Quarter in review: September 2018

The September quarter performance for the Australian market was more subdued, with the ASX 300 up 1.5%. Global markets were a lot more jittery during the quarter with all the geopolitical and trade related tensions, but the US continued to power ahead. The ASX 300 not only underperformed the MSCI World index (+4.5%), but also US S&P500 (+7.2%), as the Australian market reacted more negatively to slowing China data, US dollar strength and an escalation of rhetoric around trade wars.

The best performing sectors in the ASX 300 for the quarter were Telecommunications (+25.2%), Information Technology (+9.8%) and Health care (+4.6%). The underperforming sectors were Utilities (-3.9%), Materials (-1.3%) & Consumer Staples (-1.0%)

Some of the key issues for the quarter were:

1. Tariffs and Trade Wars

There was some good news on the trade front with the Canadians and Mexicans coming to terms with the US on a new trade deal called the US, Mexican and Canada Trade Agreement (USMCA), replacing the erstwhile North American Free Trade Agreement. Trump hailed the deal as a blueprint for future deals. More disturbingly though, the US administration increased the rhetoric against China. Vice President Pence accused China of various things including trying to manipulate the US mid-term elections in November. The US also slapped tariffs on an additional $200b of Chinese imports on 24 September, at the rate of 10% and that will further increase to 25% on 1 January 2019. China promptly slapped tariffs on $60b of US imports in retaliation. With bipartisan support for trade and intellectual property related issues against China, there is little expectation of any settlement on trade in the near term.

2. China slowdown

China’s economy continues to slow down as the government tries to reduce leverage within the system. More recently, the market has been worried about the impact of the trade war on China’s economic growth. With tariffs on $250b of exports kicking in on September 24, it is widely expected that the export related sectors will slow down. There is a growing expectation that the Chinese government will try and offset that through greater spending on infrastructure as well as by providing export subsidies.

3. Energy

With the imminent sanctions against Iran commencing from early November, oil prices have risen strongly, up 4.6% over the quarter.This is despite the Organisation of the Petroleum Exporting Countries agreeing to increase production to meet the shortfall. Russia has also agreed to increase its production to ensure that prices don’t escalate rapidly. Prior to the sanctions, Iran exported ~2.5m barrels per day. Assuming this is enforced it will most likely put pressure on supply thus market consensus is for crude prices to remain elevated for the foreseeable future.

4. US dollar

The USD has been strong and that has started to take a toll on emerging markets. The US Federal Reserve (Fed) raised the Fed Funds rate by 25 basis points in September to 2.00%. The Fed Chairman appeared to be more hawkish at the press conference post the rate meeting. A December 2018 rate hike now is extremely probable, with expectations of at least a further two hikes in 2019.

5. Change of Prime Minister

Scott Morrison was appointed as Australia’s 30th Prime Minister. He will be the 6th Prime Minister in the last 10 years. With ex-Prime Minister Malcolm Turnbull retiring from Parliament, his seat of Wentworth goes to a by-election on 20 October 2018. This will be important given that the Coalition currently holds 75 out of the 150 seats in Parliament, and is tenuously dependent on cross bench support.

6. Royal Commission Interim Report

Commissioner Hayne submitted his interim report on 28 September 2018. The report did not include any recommendations; the key concerns related to the entire finance industry failing to act in the best interest of the consumer. The interim report concluded there was little need to introduce new legislation as most of the laws required to oversee the industry were already in place. The report also observed that the key regulatory bodies APRA and ASIC chose not to use their legislative powers to ensure compliance, instead choosing a more collaborative approach to dealing with the banking and wealth intermediaries.

7. Sydney and Melbourne house prices are falling

Median Sydney house prices are down 6.1% whilst Melbourne house prices are down 3.4% year on year to September 2018. There are potential negative implications if more stringent housing credit standards are imposed post the Royal Commission. Further pressure on the investor market could come from proposed changes to negative gearing should the Labor party win government in the upcoming Federal election. A prolonged period of falling house prices is likely to have a negative wealth effect and could impact consumer confidence and spending.

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