Market update - July 2018

The month of July was marked by persisting trade and geopolitical tensions in particular between the US and China, with the Trump administration outlining an additional US$200bn worth of Chinese goods eligible for tariffs, which was soon followed by China announcing tariffs on US agriculture products This contrasted with European negotiations, where EU President Jean-Claude Juncker pledged to work towards easing trade barriers with the US during his trip to Washington. Brexit continued to dominate headlines in the UK as the March 2019 deadline to reach a final agreement nears with no formal agreement in sight. In the Middle East, geopolitical tension between the US and Iran intensified, as President Trump continued to threaten countries who accept Iranian oil exports. Despite these, global equities moved higher during the month, rising 3.2% on a hedged AUD basis. 

In Australia, economic data released during the month was strong as consumer confidence rose to its highest level in over four years and unemployment remained at a five-and-a-half-year low of 5.4%. The Reserve Bank of Australia left the official cash rate on hold at 1.5% for the 23rd month in a row, with no change to their forward outlook. 

The investment returns of the major markets for one month, three months, and one year to 31 July 2018 are summarised below.

Market Performance - 31 July 2018

Month

Quarter

1YR

Australian Equities

1.3%

5.8%

14.7%

Overseas Equities (Hedged into AUD)

3.2%

5.1%

14.0%

Overseas Equities (Unhedged into AUD)

2.5%

5.5%

21.0%

Emerging Markets (Unhedged into AUD)

1.7%

-3.9%

12.5%

Australian Property (Unlisted)

0.5%

3.0%

12.1%

Australian Property (Listed)

1.0%

6.3%

14.5%

Global Listed Property (Hedged into AUD)

1.0%

5.6%

7.5%

Australian Bonds

0.2%

1.3%

3.0%

Overseas Bonds (Hedged into AUD)

0.0%

0.6%

1.5%

Cash

0.2%

0.5%

1.8%

Australian Dollar vs. US Dollar

0.6%

-1.5%

-6.9%

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

The Australian equity market was up by 1.3% in July but underperformed global peers which were up by 3.2% and 2.5% on AUD hedged and AUD unhedged basis respectively. Large cap stocks were up by 1.6% led by Telecommunications which were up by 7.6%, primarily due to Telstra which rose 8.4% as the market reacted positively to the organisation’s restructuring plans set to take effect in October. Utilities (-1.4%) and IT (-1.1%) underperformed in July.

US markets responded positively to US corporate earnings results, with the S&P 500 rising 3.6%. The vast majority (~80%) of US firms surpassed Wall Street expectations, and ten out of eleven sectors increased earnings by at least double digits. The favorable corporate backdrop is in part due to US corporate tax reductions passed into legislation at the end of 2017. This has also supported US economic activity which grew at an annualised rate of 4.1% during the second quarter. Germany (4.1%) and the US (3.6%) were the top performing MSCI developed markets, whilst New Zealand (-1.0%) underperformed. 

The Australian dollar appreciated against most major trading partners during the month, rising against the USD (0.6%), the Yen (1.7%) and the Pound (1.3%). The strengthening Australian dollar resulted in hedged global equities (3.2%) outperforming unhedged global equities (2.5%). 

Australian bonds delivered a positive return over the month, while the return on overseas bonds was flat.