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Market Commentary May 2017 Markets were dominated by political and geopolitical events throughout May. While centrist Emmanuel Macron’s victory in the French presidential election boosted investor confidence early in the month, ongoing geopolitical concerns in the Middle East and North Korea continued to weigh on market performance. In the US, concerns mounted over the possibility that US President Donald Trump could be impeached following accusations that he disclosed classified information to Russian officials and following the revelation that he sought to interfere with the FBI investigation into former US National Security Adviser, Michael Flynn. These events corresponded with the MSCI World Index and S&P 500 Index falling more than 1.5% and 1.8% respectively in a single day. The US Republican Party passed its healthcare reform plans through the House of Representatives, providing some comfort to investors concerned about the new administration’s ability to implement tax reform. The US Federal Reserve (Fed) left interest rates unchanged at its May meeting, noting the recent weakness in US economic data, but expressing the belief that this was ‘transitionary’ in nature, while signaling that they are on track to continue raising interest rates in 2017. Further plans to reduce the Fed’s $4.5tn balance sheet were outlined, with a proposal to allow a capped number of bonds to roll-off monthly without being reinvested. Towards the end of the month, US equities rallied following the release of the US Federal budget, which outlined proposed infrastructure and defense spending initiatives. The MSCI World Index ex-Australia (hedged into AUD) rose 1.9% over the month. The Australian dollar depreciated against most developed market currencies in May, which resulted in a return for unhedged overseas equities of 2.9% (in AUD). In developed markets, the UK (4.9%) and Japan (2.2%) outperformed the broader market, while Canada (-1.4%) and the US (1.4%) underperformed. The MSCI Emerging Markets Index (3.4%) outperformed unhedged developed markets. The Reserve Bank of Australia revised their inflation and growth forecasts slightly upwards, with first quarter GDP weakness attributed to the impact of Cyclone Debbie on coal exports. Australian equities trended lower over the month, led by weak performance from the banking sector following the release of the Australian Federal Budget, which proposed a new levy on major banks. The broader Financials sector was also weighed down toward the end of the month, when ratings agency Standard & Poor downgraded the credit ratings of 23 Australian financial institutions, citing heightened risks to a sharp correction in domestic property prices, compounded by weak domestic wage growth. The S&P/ASX300 Accumulation Index fell 2.7% in May. Small Cap stocks fell 2.1% for the month, while Large Cap stocks (-3.3%) underperformed the broader market. Industrials (4.7%), Telecommunication Services (3.4%) and Energy (1.5%) outperformed, while Financials (-7.7%) and Healthcare (-2.4%) were the worst performing sectors. The yield on 10-year Australian Government bonds fell to 2.4% over the month. Elsewhere in the world, the US, UK and New Zealand 10year Government bond yields fell, while Japanese and Euro 10-year Government bond yields were flat. In Australia, long dated bonds and inflation-linked bonds both outperformed the broader market. Market Performance – 31 May 2017 Performance % Month Quarter FYTD Australian Equities -2.7% 1.4% 13.6% Australian Unlisted Property 0.5% 2.9% 9.9% Australian Listed Property -1.0% 2.2% -1.2% Global Listed Property (Hedged into AUD) 0.6% 0.3% 2.5% Overseas Equities (Hedged into AUD) 1.9% 4.3% 21.0% Overseas Equities (Unhedged into AUD) 2.9% 8.6% 18.5% Emerging Markets (Unhedged into AUD) 3.4% 11.5% 22.9% Australian Bonds 1.2% 2.4% 1.2% Overseas Bonds (Hedged into AUD) 0.6% 1.4% 0.7% Cash 0.1% 0.4% 1.7% Australian Dollar vs. US Dollar -0.5% -3.2% 0.0% Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays Market Performance – 31 May 2017 Month Quarter FYTD 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Australian Equities Australian Unlisted Property estimated Australian Listed Property Global Listed Property (Hedged into AUD) Overseas Equities (Hedged into AUD) Overseas Equities (Unhedged into AUD) Emerging Markets (Unhedged into AUD) Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays Australian Bonds Overseas Bonds (Hedged into AUD) Cash Australian Dollar vs. US Dollar