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Monthly market update.

June 2018

Global equity markets saw gains in June, rising 2.4% on an unhedged and 0.3% on an AUD hedged basis, but as usual these overall returns masked significant volatility across geographies. Geopolitical tensions eased somewhat, with the historic meeting between US President Donald Trump and North Korean leader Kim Jong-un taking place in Singapore. The two leaders signed an agreement pledging to work toward complete denuclearisation of the Korean peninsula, although it was criticised for being light on specifics. Trade concerns remain elevated due to the implementation of President Trump’s steel and aluminium tariffs on products imported from the EU, Canada and Mexico on 1 June. Additionally, the US Administration announced tariffs on a further US$50 billion of Chinese goods, including US$34 billion of goods on which a 25% tariff will apply from 6 July. These trade concerns mostly weighed on emerging market equities, chiefly China.

In the US, stronger economic data released for May, including lower unemployment and evidence of a continued gradual uptrend in inflation, gave the Federal Reserve confidence to raise interest rates for the second time this year to the target range of 1.75% - 2.00%. The Fed also signaled two further rate hikes later this year, followed by three more next year. In contrast, the European Central Bank announced that rates are not likely to rise until mid-2019 due to low inflation and modest economic growth, however it did confirm that it would cease its quantitative easing programme at the end of the 2018 calendar year as scheduled. Italian bonds had a volatile month due to uncertainty surrounding the new government’s ambitious policy agenda and fiscal sustainability, but yields fell back slightly from their steep rises during May.

In Australia, the Financial sector saw a broad recovery following the selloff that surrounded the Royal Commission, with only six of 26 companies in the ASX 200 Financials sector ending the month with a negative return. In terms of monetary policy, the RBA left the cash rate on hold at 1.50% for the twentieth meeting in a row while balancing concerns of international trade policy uncertainty, a continued easing in housing markets in Sydney and Melbourne and ongoing weak wage growth.

The Australian dollar continued to depreciate against the USD (-2.4%) due to contrasting monetary policy and reduced commodity prices. The AUD also depreciated against the Yen (-0.4%), the Pound (-1.6%) and the Euro (-1.4%). In aggregate, this depreciation resulted in unhedged equities outperforming during the month as seen in the MSCI World ex-Australia Index unhedged return of 2.4% compared to the hedged return of 0.3%. Australia (3.2%) and Switzerland (2.0%) were the top performing developed markets, while Hong Kong (-4.9%) and Singapore (-5.6%) underperformed. Emerging markets (-1.8%) again underperformed developed markets (2.4%).

The S&P/ASX300 Accumulation Index rose 3.2% over the month. Small cap stocks (1.1%) underperformed the broader market, while large caps (3.7%) outperformed. Energy was the top performing sector, returning 7.7% as crude oil prices traded higher. Telecommunications significantly underperformed (-5.5%) due to Telstra’s (83% of the sector) poorly received restructure announcement and silence from the company on forecasts for its FY19 dividend.

Relatively flat bond yields over the month across most developed markets led to small positive returns for bond investors. The US 10-year yield (2.85%), whilst down on its intra-month high of 3% due to safe-haven buying around Italy’s election, remains higher than the Australian 10-year yield (2.64%). Elsewhere in the world, UK 10-year yields rose to 1.3%, Euro 10-year yields fell to 0.3%, Japanese 10-year yields were unchanged at 0.03%, and the New Zealand 10-year yield fell to 2.8%.

 

Market Performance – June 2018

Performance
(income and capital gain or loss) 
%

Month

3 months

Australian Shares (S&P/ASX 300 Accumulation)

3.2% 8.4%

International Shares (MSCI AC World ex-Aust) unhedged

2.4% 5.7%

International Shares (MSCI AC World ex-Aust) hedged

0.3% 3.8%

Unlisted Property (Mercer Unlisted Property Funds Index (Pre Tax)

0.5% 1.3%

Listed Property Trusts (S&P/ASX 300 Property Trusts Accumulation)

2.3% 9.8%

Australian Bonds (UBS Composite Index)

0.5% 0.8%

Global Bonds (Barclays Global Aggregate (Hedged))

0.2% 0.1%

Cash (UBS Bank Bills)

0.2% 0.5%

Appreciation of $A against $US

-2.4% -3.7%

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

Market Performance - 30 June 2018

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays


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