Economic data released in June 2014 pointed to improving conditions in the US and UK. In the US the first quarter GDP was revised sharply lower in June, but investors attributed this weakness to harsh winter weather conditions and instead focused their attention on data releases more representative of current economic conditions, which were generally strong. Data releases in the UK were also strong. In contrast, conditions in the Eurozone remain depressed and early in the month the European Central Bank (ECB) announced a stimulus package that included cutting the Eurozone policy interest rate to 0.15% and cutting the deposit rate at the ECB to minus 0.1%. The package also included a lending program aimed at incentivizing new bank lending across the Eurozone. Tensions flared in the Middle East as the Islamic State of Iraq and Syria (ISIS) captured several cities and towns across Northern Iraq and continued to push on toward the nation’s capital, Baghdad. The situation in Iraq remains fluid but, to date, the impact on oil markets has been moderate relative to past Middle Eastern crises. This is because the majority of oil supplied by Iraq is exported from the relatively more stable southern regions.
The investment returns of the major markets for one and three months to 30 June 2014 are summarised below.
*Estimate at 9/7/2014
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
The MSCI World ex-Australia Index (hedged into AUD) rose 1.7% over the month. The Australian Dollar strengthened against most major currencies and this resulted in a lower return of 0.4% (in AUD) on an unhedged basis. Across developed markets the strongest performing country in local currency terms was Japan as investors became less concerned about the impact of the consumption tax increase on Japanese growth. Emerging markets outperformed developed markets on an unhedged basis, while from a global sector perspective, Energy stocks were the strongest performers due to fears that the turmoil in Iraq will lead to an oil shortage.
The S&P/ASX300 Accumulation Index (-1.4%) underperformed hedged overseas equities as consumer confidence fell sharply following the release of the Australian federal budget. Small cap stocks outperformed large cap stocks, while Property Trusts were the strongest performing sector and also outperformed unlisted Australian property.
Australian and overseas bonds provided positive returns over the month and quarter. The Australian Dollar strengthened against most major developed market currencies. The AUD continues to be one of the strongest performing currencies as high domestic interest rates relative to the developed world average and low volatility in currency markets has increased the attractiveness of the carry trade. The British Pound was the strongest performing major currency as investors responded to the prospect of rising interest rates in the UK.