Australian equities

• Most ASX-listed companies reported annual earnings to 30 June 2018. As expected, these releases caused some big swings in share prices of individual companies.
• On the whole it was a positive reporting season, with ‘upgrades’ impressively outnumbering ‘downgrades’ [see Chart of the Month on the following page]. This helped enable the S&P/ASX 200 Index (+1.4%) to reach post-GFC highs.
• Telecoms (+13.1%) was the best performing sector, with strong gains in Telstra and TPG Telecom, which announced its intention to merge with Vodafone Australia. IT (+12.9%) was the second best performer, supported by a number of small and mid cap stocks posting strong gains. Healthcare (+10.7%) also performed well, driven by strength in CSL, which is now Australia’s third largest company by value.
• Materials (-4.8%) was the worst performing sector, as falling metal prices and an uncertain economic backdrop weighed on returns. Energy (-1.3%) also lost ground despite gains in the oil price. Financials (-0.0%) struggled to remain in positive territory as the Productivity Commission released a damning report on the banks and as investors worried about regulatory ramifications.
• Returns from other sectors were all in positive territory, including Consumer Discretionary (+3.5%), Industrials (+3.2%) Consumer Staples (+2.8%), Property Trusts (+2.7%) and Utilities (+0.6%).
• Small cap stocks outperformed their larger counterparts, with the S&P/ASX All Ordinaries Index returning 2.5% over the month. Small caps benefited from a lack of exposure to banking stocks and some strong individual results, particularly in the IT sector.
• Shares in software companies Wisetech Global and Altium, for example, rose after the companies reported impressive earnings growth that exceeded expectations.

Listed property

• The S&P/ASX 200 A-REIT Index had a strong month in August, returning 2.7%. Industrials (11.1%) was the best performing sub-sector, while Retail (-0.1%) was the weakest.
• Blackstone’s $3.1 billion takeover bid for Investa Office Fund was sweetened, with the US giant offering an additional 20c per share to persuade dissenting investors.
• The strongest performers in August included Goodman Group (11.1%) and Mirvac Group (6.6%). Goodman provided strong guidance for the FY19 year, benefiting from e-commerce groups like Amazon; Goodman’s largest leasing client by net income.
• Underperformers included Abacus Property Group (-7.0%), BWP Trust (-2.4%) and Unibail Rodamco-Westfield (-2.4%). Abacus fell during the month, partly driven by the company’s repositioning under the new CEO, which may incur earnings impacts.
• Globally, many major property markets delivered solid returns. The FTSE EPRA/NAREIT USA Index performed well, returning 2.7% in USD terms. In local currency, Australia was the best performing market, while Hong Kong (-4.4%) was the worst.

Global equities

• Global markets established all-time highs in August, driven by another strong earnings season in the US and hopes that the US administration is prepared to negotiate to avoid an all-out global trade war. The MSCI World Index finished the month up 4.1% in Australian dollars. Returns were supported by the weaker Australian dollar, which fell to a 20-month low against the US dollar following subdued economic releases in Australia.
• The S&P 500 established a record for the longest ever bull run and closed the month up 3.3% in local currency terms. US equities have seen earnings growth of around 25% over the last two quarters. Encouragingly, revenue growth also rose to 10% in the second quarter, suggesting the rally might have further to run.
• European developed markets lagged, with both the UK FTSE 100 and German DAX falling -3.3% and -3.4%, respectively in their local currencies. Trade issues appeared to trouble investors as a deal on Brexit still evades negotiators and as US President Trump rejected an EU proposal to scrap car tariffs.
• The weaker Australian dollar also helped the MSCI Emerging Markets to achieve two positive months in a row for the first time since January (albeit only just), with an anaemic 0.04% rise in AUD terms. The MSCI EM Asia Index was the strongest performing region in AUD terms, up +2.0%. Korea led the charge, up 4.7% in AUD, but only 1.4% in local currency.

Global and Australian Fixed Interest

• Investors appeared to question the sustainability of global economic growth and, importantly, the likely trajectory of interest rates in key regions. Over time, it still seems likely that policy settings will be tightened globally, but expectations over the timing of potential rate hikes is starting to be pushed out.
• Sovereign bond yields drifted lower in most developed markets as these expectations started to shift.
• In the US, 10-year Treasury yields closed the month 10 bps lower, at 2.86%. They had briefly traded above 3.00% in early August, but drifted steadily lower in the remainder of the month.
• There were similar moves in Europe, with 10-year yields closing 12 bps and 10 bps lower in Germany and the UK, respectively. Japanese 10-year yields bucked the trend, rising 4 bps to 0.10%.
• There was a significant focus on emerging markets, too. Intensifying concerns over individual countries have not yet spilled over into developed markets, but they eroded confidence in the emerging market debt asset class as a whole.

Global credit

• After narrowing in July, credit spreads drifted wider in August reflecting subdued risk appetite among global investors.
• Investment grade spreads widened by 5 bps, closing at 1.18%. High yield spreads also rose, albeit by a more modest 3 bps.
• There was a fair degree of return dispersion within the credit universe, both geographically and by industry sector.
• European issuers were hampered by mixed economic data, for example, as well as concerns over how US import tariffs might affect auto makers and other manufacturers.
• In Asia, the release of favourable PMI data in China partially allayed trade-related concerns. For now at least, the introduction of new tariffs on goods exported to the US does not appear to be hampering economic activity. In fact, issuers in the Chinese banking and property sectors performed particularly well.
• Mining-related names worldwide were also supported by buoyant energy and commodity prices.

Chart of the Month – Australian Earnings Season – Positive, but it’s like a jungle out there!

In these bulletins, we aim to share interesting observations from global investment markets. This month we look at the thrills and spills of the Australian earnings season against a backdrop of political turmoil where spills have also seen a change in PM. We conclude that while generally a positive earnings season, it has resembled the Law of the Jungle where, like politics, it’s the survival of the fittest.

We are able to share with you the changes in earnings forecasts across 10-12 brokers for ~400 stocks that we have collected within our extensive broker database for most of the last decade to bring you our conclusions on this earnings season relative to prior seasons.

Through to 31 August 2018. Source: CFSGAM and S&P/ASX. Shows number of firms enjoying earnings upgrade levels in upper tertile of results over last eight years less the number of firms suffering earnings downgrade levels in the bottom tertile of results.

As the chart shows, this earnings season has seen the largest gap between upgrades and downgrades for stocks in the S&P/ASX 200 since we have been collecting data and the second largest gap for the smaller cap stocks in the S&P/ASX Mid 100. Even more encouraging from our Growth team’s perspective is the fact that upgrades in Return on Invested Capital (ROIC) is also at its highest level relative to downgrades across the ‘top 200’ stocks. “This is one of the key characteristics we look for in assessing the quality of company earnings,” observes Head of Australian Equities, Growth, Dushko Bajic. “It’s encouraging to see more companies with improving ROIC as it represents greater investment opportunities for our approach.” Indeed according to Factset Estimates many of the high ROIC stocks in the Growth team’s high conviction portfolios are also the ones enjoying stronger earnings upgrades2 – it resembles the Law of the Jungle as the strong appear to be getting stronger. Goldman Sachs equity strategist, Matthew Ross, has also noted that the earnings momentum across the market is “relatively weak”, which serves to support market multiples of quality, high-growth names.

It has been a tougher earnings season, though, for our Realindex team, which has exposure to a variety of styles, primarily value, and a secondary quality overlay. “What hurt our portfolios last month was the number of relatively expensive stocks that enjoyed strong price appreciation.” notes Andrew Francis, Chief Executive, Realindex Investments. As the AFR3 has observed “That has also made it a tough reporting season for hedge funds where valuation-driven shorts have backfired.” The subsequent short-covering has contributed to price gains in companies that might have reported disappointing results. The Realindex team remains confident, however, that the prices of these companies will mean revert over the medium term, creating opportunities for their portfolios to outperform in the future.

We are observing similar patterns across smaller cap stocks. Dawn Kanelleas, who heads up our Small Companies team, comments that “We have seen large share price swings in certain companies that can’t be attributed to the quality of their earnings or outlook.” Given the team’s focus on quality and downside protection, they will be cautious about investing in stocks were the share price has run ahead of fundamentals. “It has been an especially unpredictable earnings season, in our view. However our risk-aware approach and focus on quality companies have seen us end the month in positive territory, contributing to our long term outperformance,” said Dawn.

Our Australian equities teams are able to draw upon our proprietary 10 million+ data point collection of market statistics drawn from 10-12 brokers on a monthly basis over the last 8+ years. It has 100 data types on ~400 stocks over a minimum 5 year time frame.

The next 12 months’ expected earnings of stocks in the Growth team’s high conviction growth portfolios has grown by 18.9% between 1 January 2018 and 31 August 2018, almost double that of the S&P/ASX 200 Index, with earnings growth of 10.1% over the same period.

“Why expensive stocks are getting even more expensive” by Vesna Poljak and Sarah Turner, The Australian Financial Review (AFR), 21 August 2018.

MARKET WATCH DATA SHEET

                                                                                                            Source: FactSet, as at 31 August 2018

 

Disclaimer: This document is directed at persons of a professional, sophisticated or wholesale nature and not the retail market. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document. References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere. Past performance is not a reliable indicator of future performance. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. In Australia, this document is issued by Colonial First State Asset Management (Australia) Limited AFSL 289017 ABN 89 114 194311.

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Want more information?  Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.