Time for a breather?
Whilst we remain constructive on global equities we think the risks of a temporary pull back are increasing. We don’t think we are at the end of the bull market by any means. But it is time for a breather - at the very least - and we wouldn’t be surprised to see a hang overemerge after the party-like conditions seen over the last 2 months.
Following is a recap of market movements in October
Global share markets (or equities) piled on further gains in October with the MSCI All Country World Index returning 2.6% over the month (in local currencies). Headlines regarding the 30th anniversary of the October 1987 share market crash failed to spook the market, which instead focused on strong corporate earnings, and the potential for U.S. tax cuts being enacted this side of Christmas.
U.S. equities had yet another positive month with the S&P500 rising 2.2% during October. This marked the 7th positive month in a row and broughtyear to date returns up to 15.0%. Equities were supported by generally positive economic data, including better than expected GDP figures, and robust corporate earnings (particularly from the technology sector).
The Trump administration made some progress in the Senate with its proposed tax reforms. However, reports that any corporate cuts might be phased in over five years did weigh on domestically focused small cap companies.
European equity markets followed up September’s stellar run with a solid showing in October. The Bloomberg European 500 Index rose 2.0%.
Economic data showed that the eurozone’s recovery is continuing via solid GDP figures and the unemployment rate falling to the lowest rate since January 2009. European Central Bank President Mario Draghi provided an upbeat outlook for the eurozone economy. He announced that quantitative easing would be extended through to September 2018 but that the pace of central bank purchases would be reduced from €60 billion per month to €30 billion.
Political factors were front and centre during the month. The aftermath of Catalonia’s unofficial independence referendum caused some volatility. Madrid suspended the power of the Catalan Government and called for fresh regional elections to be held in December.
The Japanese market rose steadily throughout October and recorded its best month of the year with the TOPIX closing 5.5% higher. In the first half of the month, after considerable uncertainty over the final election outcome, the probability of an LDP victory increased, which gave investors comfort that existing monetary and fiscal policies would continue. This saw a significant pick up in net purchases of Japanese equities by foreign investors. In the final week of October Japanese corporations began reporting their earnings for the September quarter, which are expected to continue the positive trend seen in the previous quarter.
In China, the Shanghai Stock Exchange Composite Index rose 1.3% over the month, which pushed the market close to a 2-year high. Investors were buoyed by stronger economic data and a cut in the reserve ratio requirement for Chinese banks. The 19th Party Congress took place over the month but had a relatively subdued impact on markets given the lack of any major surprises. Stability in the Chinese yuan, which ended the month slightly higher against the USD, was another tail-wind for the share market.
Emerging equity markets as a whole produced another strong month of returns with the MSCI Emerging Markets Index rising 3.9% over the month (in local currencies). The Index is yet to post a negative monthly return in 2017 and is up 25.9% year to date. Taiwan and South Korea were among the top performing markets in October with tech stocks registering strong gains. Elsewhere, India posted a solid return as the government announced plans to recapitalise its state-controlled banks.
In Australia, equities made robust gains over the month with the ASX200 Accumulation Index returning 4.0%. Higher commodity prices for the likes of copper and oil sent Aussie mining and energy company share prices higher in October whilst bank shares also rallied - perhaps in anticipation of solid earnings results.
Back home and the NZ50 Gross Index posted a healthy 2.7% return over the month. Market darling A2 Milk drove the market higher again with a whopping 34.8% return in October - although we note it has given up some of these gains in November.
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