Virtually no difference to performance. This outcome was due to periods of weakness causing un-hedged equities to outperform hedged equities.
Our overall conclusion is that for long-term investors who expect to stay invested through the cycle, there is close to no benefit in hedging. This is not to say investors cannot add return by hedging at particular times if they have a strong conviction, but picking short-term foreign currency moves is notoriously difficult.
Australian economy: Steady Groundhog day for the Reserve Bank of Australia (RBA) with 23 unchanged cash rate decisions and counting? The RBA still believes the next move in official rates is up. Q2 2018 GDP was better than expected at 3.4% YoY. The surprise was driven by better household consumption. Worryingly, consumption was the result of drawing down on savings, which is not surprising given that wages per employee have grown by only 1.8% YoY – less than the rate of inflation. Other data is generally soft. House prices continue to fall in most capital cities. Building approvals fell –1.2% for July and are now down –6.3% YoY. The reporting season was soft, with fewer companies than usual exceeding expectations. Unemployment stayed low at 5.4%.
Markets: Equities and bonds rise August saw a continuation of solid returns in equity markets. International equities rose 4.5% in AUD, helped by a strong USD. The ASX 200 Accumulation Index finished up 1.4%. The top- performing sectors were Telecommunications (+13.1%), Information Technology (+12.9%) and Healthcare (+10.7%) while Materials (-4.8%), Energy (-1.2%) and Financials (0.0%) were the worst performers. The bond market rose, with the Bloomberg AUD Bond Index finishing up 0.81%. We are continuing our neutral position in Australian equities, where valuation is reasonable versus other markets, but earnings revisions have turned down. We see better opportunities for growth in international shares, particularly in emerging markets and more specifically China. Outside of China, the strong USD has led to selling in indebted emerging markets such as South Africa, Argentina and Turkey. We also retain our neutral position in Australian bonds. Although the Australian economy has surprised positively this month, we do not think an underweight position is warranted since consumers appear under pressure as wages lag inflation.
AUD: Pressured by political and Chinese risks, but bulk commodities support With the change in the Australian prime minister, it remains to be seen whether political uncertainty persists, which would have a negative impact on the AUD. Furthermore, US-Chinese trade war concerns are likely to weigh on the AUD. On the other hand, some support could come from steady bulk commodity prices. Also, economic growth in Australia has picked up along with employment, which is positive for the AUD. However, inflation remains within the RBA’s target range and lower wage growth, private investment and household consumption have diminished the room for a rate hike. We maintain our neutral view on AUD/USD, but revise our forecast lower from 0.75 to 0.72 over 3M and retain it at 0.75 over 12M.
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