Strong corporate earnings and a pick-up in M&A activity provided support for risk assets in a month where developed market economic data releases were generally weak. Defensive assets were more heavily influenced by economic data and also produced strong returns. Quarterly economic growth in the US was negative for the first time in three years. However, investors attributed much of the decline to weather conditions earlier in the year and the growth outlook remains broadly unchanged. In contrast, first quarter growth in Japan was very strong, but much of the increase was due to consumers bringing forward purchases in advance of the sales tax increase. In Europe, below target economic growth and inflation led the market to price a higher probability that the European Central Bank (ECB) would announce some form of additional monetary easing at its June meeting. Across the emerging market universe, several elections and other significant political events occurred and investors showed a clear preference for stability.
Post month-end the ECB announced a stimulus package that included cutting the Eurozone policy interest rate to 0.15% and cutting the deposit rate (from banks to ECB) to -0.1%. The package also included a lending program aimed at incentivizing new bank lending across the Eurozone.
The investment returns of the major markets for one and three months to 31 May 2014 are summarised below.
*Estimate at 10/6/2014
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
The MSCI World ex-Australia Index (hedged into $A) rose 2.6% over the month. Across developed markets the strongest performing countries in local currency terms were those in the Eurozone as investors responded to the prospect of additional monetary stimulus. Emerging markets outperformed developed markets on an unhedged basis due to strong economic data releases across Asia and several positive (i.e. stabilising) political developments. In local currency terms, Russia and India were among the best performing countries.
Australian shares as represented by the S&P/ASX300 Accumulation Index returned 0.6%, underperforming hedged overseas equities as falling iron ore prices led to poor performance from the Materials sector. In contrast, Energy stocks were the best performers in the Australian market, while Property Trusts underperformed the broader market and also unlisted Australian property. Small cap stocks underperformed large caps.
Bonds provided strong returns due to weaker US economic data releases and the prospect of additional monetary stimulus in the Eurozone.
The Australian Dollar (AUD) strengthened against most major developed market currencies. The AUD continues to be one of the strongest performing currencies due to the higher interest rates in Australia relative to the developed world average.