Market update - July 2017

Global markets were broadly positive over the month of July, supported by a continuation of a synchronised growth in major economies and corporate earnings. In a recent market report, the International Monetary Fund commented on their increasing confidence of acceleration in global growth, but highlights the risks of ‘rich’ valuations in equity markets, low market volatility and economic policy uncertainty, making asset prices vulnerable to a sharp correction. Geopolitical risks also remain heightened.

In the US, markets were supported by dovish comments (softer outlook on inflation) by US Federal Reserve (Fed) President Janet Yellen. The Fed kept interest rates unchanged as inflation remains below the 2% target and indicated that they will begin unwinding their $US4.5 trillion balance sheet ‘relatively soon’. However, the absence of inflationary wage pressures despite low unemployment levels has left the central bank perplexed. As such, the expectation for interest rates increases has softened. Towards the end of the month, most US corporates reported strong earnings results, with majority of S&P 500 companies beating earnings forecast.

The Australian dollar strengthened significantly over the month, driven by stronger than expected economic growth in China, a sharp increase in commodity prices and a corresponding weakness of the US dollar. Australian Prudential Regulation Authority’s latest decision to increase the required capital held by banks was supported by major global ratings agencies, citing that the bigger buffer will strengthen the banking system to be more resilient to shocks, following their recent credit downgrades.

The investment returns of the major markets for one month, three months and one year to 31 July 2017 are summarised below.

Market Performance - 31 July 2017 Month Quarter 1 Year
Australian Equities 0.0% -2.5% 7.0%
Australian Property (Unlisted)* 0.4% 2.9% 12.1%
Australian Property (Listed) -0.2% -5.6% -10.6%
Overseas Equities (Hedged into AUD) 1.5% 3.6% 18.2%
Overseas Equities (Unhedged into AUD) -1.6% -1.5% 11.2%
Emerging Markets (Unhedged into AUD) 1.9% 3.4% 19.3%
Australian Bonds 0.2% 0.5% 0.2%
Overseas Bonds (Hedged into AUD) 0.4% 0.8% 0.1%
Cash 0.1% 0.4% 1.8%
Australian Dollar vs. US Dollar 4.1% 6.8% 5.0%

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays 

Australian equity markets were range bound through July, ending the month unchanged. Large Cap (0.2%) and Small Cap (0.3%) stocks marginally outperformed the broader market over the month, while Mid Cap (-1.6%) stocks underperformed. At sector level, Materials (3.5%), Financials (1.2%) and Consumer Staples (1.0%) outperformed, while Health Care (-7.5%) and Utilities (-5.3%) were the worst performing sectors.

The MSCI World Index ex-Australia (hedged into AUD) rose 1.5% over the month. The Australian dollar appreciated against most developed market currencies in July, which resulted in a return for unhedged overseas equities of -1.6% (in AUD). In developed markets, the US (2.0%) and Switzerland (1.6%) outperformed the broader market, while Germany (-1.5%) and France (-0.5%) underperformed. The MSCI Emerging Markets Index (1.9%) outperformed unhedged developed markets.

Both Australian and global bonds (hedged into AUD) delivered positive returns over the month and three months but were relatively flat for one year to July 2017.