Investment update for July 2019
After a strong first half of 2019, financial markets delivered a more muted month in July as most asset classes recorded modest positive returns. Developed market equities were slightly higher, while bonds continued to benefit from a further drop in yields. In terms of market action, most occurred later in the month with the UK confirming Boris Johnson as the new Prime Minster and the US Federal Reserve (Fed) announcing a change in policy rate on the last day of the month.
US and overseas markets
The rate cut by the Fed, the first in 11 years, was made on the back of mounting concerns about the global economy and trade disputes. The benchmark rate was cut by 0.25 of a percentage point to a range of 2% to 2.25%, leaving investors curious as to whether there would be follow-up reductions despite Fed chairman Jerome Powell insisting that the cut would not be a signal of the start of a ‘lengthy cutting cycle’. Across the Atlantic, Boris Johnson won the Conservative party leadership contest with roughly two-thirds of the vote to succeed Theresa May, becoming the 77th Prime Minister of the UK. The British pound came under immediate pressure, reacting to Johnson’s Brexit stance and the potential for the UK to leave the European Union without a deal.
Despite the US economy appearing to remain on a path of slowing growth, the S&P 500 Index returned 1.4%, driven by roughly three-quarters of companies that had reported earnings by the end of July exceeding analyst estimates. Tech stocks led developed market equities in the US and Europe, while the easing of US restrictions on Chinese telecom company Huawei also boosted sentiment across the Asian region. Energy and Materials were the poorest performers sector during the month.
The MSCI World ex-Australia Index (hedged into AUD) returned 1.2% for the month. Belgium was the standout for the month returning 8.5%, along with solid returns from New Zealand (5.8%), Netherlands (3.0%) and the UK (2.1%). Within emerging markets, Turkey (7.1%) and Hungary (3.4%) were the standouts, with some of the major markets, namely India (-5.6%), Mexico (-5.0%) and Korea (-3.9%), delivering poor performance.
Domestically, the Australian equity market continued its streak of positive performance, with the ASX pushing past pre-GFC highs late in the month. As RBA governor Philip Lowe signaled in June, the RBA cut the cash rate by 25 basis points to 1.0% in July, which marked the first back-to-back cuts since mid-2012. However, there was a softer tone to economic data released over the month with retail sales, private sector credit and employment all reporting weaker than expected and business confidence and consumer sentiment also falling despite the RBA rate cut.
The S&P/ASX 300 Accumulation Index (3.0%) outperformed hedged overseas equities (1.2%) over the month. Mid and small cap stocks outperformed large cap stocks, led by the S&P/ASX MidCap 50 Accumulation Index returning 4.9% for the month. All equity sectors delivered positive returns for the month, led by Consumer Staples delivering a 9.6% return. Australian Property Trusts (2.6%) outperformed Global Property Trusts (1.1%) for the month.
The Australian Dollar recorded mixed results against the major developed market currencies over the month, depreciating against the USD (-1.8%) and the Japanese Yen (-1.0%) and appreciating against the Euro (0.5%). The most significant move was against the Pound (2.1%), as markets reacted to the Boris Johnson appointment. In aggregate, the moves in the Australian dollar saw unhedged global equities (2.3%) outperform hedged global equities (1.2%).
Bonds enjoyed a positive month in July, as yields again fell on the back of the continuously accommodative central bank tone. The Australian 10-year bond yield hit another record low and ended the month at 1.2%. Abroad, the US 10-year yield finished the month unchanged at 2.0%, following the significant drop year-to-date. As a result of these moves, Australian bonds returned 0.9% over the month, marginally outperforming hedged international bonds (0.7%). Corporate bond markets outperformed treasuries as credit spreads also continued to tighten over the month.
* Past performance is not an indication of future performance.
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