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Financial Planning Update - October 2019
11 November 2019
Markets
A relatively subdued October saw ‘the most unloved bull market ever’ grind higher, volatility continue to fall, and investors bring a little more risk back to the table. Australian inflation data came in broadly in-line with expectations (+0.5% for the September quarter), easing pressure on the RBA for another rate cut by year end. The federal reserve closed out the month with what’s now be coined a ‘hawkish cut’ and at the time of writing the market broadly expects rates to stay on hold for a while now. A ‘hawkish cut’ is a new one in market vernacular meaning a rate cut, which is supposed to be ‘dovish’ and supportive of markets, accompanied by ‘hawkish’ commentary. The commentary is designed to stop markets assuming more cuts are on the way and discounting them straight away. This speaks volumes about the degree of uncertainty in the market and the Fed’s increasingly uneasy relationship with financial markets and the cause and effect of monetary policy.
Australian equities slipped -0.4% for the month, international equities rose by +0.8%, while emerging markets climbed +2.2%. A-REITs rebounded from last month’s drop returning +1.4%, while in local currency terms G-REITs and infrastructure posted +2.0% and -0.2%, respectively. The resurgent risk appetite of investors was partly to blame for the lacklustre month of fixed interest assets, returning -0.5% domestically and -0.7% internationally. Cash returned +0.1% for the month, and gold appeared seemingly resilient given investors risk appetite for the month.
Australian 10-year yields rose from 1.0% to 1.1% during the month while their US counterparts traded in the ranges of 1.5%-1.8%. Domestically, the Morrison government remained resistant to the idea of any fiscal stimulus suggesting the RBA’s monetary intervention will need to do the heavy lifting in terms of economic growth. Conversation of our home-grown quantitative easing policies continued in the wake of this dynamic, with many speculating on the scale in which buying government bonds with newly created money can truly impact the economy.
Earnings season kicked off in the US showing the widely anticipated signs of softer consumer data, although seemingly not as bad as investors expected. At the time of writing over 85% of earnings had beaten estimates, propelling the S&P 500 above 3000 and subsequently the gauges record high.
Sentiment continued to improve after the US China trade war edged towards a ‘Phase 1’ agreement in which resolution was sought over intellectual property, agriculture and currency. Although clearly a long way from that, and nothing we haven’t heard before, this alleviated tensions and equity markets responded well; the MSCI All Country World index lifting +2.7% for the month on a total return basis.
Brexit continued to be at the forefront of the UK and EU’s agendas, but was yet again delayed from its original October 31 deadline. The UK is set for a December 12 general election in which the stakes are high for Prime Minister Boris Johnson. For markets this means a whole lot more uncertainty.
The pound rose +4.1% (against a basket of leading global currencies), UK equities fell -1.9% (FTSE 100) and UK 10-year government bond yields finished the month at 0.6%.
Portfolios
The Mulcahy Portfolios posted mixed results for the month with returns ranging from -0.3% to +0.3% across the nine active risk profiles. For the direct share models, those with a higher allocation to growth assets fared a little better, whereas for the no direct share models, the results were somewhat mixed.
Asset allocation did little to impact performance for the month. The portfolios’ overweight to Australian equities detracted slightly given the poor domestic performance we touched on above. The portfolios’ underweight to international equities was also a slight drag on performance, as did having no exposure to property & infrastructure assets. These negatives were offset by the portfolios’ slight overweight to cash and underweight to fixed interest, as cash proved defensive against falling fixed interest markets, driven by investors preference
for risk-assets for the month.
The more meaningful implications on the performance of the portfolios came from manager selection during the month. VanEck Vectors Austrian Floating Rate ETF (FLOT) outperformed its fixed interest composite benchmark, returning +0.2% for the month. The ActiveX Ardea Real Outcome Bond Fund performed similarly, returning -0.2% for the month. This slightly negative return compares well to the more extensive negative returns of the asset class, both domestically and internationally. The portfolios’ exposure to the Vanguard FTSE All World Ex-US ETF
(VEU) added value, and remains a high conviction investment thesis of an underweight to US equity markets. The Fund returned +0.6% for the month.
The Mulcahy Direct Australian Equity component returned -0.2% for the month which was a pleasing result given the -0.4% performance of the S&P/ASX 300 Index. Compared to the index the portfolios slight overweight to consumer discretionary and materials and underweight to real estate each added value. From an absolute return perspective, the highest performers were Bluescope Steel (BSL, +11.0%), Challenger (CGF, +8.0%) and Star Entertainment Group (SGR, +7.8%). At the other end of the spectrum was Newcrest (NCM, -9.9%), ANZ (ANZ, -6.2%) and Treasury Wine (TWE, -5.4%).
While negative returns are never welcome, it’s worth keeping a longer-term perspective in mind when it comes to investing. Since inception, the Mulcahy Portfolios have continued to outperform their respective objectives. While lower yield and higher volatility environments may increase difficulty in achieving these objectives, we remain confident in the fact the portfolios are positioned to perform in line - subject to the usual ups and downs of equity markets.
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