Economic update - December 2018

3 min read

Global equity markets continued to fall throughout the month, marking the end to the worst year since the GFC. Economic slowdown fears was a key theme globally in December, as concerns such as the everlasting US-China trade talks, Brexit uncertainty and an oversupply of oil brought instability to markets.

Australian markets trend downwards

Australian markets were negative in December, predominantly due to a decrease in business confidence following the release of various surveys, and as a result of smaller than expected GDP growth over Q3. Over the final quarter of 2018, Australia’s ASX 200 Index fell -8.5% which coincides with the broader global sell-off over the same period. The S&P/ASX200 Accumulation Index lost 0.12% over the month and the S&P/ASX Small Ords Accumulation Index was hit the hardest, losing -4.18%. On the contrary, the S&P/ASX 200 Resources Accumulation Index rebounded with a 5.07% increase in December after falling -6.50% due to a drop in oil prices over the previous month.

Fall in house prices continues

Australia’s housing prices continued to fall throughout December. Nationally, dwelling prices fell 0.7%. The downward pressure on housing prices was most significantly seen in Sydney and Melbourne. Together, the two cities account for roughly 50-55% of the entire value of Australia’s property market. Minutes from the RBA’s December meeting noted that housing credit growth is slowing, along with weakening demand. As Australia’s federal election looms closer, there is uncertainty in regards to the economic impacts of election promises made by both political parties. 

Australian budget to return to surplus

The Coalition has announced that Australia’s budget is set to return to surplus by the 2019/20 financial year, for the first time in a decade. The economy is growing faster than the OECD average and at a quicker rate than all of the G7 nations (excl. USA). However, the 2019 federal budget will be based upon an expectation of continued growth in tax revenues, which may be affected by the declining state of the domestic housing market, the outcome of the Hayne Royal Commission and tightening lending restrictions for consumers and small businesses.

US geopolitical tensions continue to influence markets

The threat of a trade war between the US and China continues to affect markets, despite the diplomatic agreement of a 90 day ‘truce’ which resulted during a meeting between US president Trump and China’s president Xi Jinping at the G20 summit held in Argentina from November 30th – December 1st. During this time, no new tariffs will be introduced as talks between the two countries are held. Ultimately, there are still large disparities between the positions of both parties - particularly in relation to intellectual property theft and certain elements of the current trade structure. In addition, US President Trump has created further tension for markets with his threats of a long government shutdown in the event funding is not received for his controversially proposed Mexican border wall.

US markets fall in December

US equity markets were hit particularly hard in December with the NASDAQ (-9.1%) and Dow Jones (-8.59%) both down on a total return basis. The MSCI World ex Australia (Unhedged) also fell -4.27% on the back of generally slowing global economic growth and political instability – particularly between USA and China.

Chinese property sector booming

Markets within Asia experienced smaller losses over the month compared to other developed markets. Hong Kong’s Hang Sen Index lost only -2.49%, Korea KOSPI was down -2.66% and the Shanghai Composite was down -3.64%. Most notably, Japanese equity markets entered into bear market territory, with the Nikkei 225 finishing the month -10.45%.

In particular, Chinese property stocks have surged in Q4 resulting from both a selection of domestic cities loosening their laws on property presales and banks offering cheaper mortgages to create demand. Beijing is working exceptionally hard to steady the property sector in order to drive an increase in domestic consumption.

Uncertainty in Europe weighing on markets

December has proved to be a difficult month for markets within Europe. Investors are largely unwilling to take significant risk due to the current market uncertainties. The STOXX Europe 600 Index ended the month -5.44% on a total return basis. Further falls in the CAC 40 (-5.46%), the FTSE 100 (-3.61%) and the DAX (-6.2%) attributed to the negative outlook for European markets within December.

On a brighter note, tensions surrounding Italy's coalition have lessened after agreeing to a 2019 budget that will not trigger the Excessive Debt Procedure (EDP). Europe’s Central Bank (ECB) has also halted quantitative easing (QE) after almost four years and has therefore stopped purchasing new bonds. This signifies a positive step forward, with the Eurozone in a much better position economically in comparison to before the commencement of QE.

A more detailed summary, including December market data, is also available.

Economy 29 Jan 2018
The annual returns for different asset class investments from 1998 to 2017.

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