Market update - June 2018

Global equity markets saw gains in June, rising 2.4% in AUD terms and 0.3% in local currencies or on an AUD hedged basis. But these overall returns masked significant volatility across geographies.  Geopolitical tensions eased somewhat, with the historic meeting between US President Donald Trump and North Korean leader Kim Jong-un taking place in Singapore.  The two leaders signed an agreement pledging to work toward complete denuclearisation of the Korean peninsula, although it was criticised for being light on specifics.  Trade concerns remain elevated due to the implementation of President Trump’s steel and aluminium tariffs on products imported from the EU, Canada and Mexico on 1 June.  Additionally, the US Administration announced tariffs on a further US$50 billion of Chinese goods, including US$34 billion of goods on which a 25% tariff will apply from 6 July.  These trade concerns mostly weighed on emerging market equities, in particular China.

In the US, stronger economic data released for May, including lower unemployment and evidence of a continued gradual uptrend in inflation, gave the Federal Reserve confidence to raise interest rates for the second time this year to the target range of 1.75% - 2.00%.  The Fed also signaled two further rate hikes later this year, followed by three more next year.  In contrast, the European Central Bank announced that rates are not likely to rise until mid-2019 due to low inflation and modest economic growth, however it did confirm that it would cease its quantitative easing programme at the end of the 2018 calendar year as scheduled.  Italian bonds had a volatile month due to uncertainty surrounding the new government’s ambitious policy agenda and fiscal sustainability, but yields fell back slightly from their steep rises during May.

In Australia, the Financial sector saw a broad recovery following the selloff that surrounded the Royal Commission, with only six of 26 companies in the ASX 200 Financials sector ending the month with a negative return.  In terms of monetary policy, the RBA left the cash rate on hold at 1.50% for the twentieth meeting in a row while balancing concerns of international trade policy uncertainty, a continued easing in housing markets in Sydney and Melbourne and ongoing weak wage growth.

The Australian dollar continued to depreciate against the USD (-2.4%) due to contrasting monetary policy and reduced commodity prices.  The AUD also depreciated against most other currencies in June, resulting in higher returns from unhedged global equities as noted above.

The investment returns of the major markets for one and three months, and financial year (or one year) to 30 June 2018 are summarised below.

Market performance - 30 June 2018  Month %  Quarter % 1YR %
Australian Equities 3.2 8.4 13.2
Overseas Equities (Hedged into AUD) 0.3 3.8 12.1
Overseas Equities (Unhedged into AUD) 2.4 5.7 16.0
Emerging Markets (Unhedged into AUD) -1.8 -4.3 12.7
Australian Property (Unlisted) 0.5 1.3 10.3
Australian Property (Listed) 2.3 9.8 13.2
Global Listed Property (Hedged into AUD) 2.2 7.6 7.5
Australian Bonds 0.5 0.8 3.1
Overseas Bonds (Hedged into AUD) 0.2 0.1 1.9
Cash 0.2 0.5 1.8
Australian Dollar vs. US Dollar -2.4 -3.7 -3.7

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

The Australian shares, as measured by the S&P/ASX300 Accumulation Index, rose 3.2% over the month.  Small cap stocks (1.1%) underperformed the broader market, while large caps (3.7%) outperformed.  Energy was the top performing sector, returning 7.7% as crude oil prices traded higher.  Telecommunications significantly underperformed (-5.5%) due to Telstra’s restructure announcement which was poorly received by market participants and silence from the company on forecasts for its FY19 dividend. Telstra is 83% of the sector.

Global shares rose by 0.3% in local currencies over the month of June. This positive return was mostly contributed by the US (0.7%) while Germany (-2.4%), Japan (-0.6%) and the UK (-0.2%) detracted from global equity performance. Emerging market shares were in the negative territory in local currency terms with China down by 5.1%.  Argentina suffered a 22% fall in its equity markets due to uncertainties on its inflation targets, interest rates and tax changes.

Australian and overseas bonds delivered positive returns over the month and all periods shown above.