Market update - June 2017

Geopolitical events continued to dominate headlines during June, with terror attacks across Europe, further North Korean missile tests and ongoing tensions in the Middle East. Global politics were also eventful, contributing further to uncertainty for investors. Most notably, British Prime Minister Theresa May’s attempt to consolidate parliamentary influence ahead of Brexit negotiations backfired, with the snap general election resulting in a hung parliament where no party won an absolute majority.

In the US, the Trump administration released plans to overhaul banking rules. If successful, this represents a winding back of many of the central provisions of the Dodd-Frank Act, which was implemented in response to the global financial crisis. This and some relief provided by the Federal Reserve (Fed) with regards to banks’ excess capital requirements contributed to strong performance from the US Financials sector. The planned vote on a bill to replace the current US healthcare system was further delayed by US Senate Republican leader Mitch McConnell, which led to renewed concerns amongst investors on the Trump administration’s ability to deliver on their domestic agenda.

Given the continuation of economic recovery in many developed economies, several major central banks turned more “hawkish” (anticipated higher inflation which may necessitate lifting of interest rates). This resulted in a sell-off in bonds across most major developed markets. In the US, the Fed raised interest rates by 0.25%, and announced that they will begin implementing a balance sheet normalisation program this year.

In Australia credit rating agency Moody's downgraded a dozen Australian banks, citing increased risks in the nation's increasingly indebted households which has risen sharply in recent years. Similar views have been expressed by the Organisation for Economic Co-Operation and Development (OECD) and the Bank of International Settlements (BIS). The Reserve Bank of Australia is increasingly focused on the implications the current low interest rate environment and how it could lead to greater financial risks, which could pose a greater risk for the economy.

The investment returns of the major markets for one and three months and full financial year to 30 June 2017 are summarised below.

Market Performance - 30 June 2017 Month Quarter FYTD
Australian Equities -0.2% 1.6% 13.8%
Australian Property (Unlisted)* 2.0% 2.9% 12%
Australian Property (Listed) -4.5% -3.1% -5.6%
Overseas Equities (Hedged into AUD) 0.2% 3.4% 21.2%
Overseas Equities (Unhedged into AUD) -2.6% 3.8% 15.4%
Emerging Markets (Unhedged into AUD) -1.9% 5.8% 20.5%
Australian Bonds -0.9% 1.0% 0.2%
Overseas Bonds (Hedged into AUD) -0.2% 1.2% 0.5%
Cash 0.1% 0.4% 1.8%
Australian Dollar vs. US Dollar 3.0% 0.6% 3.0%

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

The Australian share market as measured by the S&P/ASX300 Accumulation Index rose 0.2% in June. Small Cap stocks rose 2.0% for the month, while Large Cap stocks were down by 0.1%, underperforming the broader market. Healthcare (+6.1%), IT (+1.9%) and Financials (+1.7%) outperformed, while Energy (‑6.8%) and Utilities (-2.7%) were the worst performing sectors.

The MSCI World Index ex-Australia (hedged into AUD) rose 0.2% over the month. The Australian dollar appreciated against most developed market currencies in June, which resulted in a return for unhedged overseas equities of -2.6% (in AUD). In developed markets, Japan (2.7%) and the US (0.6%) outperformed the broader market, while France (-2.6%) and the UK (-2.5%) underperformed.

Both Australian and global bonds (hedged into AUD) delivered negative returns in June and relatively flat returns for the full financial year 2016/2017.