Over the past four weeks, sentiment has bounced as there was some signs of reconciliation between U.S. and China. The S&P/ASX 200 was up 4.2% and breaching the 6,700 mark. Meanwhile, the S&P 500 is near all time highs at just over 3,000, rising 2.8%. The Euro Stoxx 50 was up 4.7% and Japan was the big outperformer with the Nikkei 225 up nearly 8%. China, like the U.S., was a relative underperformer with a 3.1% return on the CSI 300 index.
Commodities rebounded as copper and oil rose, the latter buoyed by an attack on Saudi Arabian facilities, though U.S. and Saudi Arabia moved to ease concerns of a supply squeeze. Gold and precious metals fell slightly, after surging since May.
In the fixed income world, bonds sold off as yields rebounded despite the U.S. Federal Reserve (Fed) and European Central Bank (ECB) both cutting rates, with the ECB restarting QE. U.S. 10-year treasury yields rose by 0.25% to 1.8% whilst Australia’s 10-year bond yield rose by 0.2% to 1.06%.
The Australian Dollar continues to trade around 68 U.S. cents.
Oil spiked as key Saudi Arabian oil assets were attacked with Yemeni rebels taking the credit but the U.S. pointing the finger at Iran. The U.S. saw huge spikes in the overnight repo rate (used to provide short term liquidity) and the Fed needed the intervention to steady the ship, though markets took a blasé approach and brushed it off as a timing issue, with large bond issuance and corporate tax payments due in a short timeframe being touted as the cause. All this, alongside heavily watched monetary policy decisions, made for an eventful month in the macroeconomic world.
U.S. economic data was mixed, with activity indicators for both manufacturing and services significantly weakening over the prior months and now bordering on readings that signal contraction. Employment remained resilient though the number of jobs added was less than expected. Inflation was on the rise which could pose a threat to the current consensus view of lower interest rates. Core inflation came in at 2.4%, higher than expected, and above the Fed target of 2%. Wages also rose more than expected, rising 3.2% in the twelve months to August. This led to the Fed being heavily divided but deciding to cut rates by 0.25% as expected.
Australian housing data continues to be weak as construction, building approvals and sales figures continue to slump. GDP was also the weakest in years at 1.4% for the last financial year. On a positive note, the manufacturing indicator rebounded strongly after several weak readings over the past few months.
Over in Europe, weak manufacturing continues to be offset by services, but GDP is expected to be a weak 0.2% for the June quarter. In the effort to spur on the European economy, the ECB announced a cut to drive interest rates further into negative territory, from -0.4% to -0.5%, and restarted a Quantitative Easing (QE) program to the tune of 20 billion Euros per month with no specified end date.
In China, manufacturing activity indicators are showing nascent signs of a rebound, but it remains too early to tell if it is sustainable. Exports unexpectedly fell for the year to August, showing the effects of the trade war. There was another Reserve Requirement Ratio (RRR) cut to provide monetary stimulus but markets are expecting further stimulatory measures in the coming months to combat the slowdown.
On the trade front, Trump moved to delay a 5% increase in tariffs that were set to go into effect on the $250 billion worth of Chinese goods currently tariffed at 25%. China also exempted some items from the tariff list in a sign of easing tensions. However, markets remain sceptical that an agreement can be made given the recent history.
Is value investing making a comeback?
For over 10 years, value investing has been a serial underperformer but over the past couple of weeks, there has been some reversal. Although there have been signs of life for value investors in 2011 and 2016, the performance of value stocks has been extremely poor relative to growth stocks.
This period has been worse for value investors than even the Nifty-fifty bubble of the 1970s and the Dotcom bubble of the early 2000s. Furthermore, it is not just the degree of performance differential that has hurt value investors. Value has underperformed for a much longer period than the 1970s or 2000s. This has left many investors questioning whether value is dead for good. The answer is probably no. As seen in the past, the momentum of one style outperforming the other eventually reverses. With the recent outperformance of value stocks, value investors are hopeful once again, as they were in 2011 and 2016, that a longer-term reversal will materialise.
Monetary policy, specifically QE has been a big headwind for value investors. QE was implemented to bring down borrowing costs on the long end and was hugely successful in this respect. As seen in the chart below, the yield curve (difference between yields of different maturity dates) has been key in the relative performance of value stocks. A flattening yield curve means the difference between long-term and short-term interest rates are falling. The low, and in some cases negative, long-term yield environment has led to lower long-term discount rates which means that investors tend to value future growth more highly as long-term interest rates fall and growth stocks tend to outperform in such cases.
In recent weeks, long-term yields have rebounded after collapsing in August, which has resulted in value’s recent outperformance. The question of whether this can continue will largely hinge on central bank reactions to the state of global economic growth which is, in turn, currently hostage to the U.S.-China trade talks. The ECB has already restarted QE, just months after ending it, and there are calls from Trump for the Fed to do the same, with the Fed recently hinting that it is considering the possibility of a fourth QE program.
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This month’s perspective highlights that market sentiment on all asset classes is constantly changing. It is important for us to quickly recognise any threats, to preserve your investment capital or to identify early investment opportunities to maximise any return advantages. At Partners Wealth Group we don’t get complacent with the current state of play and constantly monitor investments and your portfolios.
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