July was awash with geopolitical events. Violence continued to rage in Iraq and Syria as the Islamic State (formerly ISIS) declared a caliphate in the territory it controls, while tensions also flared in Gaza. Arguably the biggest event in terms of impact on investor sentiment was the tragic downing of flight MH17, which was allegedly shot-down by Russian separatists in Eastern Ukraine. Major Western nations (and regions) responded by imposing additional sanctions on Russia, mostly targeting the weapons, energy and finance sectors. Post month-end, Russia announced a ban on food imports from several countries / regions including the US, Europe and Australia.
US economic data was broadly strong, with second quarter GDP posting a strong result following a weak, weather-impacted, first quarter. The US Federal Reserve continued the tapering of its quantitative easing (QE) program, reducing monthly bond purchases by USD 10 billion. Finally, on July 30, Argentina defaulted on its debt after holders of 2033 Discount Bonds did not receive their coupons. This was linked to the ongoing legal dispute between Argentina and holdout investors in earlier defaulted bonds.
The investment returns of the major markets for one and three months to 31 July 2014 are summarised below.
*Estimate at 11/8/2014
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
The MSCI World ex-Australia Index (hedged into AUD) fell 0.7% over the month. The Australian Dollar weakened against most major currencies and this resulted in a higher return for the unhedged overseas equities. Across developed markets the strongest performing countries in local currency terms were Australia, Canada and Japan. Emerging markets outperformed developed markets on an unhedged basis, while from a global sector perspective, IT stocks were the strongest performers and Utilities stocks lagged the most.
Australian equities rose strongly (by 4.4% for the month) as better than expected production updates from index heavyweights Rio Tinto and BHP Billiton saw their stock prices soar. The Materials sector was the strongest performer and all sectors produced a positive absolute return. Small cap stocks marginally outperformed large cap stocks, while Property Trusts also outperformed the broader Index and unlisted Australian property.
The Australian and global bonds had positive returns over the month and quarter. The Australian Dollar weakened against most major developed market currencies.