The trend in equity markets continued with international markets up 3.35% (MSCI world $AU) outperforming the Australian market which remained stationary for the month. This further accentuates the point of having reasonable exposure to international equities.

Despite uncertainty about who will chair the Fed and tax reform in the US, 59 shot dead and over 500 injured in another terrible US mass shooting in Las Vegas, a political crisis in Spain and the ongoing issue around North Korea, global share markets continued to climb the classic wall of worry over the past month. Why? Put simply the global economy is looking stronger and stronger and this is driving profits, while at the same time inflation and central banks’ policy remain relatively benign.

Expect increasing focus on who will be the next US Fed Chair as President Trump will reportedly make an announcement on his choice in the next couple of weeks. But it’s doubtful it will make much difference to what the Fed does in the next year or so. With the Fed already on a tightening path, having already announced a schedule for reducing its balance sheet and being on track for more interest rate hikes, it’s doubtful that whoever is appointed will take a significantly different direction for US monetary policy over the next year or two compared to what would occur under Janet Yellen. The real test may come during the next crisis when a hawkish Fed Chair may be slower to react.
US data remains strong. September jobs data was hit by the hurricanes but a rebound is likely this month; the ISM business conditions indexes rose to very strong levels in September (no hurricane dip here); readings on employment plans were very strong and auto sales surged in September (although this may reflect hurricane replacement demand). This data is consistent with another Fed rate hike in December, with the money market reflecting the probability of a December move now at 79%.
As expected, the RBA left interest rates on hold for the 14th month in a row and retained a basically neutral short-term bias on rates. Improving global growth, strong business confidence and jobs growth, the RBA’s own expectations for a pick-up in growth and already high levels of household debt argue against a rate cut. However, record low wages growth, low underlying inflation, the impending slowdown in housing construction, risks around the consumer and the strong A$ argue against a rate hike. The next move in rates is likely to be up, but for now the downside risks are still significant and as such we remain of the view that it’s way too early to start raising rates just yet and don’t see a rate hike until late next year.
In the Australian share market retail-related names declined over the month as the Australian Bureau of Statistics (ABS) announced that consumer spending had fallen -0.6% sequentially from July, which had itself seen a -0.2% fall. This shocked a market expecting a +0.3% gain and is the largest two-month slide since 2010. Australia’s retail sector is under fire on multiple fronts: consumer behaviour is changing, with a greater focus on ’experiences’ such as dining and holidays – while stagnant wage growth and higher electricity prices are crimping disposable income. Meanwhile, global fast-fashion chains such as Zara, H&M and Uniqlo are ratcheting up the competition – and the threat of Amazon Prime continues to lurk on the horizon. This combination presents a material threat, one that has been reflected in the sector’s significant de-rating over the last 12 months. Conversely the miners also had a strong month, helped along by a quarterly report from the Department of Industry, Innovation and Science which suggested that strong iron ore and coking coal prices can continue to see earnings growth for the remainder of FY18, before waning in FY19. BHP, Rio Tinto and Fortescue Metals all made gains.
This is still a seasonally volatile time of the year for shares, North Korean risks remain high and Wall Street is overdue for a decent 5% or so correction which would affect other share markets. However, beyond short term uncertainties we remain in a sweet spot in the investment cycle – with okay valuations particularly outside of the US, solid global growth and improving profits but still benign monetary conditions – so we remain of the view that the broad trend in share markets will remain up. This should eventually drag Australian shares up from their range-bound malaise.