| MERCER SECTOR SURVEYS – APRIL 2017 |
Global equity markets continued to drift higher in April 2017, led by growth and small cap stocks. The global economy has strengthened, reflecting the strongest and most synchronised growth since 2010 among developed and emerging markets. The International Monetary Fund (IMF) revised its 2017 growth forecast for the world economy to 3.5% from 3.4%. Headline inflation rates have increased while long-term bond yields are also higher than last year. These conditions have lowered expectations of additional monetary easing policies from major economies across the globe.
A strong start to first quarter earnings season and hopes that potential US tax reforms or cuts can pass in August drove near-term momentum. Volatility temporarily rose and then fell due to tensions in North Korea and South Africa, as well as the terror attacks in St Petersburg and Paris. Political risks remain elevated with the United Kingdom (UK) Prime Minister Theresa May calling for an early general election on 8 June 2017 to strengthen the Brexit negotiating position. Analysts also paid close attention to the decisive second round of the French election on 7 May 2017 between the centrist candidate Emmanuel Macron and the populist candidate Marine Le Pen.
Meanwhile, the equity market rally pushed valuations ever higher. The Shiller P/E ratio on United States (US) equities is at its highest level since the tech bubble. While Trump’s tax agenda has been delayed, corporate tax cuts still appear likely in the next year, which should give a boost to earnings. It is still unclear what a final tax package might look like, but it is more likely to favour small-caps over large-caps.
Emerging markets benefitted from improved sentiment and stronger macro-economic conditions. A softer US dollar and signs of a more dovish Federal Reserve (Fed) rate policy stimulated investors’ sentiments. Emerging markets performance was led by China after stronger than expected gross domestic product (GDP) growth of 6.9% was recorded for Q1 2017.
Domestically, support from low interest rates continues, although lenders have increased mortgage rates in its wake, particularly focused on investors and interest-only loans. Growth in household borrowing is still outpacing growth in household income. The new recent supervisory measures are expected to curb the risks of this rising household debt. The housing market situation continues to vary across the nation, with attention focused on the uptick of apartments scheduled to flood eastern seaboard capital cities in the next few years.
| AUSTRALIAN SHARES |
The broad Australian equity market grew modestly over April, as the S&P/ASX 300 Accumulation Index increased 1.0% for the month. Returns were positive across most of the market spectrum, with the best relative performer being the S&P/ASX mid 50 Accum, increasing 1.7% for the month. The worst performer was the S&P/ASX Small Ordinaries, decreasing by 0.3% over the month. The best performing sectors were Industrials (+4.1%) and IT (+3.5%). The weakest performing sectors were Telecom Services (-9.5%) and Consumer Staples (-2.5%). The largest positive contributors to the return of the index were CSL, ANZ and CBA, with absolute returns of 5.9%, 3.4% and 1.7% respectively. In contrast, the most significant detractors from performance were Telstra, Wesfarmers and Fortescue Metals with absolute returns of -8.9%, -4.3% and -14.4% respectively.
| The latest Mercer sector survey data for April reveals that the median Australian shares manager performed in line with the index over the quarter and the year. Over the longer term periods of three and five years, the median manager has outperformed by 0.8% and 1.2% respectively.
Income Oriented strategies were the strongest performing style over three month, three year, and five year periods recording excess returns of 0.7%, 3.3% and 2.7% respectively. Over one year, Enhanced Index strategies were the leading performer with excess returns of 1.8%
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“The market’s dramatic rotation over the year is clearly demonstrated in the return profile of Hyperion, a quality growth manager which delivered the best return for April, up nearly 5%, in the peer universe but with the strong returns of the cyclical stocks and the de rating of growth names over 2016 impacting its portfolio, it is the weakest performer over the last year, up 8.1%” said Clare Armstrong, a principal in Mercer’s Manager Research team. “The stronger quarter for quality has bolstered the portfolios of many stock pickers so we now see very healthy returns posted for different investment styles over the year, Dimensional Fund Advisors, Allan Gray and Martin Currie are flying the flag for value approaches to investing alongside high conviction strategies like Macquarie and Alleron each returning close to 25%, well ahead of the market’s healthy gain of 17.5%”
“With the Australian market performing well so far in 2017 the issue that divides opinion amongst the managers relates to the outlook for resources. Today the key risk to portfolios is that valuations in most sectors other than Resources are starting to look a bit stretched, especially in the so-called yield proxy stocks many of which are trading at the most expensive they have been relative to bonds in the last 12 months” commented Armstrong. “This makes the decision to take profits from value portfolios a more difficult one”
OVERSEAS SHARES |
The broad MSCI World ex Australia (NR) Index was up 1.3% in hedged terms and 3.6% in unhedged terms over the month, as the Australian dollar depreciated against the major currencies. The strongest performing sectors were Consumer Discretionary (+4.9%) and Industrials (+4.9%), while Energy (-0.3%) and Telecommunication Services (+0.6%) were the worst performers. In Australian dollar terms, the Global Small Cap sector increased by 4.1% while Emerging Markets increased 4.2% in unhedged Australian dollar terms.
Over April, the NASDAQ returned 2.3%, the S&P 500 Composite Index rose by 1.0% and the Dow Jones Industrial Average increased by 1.4%, all in US dollar terms. Major European equity markets also experienced mostly positive returns as the CAC 40 (France) increased 3.1% and the DAX 30 (Germany) increased 1.0%. The FTSE 100 (UK) retreated by 1.3% however. In Asia, the Japanese TOPIX was up 1.3%, the Indian BSE 500 was up 2.7% and the Hang Seng Index was up 2.1%. The SSE Composite (China) decreased 2.1% over April.
| Mercer sector survey data for April reveals that the median Overseas shares manager outperformed by 0.8% over both the three month and one year periods, while over the longer term periods of three and five years, the median manager has outperformed the benchmark by 0.6% and 0.3% respectively.
SRI strategies were the strongest performers over three months with excess returns of 1.5%, while over a one year period, Long Short strategies were the best performing style outperforming by 1.9%. Targeted Volatility strategies were the strongest performing style over three years posting excess returns of 1.6% while over five years, Long Short strategies were again the leading performer with excess returns of 1.4% RESULTS The preliminary medians for the Mercer Surveys were as follows:
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