Financial markets enjoyed a solid rebound in June off the back of optimism that the escalating tariff war between the US and China would subside and global interest rates may soften. We cover notable developments for the month in our June 2019 Financial Market Review below.
Following a sharp sell-off in May, global equities rebounded strongly in June. Two key factors contributed to the change in the previous month’s negative sentiment.
- Hope that the US and China could work out a compromise at the G20 world forum.
- Expectations of further interest rate reductions, as market consensus swung towards a slowing global economy.
Equity markets and interest sensitive property, infrastructure and fixed income assets responded positively. In fact, the past six months has seen the strongest and broadest cross-asset class rally in a decade with nearly every major asset class rising materially.
- The US market (S&P 500) rose 5.7% in the month despite the next corporate reporting season potentially disappointing investors. Global activity data has been undershooting expectations since May.
- The Chinese market (Shenzhen CSI 300) also rebounded off the back of a truce in the tariff war, rising 5.2%. President Xi needs trade tensions to cool down to support China’s domestic economy, while pursuing big plans for financial market liberalisation. Hong Kong rallied 5.7% as did Asia in general, with the MSCI Asia Index rising 5.8%. Japan rose 2.8% for the month.
- European markets posted solid results, particularly Germany where the DAX Index jumped 6.7% for the month. The European Central Bank President Mario Draghi indicated the Bank would use necessary stimulus if the economic outlook soured. The UK market had a positive month, but underperformed other parts of Europe, with a 3.6% increase. Brexit continues to weigh on sentiment, having claimed a second Prime Minister.
West Texas oil rose 9.3% to U$58.5 barrel on tensions in the Gulf where Iran was accused of attacking oil vessels and shooting down a US Airforce drone. Gold closed at U$1,409 (up 8.0%) given these tensions and reports China was now becoming an active buyer. Base metals were mixed, but iron ore surged again, rising 15.5%.
The Australian market rose 3.7% in June, which was below most other major markets. This relative underperformance, however, follows a strong May when Australia was one of the few markets to deliver a positive return. The Small Ordinaries had a less stellar rise of just 0.6% and in fact fell -0.9% over the full financial year.
Resources (+6.4%) was the best performing sector over the month. The rise was led by gold stocks and the major mining companies. Interest rate sensitive stocks within the Industrials sector (up 5.4%) accounted for that sectors strong rise. Property Trusts (up 4.2%) also enjoyed a solid month as did other interest sensitive equities, with Financials (up 3.5%) and Utilities (up 3.2%) both rising. Consumer Discretionary (down 1.5%) was the worst performing sector. This is likely to reflect ongoing weak retail sales growth as well as poor consumer confidence data.
Fixed Interest & Currencies
As expected, the Reserve Bank of Australia (RBA) cut the official cash interest rate by 0.25% to 1.25% in June, with a further 0.25% reduction announced in early July. The RBA has indicated that the unemployment rate in Australia could fall further than previously thought, before tight labour markets will become inflationary. This provides the central bank with more scope to ease monetary policy in an attempt to lower unemployment.
Along with the lowering of cash interest rates, the 10-year Government bond yield fell 0.14% to 1.32%. Mortgage rates are now at their lowest level since the 1960’s.
In the United States, 10-year Government yields also fell by 0.14%, due to guidance by the Federal Reserve. Foreign exchange markets took their lead from strong commodity prices, particularly iron ore, and the local currency rose over the month to close the financial year at US 70.1 cents.
Outlook and Portfolio Positioning
Recent months have demonstrated that equity markets have been more influenced by movements in interest rates than resolution of the US and China tarrif war. However, this may not always be the case and if disagreement on trade continues, we anticipate increased equity market volatility in the second half of 2019. Conversely, if the the world’s two largest economies can reach an acceptable compromise, the recent rally on global share markets may continue. With low interest rates and low inflation seemingly entrenched, global share market valuations are not excessive, despite the strength of markets over recent months.
For investors, the shorter-term outlook for share markets remains highly unpredictable, given the dependence on trade negotiations for direction. In such an environment, remaining focussed on longer term strategies becomes even more important than normal.
The recent decline in Australian interest rates has pushed expected returns from low risk defensive investments below normal levels of inflation. As such, the environment has become more challenging for investors, as exposure to investment risk becomes necessary to provide any scope for returns to exceed inflation. Ensuring this risk is diversified remains the key component of our investment strategies. With the outlook for the local economy remaining relatively soft, holding material levels of exposure to global investments is a core component of this diversification.
Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned here should only be made after reviewing the relevant Product Disclosure Statements. Past performance is not a reliable indicator of future performance. No revenue has been received by Accru Financial Planning as a result of this article.
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