The Research Team provides a performance summary and commentary on each of the five main asset classes.
The S&P/ASX 300 Accumulation Index underperformed global markets in the March quarter, rising by 4.2%.
At a sector level, the benchmark was driven higher by the financials sector (up 11.3%), the consumer discretionary sector (up 7.4%) and the communication services sector (up 7.1%). Strong performance by Telstra was a feature with the announcement that Telstra will split into three separate businesses. The belief is that the new businesses, as smaller operations, will be able to run more efficiently than currently.
At an investment style level, value stocks were the standout over all others. The banking sector was a primary driver of this with improvement in credit growth as housing finance surged during the quarter. In addition, a steeper Australian yield curve added to expectations of higher bank profit margins while bad debts related to the pandemic have not been as bad as initially feared.
The Australian Real Estate Investment Trust (A-REIT) sector performed poorly, falling 0.6% during the March quarter, and is still lingering below its pre-pandemic highs.
This is likely due to spill overs from the global and local bond market selloffs. Sectors such as A-REITs can be treated like substitutes for bonds because of the yield they generate. However that view by investors means that when bonds struggle so can A-REITs with the two tending to trade closely together at times.
Another factor lies in the concentrated nature of the Australian listed property market. Two businesses, Goodman Group and Scentre Group (the Westfield landlord) account for over 35% of the index. Accordingly, when their share prices struggle it is difficult for the sector overall to perform well. Goodman Group shares fell 4.2% for the quarter even as the business upgraded expected profit growth to 12%.
Sectors that ‘won’, because they were better shielded from the impact of the COVID-19 pandemic, struggled amidst the global vaccination rollout. Instead, investors rotated towards sectors such as retail and office, which outperformed. For instance, office giant Dexus saw its share price rise over 3.7% for the same period, as investors began to price in a ‘return to normal’, following vaccine rollouts and the strong handling of the pandemic domestically.
International shares had a stronger quarter compared to the Australian market with the MSCI World Index in Australian dollar terms rising 6.3%.
Vaccine rollouts, most notably in the US, was a key driver as investor expectations of a return to normal grew. Added to this was a new $1.9 trillion US stimulus package from the Biden administration that will further support the economy and business profits. Even amidst concerns over the AstraZeneca vaccine, the successful US rollout saw investors rotate away from technology stocks towards more cyclical companies as they anticipated a strengthening of the global economic recovery.
The Australian dollar rose 0.8% against major trading partners but fell 1.3% against the US dollar during the quarter which added to unhedged global equity returns. Hedged global equities rose 6.1%, slightly underperforming by contrast. US dollar strength was notable in the quarter with stronger relative economic growth. Contributing to this was better management of the vaccine rollout and oversold conditions (too many speculators were arguably betting against the US dollar), both factors contributing to its rise.
The Australian bond market benchmark, the Bloomberg AusBond Composite Index, fell 3.2% during the March quarter.
The Australian bond market was driven by several factors:
The RBA countered these actions by buying more bonds (accelerating its previous schedule) and limiting the ability of investors to short-sell (essentially betting on the bond prices falling further). These factors helped stabilise the market with the index bouncing back 0.8% in March but down 3.2% overall for the quarter.
The Cash benchmark, the Bloomberg AusBond Bank Bill Index, was flat during the March quarter.
The RBA repeated remarks that it does not anticipate moving rates higher until 2024 at the earliest. This is due to the time it will take for the economy to recover and inflation to return to target levels of 2-3%.