Investment market review - quarter ended 30 June 2019
19 Aug 2019
The S&P/ASX 300 Accumulation Index outperformed global markets in the June quarter, rising 8%.
At a sector level, the best performers were Communication Services (up 12.7%), Health Care (up 10.6%) and Materials/Mining (up 7.3%). Energy was the worst performing sector (down 0.4%), followed by Utilities (up 0.7%) and Property Trusts (up 2.4%). The energy sector performance was driven by global oil prices declining during the quarter due to concerns about global growth offsetting geopolitical fears in the Persian Gulf. The strong performance of Communication Services was driven by Telstra and real estate portals REA Group and Domain. Telstra benefited from a mix of its 5G rollout, new mobile plans and shareholders being attracted to its yield following Reserve Bank of Australia (RBA) rate cuts in June and July. The property portals benefited from stronger interest in property markets after the Coalition’s election win in May. This ended the possibility of a Labor government exacerbating the property market decline with changes to tax policies. The RBA rate cut was also supportive of property markets.
Listed property trusts
The Australian real estate investment trust (A-REIT) sector generated a strong return of 4.1% for the June quarter with the decline in bond yields providing a tailwind for the sector.
A-REITs are viewed as a proxy for bonds and often falling bond yields results in stronger performance for this asset class. The trigger for lower yields was weaker Australian economic data. Another factor in the A-REITS relative underperformance was the substantial capital raising undertaken by a number of major REITs. According to the Australian Financial Review1 the amount of capital raised this year was $4.4billion, the largest amount since 2010 (in the wake of the Global Financial Crisis). An influx of new capital can weigh on share prices helping explain the relative underperformance of the broader Australian market even as bond yields fell.
Global markets had a strong quarter with the MSCI World Index in Australian dollar terms recording a gain of 5.3% for the quarter.
The shift in international markets has been driven by two factors. Firstly, the US Federal Reserve has effectively signalled an end to interest rate hikes for 2019. This means it will continue to be easier for consumers and businesses to borrow, supporting economic growth. Secondly, there was positive progress on the US-China trade war. Both countries halted their ‘tit-for-tat’ on raising tariffs against each other and are working towards a final deal to resolve their disagreements, calming fears that further escalation would hit international trade and reduce global growth. The easing of trade tensions and the end of US interest rate increases in the short term have both supported riskier assets like shares. Prices have now almost completely recovered from the December 2018 sell-off.
Australian and global bond yields fell further during the quarter with the AusBond Composite rising 3.1%.
In Australia there has been a continuation of weak data for the domestic economy, including disappointing retail sales, an underlying measure for consumer demand, weaker jobs growth in cyclical parts of the economy and low inflation of 0% for the March quarter and only 1.3% for the previous 12 months. These factors suggest weaker growth for the June quarter (which will be reported in September). Lastly, the RBA determined that the target rate for unemployment could be lower than it had previously forecast without triggering excessive inflation. This target rate has fallen from 5% to 4.5% in its assessment. Given this view it felt justified in cutting rates in both early June and July.
Weaker economic news in the US and volatility on trade talk disruptions with China helped drive global yields lower.
The RBA cut interest rates by 0.25% in June, this was their first change of interest rates since August 2016. The RBA was motivated by concerns around a slowing economy and their assessment that unemployment could fall further to 4.5% (5.2% as of June) without triggering excessive inflation.
This move was followed by another interest rate cut in early July to leave the cash rate at 1%.