– August Market Snapshot –
- Share markets finished in positive territory following a significant correction early in the month.
- Bond yields continued to drift lower, as expectations of a cut in US cash rates firmed.
- The $A appreciated as prospects for a near term interest rate decline in Australia remained low.
International Equities
After declining by 6.6% in the first 3 trading days of August, global equity markets bounced back strongly to finish the month 1.7% higher on average. It appears technical market factors were the predominant driver of the early August correction. More specifically, the Bank of Japan’s announcement of an increase in the overnight cash interest rate (to approximately 0.25%), and its intention to be less supportive in buying government bonds, was significant. Higher borrowing costs for Japanese investors triggered a selling of equities by these investors. As such, the Japanese equity market was the most impacted by the early month volatility, being down by more than 20% at one stage before recovering to close August just 1.2% lower.
Sentiment around the U.S. market swung from one of concern over the prospect of slower economic growth, to optimism around the likelihood the Federal Reserve would cut interest rates in September, potentially by 0.5%. Weaker employment data in the U.S. has been the primary reason for this shift in sentiment, although the tightening in labour market conditions is still not of a magnitude to suggest that a U.S. recession is imminent. The recovery on U.S. share markets that followed the early month decline was heavily orientated to “growth” styled equities, with a strong rally in technology stocks reversing the decline recorded in this sector in July. Similarly, July’s rally in more cyclical and smaller companies was reversed in August, as buyers rotated to growth stocks, which were deemed to be less impacted by a period of weaker economic growth ahead. Both U.S. and European markets were also assisted by a relatively positive company earnings reporting season.
China continued to be a source of disappointment for emerging market investors, with the subdued outlook for earnings growth weighing on share prices, which declined by an average 3.3% last month. Other emerging markets were more positive, with India (up 1.2%) and Brazil (up 6.9%) making strong contributions. South Korea, however, recorded a 5.1% decline.
As was the case in July, lower bond yields increased support for real assets, with global listed property (up 5.0%) and global listed infrastructure (up 3.1%) both rising strongly in August. The Australian listed property sector (up 0.6%), however, was held back by Goodman Group, which declined in price by 4.8% – but remains 44% higher on an annual basis.
Australian Equities
Profit reporting for the period ending June had a mixed impact on Australian shares last month. Overall, most results continued to defy the weak conditions prevailing across the broader economy. The Australian market underperformed the global average, with the S&P ASX 200 Index rising by just 0.5%. Ongoing declines in iron ore and oil prices resulted in negative returns from both the resource and energy sectors, which have now declined by 7.5% and 16.0% respectively over the past 12 months.
Consistent with the broader global trend, the Information Technology sector was the strongest on the local market, rising by 7.9% and assisted by a strong earnings result from the logistics software company, Wisetech, which rallied 25.0%. Financial and industrial sectors continued to be well supported, however the earnings results from consumer facing stocks were very mixed, with both consumer staples and consumer discretionary sectors finishing flat for the month.
Fixed Interest & Currencies
Softer employment data in the United States reinforced expectations of a September monetary policy easing and bond yields continued to drift lower as a result. The United States 10-year Treasury bond yield fell from 4.09% to 3.91%. In Australia, bond yields broadly followed the U.S. trend, despite expectations that cash interest rates will remain steady for at least the remainder of the year here. Australian 10-year bonds are now yielding 3.97%, after declining 0.15% last month.
The $US weakened over August, given the expectations of lower interest rates for USD denominated investments. This resulted in the $A appreciating from US 64.9 cents to US 68.1 cents. Despite the weakening iron ore prices, the expectations that Australian cash interest rates are unlikely to change this year saw broader support for the $A, with the currency also appreciating against the Euro by 2.5%. The $A did decline, however, against the Japanese Yen by 0.6%, as the Yen gained further support from the tightening of monetary policy announced in late July.
Outlook and Portfolio Positioning
The immediacy and strength of the bounce back on equity markets from the sharp correction of early August highlights the degree of positive investor sentiment around equities in the current cycle. This positive sentiment has been regularly reinforced by company earnings results, particularly in the US technology sector, which was once again the focus of the share market rally experienced post the early August correction. At an aggregate level, company earnings have become more disconnected with the general level of economic activity, which explains why share markets are responding so positively to expectations of an environment of modest economic growth that allows for a lower interest rate structure.
Burgeoning investor sentiment, however, may become more challenged in the months ahead. In the U.S., the uncertainty associated with the November presidential election and subsequent policy environment may start to weigh more heavily on confidence. Whether equity market investors will continue to purchase at current valuations in the immediate lead up to the election remains to be seen.
Within Australia, the challenge to sentiment is more likely to be related to the state of the broader economy. To date, local investors have been prepared to follow the general trend set by global equity markets, despite the economic and earnings growth momentum here being somewhat weaker. The all-important banking sector provides a useful barometer of this general sentiment, with the banking sector rallying 37% on average over the past year, despite minimal change in earnings forecasts. Australian economic data continues to paint a relatively bleak picture, with the June National Accounts showing that economic growth per person has been negative in 7 of the past 8 quarters. With household spending constrained and demand from our largest trading partner subdued, this sombre macro-economic environment may test the confidence of local investors, particularly if global sentiment starts to deteriorate.
Notwithstanding the potential challenges to investor sentiment in the short term, overall corporate sector profitability and balance sheet strength remains in rude health, supported by a well-functioning and highly liquid financial sector. In this environment, there is a reasonable case to maintain long term neutral positions in equity markets. However, given the possible shorter-term uncertainties, there may also be a higher-than-normal upside to having some additional risk management overlays in portfolios (such as cash, gold or unhedged foreign currency) that provide a combination of protection against equity market declines and a possible funding source to increase equity market exposure should the opportunity arise in the months ahead.
Important Information
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR, MSCI World ex Australia NR Hdg AUD, FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged), CSI China Securities 300 TR in CN, Deutsche Borse DAX 30 Performance TR in EU. Hang Seng TR in HKD, MSCI United Kingdom TR in GBP, Nikkei 225 in JPY, S&P 500 TR in USD.
General Advice Disclaimer
Any advice contained in this document is of a general nature only and does not take in to account the objectives, financial situation or needs of any particular person. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Past performance is not a reliable indicator of future performance. Varria Pty Ltd is an authorised representative of Charter Financial Planning ABN 35 002 976 294 AFSL number 234665