The Research Team provides a performance summary and commentary on each of the five main asset classes.
The S&P/ASX 300 Accumulation Index outperformed global markets in the June quarter, rising 16.8%. The Technology sector was the top performer (up 48.7%) while defensive sectors, such as Consumer Staples (up 7.2%), Utilities (up 4.1%) and Healthcare (up 2.3%) did not rise as much as the overall market. Smaller companies outperformed the broader market with the Small Ordinaries Index up 23.5%.
The key driver of these relative differences was the move away from the ‘flight to safety’, experienced during the March quarter, due to improving economic growth. Some sectors, such as the energy sector, benefited from a new Organization of the Petroleum Exporting Countries (OPEC) deal that reduced global supply, which boosted oil prices from their low levels.
The Australian Real Estate Investment Trust (A-REIT) sector performed strongly, rising 20.2% during the June quarter, recovering some of the losses experienced during the March quarter decline.
The easing of lockdown restrictions across Australia was a key driver of this improvement as economic activity began to recover. Government stimulus also supported consumer spending which saw real estate associated with e-commerce or retail businesses benefit substantially. For example, Westfield landlord Scentre Group was one of the top performers, up 38.7%, while the owner of the Strand Arcade in Sydney, Vicinity, was also up 38.1% during the June quarter as consumer spending began to recover and foot traffic resumed.
International shares had a weaker quarter compared to the Australian market with the MSCI World Index in Australian dollar terms rising 6.1%.
Global share markets rose during the June quarter (in local currency terms) led by United States (US) technology stocks and the US market more generally. A major factor in this was a stronger economic outlook as a result of substantive Government and central bank stimulus. This stimulus arrived at a greater speed than we saw during the global financial crisis (GFC), helping to spur a faster recovery.
The Australian dollar rose 9.7% against major trading partners during the quarter which detracted from unhedged global equity returns. Hedged global equities rose 17.8% by contrast. Key drivers were the strength of the bounce back in the Chinese economy as well as positive economic surprises for Australia, thanks to the scale of Government stimulus efforts here. In addition, a 17% rise in iron ore prices (due to Brazil supply disruptions) boosted demand for Australian dollars.
The Australian bond market benchmark, the Bloomberg AusBond Composite Index, rose 0.5% during the June quarter.
The main driver behind the increase was the fall in credit spreads during the quarter. Government bonds returned 0.3% against a 1.6% return for corporate bonds. Credit spreads are the extra discount investors demand in return for buying corporate bonds because they carry a higher risk of default. In periods where markets are falling due to economic fears, the risk of businesses failing is higher and these bonds tend to fall more than Government bonds. Conversely, in periods where economic activity is improving, such as the June quarter with Australian states and territories exiting lockdown, these bonds can perform strongly.
During the March and June quarters, the Reserve Bank of Australia’s (RBA) bond-yield targeting strategy saw them purchase over $50 billion-worth of Government bonds. This supported overall bond returns during the quarter.
The Cash benchmark, the Bloomberg AusBond Bank Bill Index, rose 0.1% during the June quarter.
The RBA outlook continues to be influenced by their concerns over the Australian economy. A recession has now been confirmed. This has been caused by a slowdown in economic activity triggered by the measures taken to contain the COVID-19 outbreak combined with the already weak state of the economy. Further lockdowns in Victoria will also drag on economic growth.
Term deposit investors could benefit from bank competition for deposits meaning they are willing to offer higher interest rates, but overall cash returns are expected to remain low.
Overall, last financial year saw weak or negative returns across each asset class compared to their 10 year average. However, 10 year returns remained positive across the board. Over time investors are likely to earn positive returns although negative returns can occur over shorter time periods.