Investment market review 30 June 2017

28 Aug 2017

By Shadforth Financial Group

Australian shares

The S&P/ASX 300 Accumulation Index was down -1.6% in the June quarter as concerns over the property market, the Australian consumer and the big banks weighed on investors.

On a sector level, the best performers were industrials up +7.8%, health care up +7.0% and information technology up +5.7%. The worst performing sectors were telecommunications down -8.1%, energy down -6.0%, financials down -5.9% and consumer staples down -5.3%. Cyclical sectors fared worse on geopolitical concerns and a pause in the reflation trade. The big banks dragged the financials sector lower following the announcement of the bank levy and on general concerns regarding the property market.

Listed property trusts

The A-REIT sector generated a negative return of -2.99% for the June quarter.

The sector continued to be pressured by the expectation of higher bond yields going forward as well as the impact of Amazon and the challenging consumer outlook on the retail sector and the retail REITs. The driver of retail spending is disposable income and the outlook for spending looks challenging given lower real wages, increased debt to income levels and rising interest rates.

International shares

Global markets provided a mixed bag of returns for the second quarter of the year.

The MSCI World Index in Australian dollar terms was up +3.8% in the June quarter and markets in Asia and the US recorded solid gains despite volatile commodity prices and concerns over Donald Trump’s agenda and calls for impeachment. Major European markets on the other hand finished the quarter flat
despite investor relief as Emmanuel Macron defeated right wing candidate Marine Le Pen in the French presidential election. British Prime Minister Theresa May wasn’t so fortunate with her snap election backfiring and her Conservative Party losing its majority in the House of Commons. The S&P 500 gained +2.6%, the FTSE 100 lost -0.1%, the German DAX 30 was up +0.1% and the Nikkei 225 was up +6.0%.

Markets bought the idea that we are in the midst of a global push by central bankers to coordinate a more hawkish message on monetary policy. This was the result of a shift in tone from banks including the European Central Bank, Bank of England and the Bank of Japan. The European Central Bank left monetary policy unchanged and the US Federal Reserve increased the federal funds rate by 25 basis points to a target range of 1.00-1.25% in its June meeting as widely expected. The Fed reiterated its expectation of implementing balance sheet normalisation this year.

Fixed interest

The US and Australian yield curves were flatter over the quarter.

The Australian 3 year bond yield was unchanged at 1.91% and the 10-year fell -10bps. The US 3 year bond yield rose +6bps and the 10 year fell -8bps. Long term bond yields fell modestly due to geopolitical concerns including increased tensions between the US and North Korea, as well as concerns over Donald Trump’s ability to enact tax reform. Trump created more political uncertainty following reports that he asked former director of the FBI, James Comey, to stop his investigation into former National Security Adviser Michael Flynn. The possibility of impeachment, even though it is unlikely, is a dampener for long term bond yields.

Cash

The RBA left the cash rate unchanged at a historical low of 1.50% in the June quarter but there was chatter in the market about the possibility of a rate cut this year due to the March quarter GDP result of 0.3%QoQ and 1.6%YoY.

Although the risk of a rate cut was indicated, the slowdown in GDP growth wasn’t unexpected, and unlike markets, central banks do not react to single data readings.

The long view

This chart displays the highest and lowest 12-month returns of the major asset classes since December 1996.* As you can see, cash provides stability and security, having never generated a negative return over a 12-month period. The trade-off for this stability and lower risk is that cash will be unlikely to match the higher returns generated by other asset classes.

Source: Morningstar. Indices used are: Cash — AusBond Bank Bill; Fixed Interest — AusBond Composite 0+ year; Australian shares — S&P/ASX 300 Accumulation;
International shares — MSCI World Accumulation Index (AUD); Listed property trusts — S&P/ASX 300 A-REIT Accumulation.
* The listed property index is only available from June 2001 and the international shares index is only available from January 1999.

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