Investment market review - Quarter-ended 31 Mar 2019
Australian shares slightly underperformed global markets in the March 2019 quarter, rising 10.9%.
At a sector level, the best performers were Technology (up 20%), Mining (up 15.7%) and Telecommunications (up 14.5%). Relatively speaking, Consumer Staples were the worst-performing sector (up 4%), followed by Financials (up 4.8%) and Healthcare (up 5.5%).
Strength in the Australian mining sector was driven by a dam collapse in Brazil that reduced iron ore production. Due to the reduction in world-wide supply, iron ore prices rose and Australian miners such as Rio Tinto and BHP benefited from increased demand and higher prices.
Technology shares were clear outperformers during the March 2019 quarter with investors comfortable chasing growth opportunities in this space.
Listed property trusts
The Australian real estate investment trust (A-REIT) sector generated a strong return of 14.4% for the March 2019 quarter influenced by a decline in bond yields.
In addition, we saw the growth prospects of select REITs such as Dexus and Goodman Group re-rated by investors on the back of positive earnings results relative to the broader market. Retail REITs by contrast such as Scentre Group continued to track at a discount to their underlying asset base as investors were concerned about their prospects given poorer retail sales.
A-REITs are often viewed by investors as a substitute for bonds so falling bond yields can result in stronger performance for this asset class. The trigger for lower bond yields was weaker Australian economic data. For example, economic growth in 2018 was lower than expected. This saw markets increasingly price-in rate cuts, driving yields on existing bonds lower. Therefore, by comparison, yields on income substitutes like
A-REITs look more attractive so their prices go up as a result.
The international share market had a strong March quarter with the MSCI World Index in Australian dollar terms gaining 11.5%.
The shift in international markets has been driven by two factors. Firstly, the US Federal Reserve has effectively signalled an end to interest rate hikes for 2019. This means it will continue to be easier for consumers and businesses to borrow, supporting economic growth. Secondly, there was positive progress on the US-China trade war. Both countries halted their ‘tit-for-tat’ on raising tariffs against each other and are working towards a final deal to resolve their disagreements, calming fears that further escalation would hit international trade and reduce global growth. The easing of trade tensions and the end of US interest rate increases in the short term have both supported riskier assets like shares. Prices have now almost completely recovered from the December 2018 sell-off.
Both the Australian and US yield curve fell during the March 2019 quarter for different reasons.
In Australia, the focus was on the weaker economic environment with soft and hard data highlighting economic weakness. An example of soft data is the weaker business sentiment disclosed in the NAB Business surveys which reflected weaker business confidence compared to the historical average, falling over the course of 2018 to weakly positive levels. Business conditions have held up better, supported by strong commodity prices but have still weakened in recent months.
The Reserve Bank of Australia (RBA) left the cash rate unchanged at a historical low of 1.50% in the March quarter.
It focused on the disconnect between slowing economic growth and a strong labour market. This was triggered, in part, by disappointing Australian economic growth data for the December 2018 quarter (released in the March quarter).