June 27, 2019
June 27, 2019 | Investments Insightz
In this month’s Market Update Charles Stodart, Investment Specialist, looks at the latest events driving investor sentiment across the major asset classes.
- Equity markets bounce back in June after trade tensions ease and Central Banks signal accommodation. In the US and Australia, equity markets have tested new highs.
- The US Federal Reserve holds rates steady but signals that it will ‘act as appropriate to sustain the expansion’; the market anticipates rate cuts in the second half. The US 10-yr yield tests 2%, the lowest since late 2016.
- Presidents Trump and Xi to meet at the G20 summit in Tokyo in late June, potentially agreeing to a path forward for US-China trade negotiations and moderating tensions near term.
- Trump officially launches his 2020 presidential re-election campaign to ‘Keep America Great’.
- In the UK, Prime Minister May steps down. Boris Johnson is the most likely successor, to be named on July 22nd. The Brexit countdown, set for 31st October, keeps ticking.
- In Australia, the coalition wins the Federal election, allowing policy continuity. Equities respond positively. As widely anticipated, the Reserve Bank of Australia cuts rates to 1.25% in early June. More cuts are expected.
- Oil surges 9% in a week after geo-political tensions flare between the US and Iran. Gold hits a 6 year high.
- Facebook proposes its own cryptocurrency, the Libra, for launch in 2020. Central Banks ponder implications.
Global equity markets plunged in May as the trade war between the US and China escalated amid a breakdown in negotiations and a new round of tariffs. Additionally, late in May, President Trump threatened to impose tariffs on Mexico, adding to investors’ worries about global growth. Against this backdrop, stock market declines were widespread, with US stocks marginally underperforming non-US stocks. However, investor concerns have been somewhat soothed in June as trade rhetoric has been dialed back and as Central Banks stand ready to act to support economic growth. Equity markets have responded accordingly.
USA: In the U.S., mixed economic data added to stock market volatility. According to FactSet, first-quarter blended earnings for S&P 500 Index companies are estimated to decline from the same period last year. On a positive note, with 98% of the companies in the S&P 500 Index reporting first-quarter results, 76% reported a positive earnings-per-share surprise and 59% reported a positive revenue surprise. While the economy grew at a revised 3.1% annual rate in the first quarter, slightly ahead of investor expectations, recent data suggest growth is moderating in the second quarter. Factory orders were particularly weak, and the Institute for Supply Management’s Purchasing Managers’ Index declined to its lowest level since mid-2016. While not yet indicating contraction, these levels suggest weaker economic growth.
China: Industrial production growth slowed to a 17-year low of only 5% year-on-year in May, while fixed asset investment growth also continued to decelerate. The front-loading spending spree earlier this year seems to be fizzling out, as infrastructure spending slowed. The US-China trade war risks evolving into an IT cold war since the US put a technology ban on Chinese IT company, Huawei. The slump in imports also shows evidence of weak domestic demand, though, on a positive note, retail sales growth rebounded. President Xi sees China on a ‘new Long March’ to tackle major challenges, while the People’s Bank of China Governor Yi Gang said there is room for further stimulus.
Europe: European markets have firmed in June as trade concerns eased and despite the Eurozone showing signs of cooling. The IHS Markit Eurozone Composite Purchasing Managers’ Index rose fractionally in May but continued to signal a slow economic expansion. While the European Central Bank has struck a dovish tone recently, acknowledging downside risks to economic growth and inflation, it has been slow to act. Stocks in the U.K. also declined. Brexit remained clouded in uncertainty as Parliament’s failure to reach a deal led to Prime Minister Theresa May’s resignation in early June. Boris Johnson appears to be her most likely successor. Parliament now has until October 31 to reach an agreement or leave the European Union without a deal.
While global equity markets fell sharply in May, the Australian market bucked the trend, posting a positive return following the surprise re-election of the Coalition. The market is no longer faced with the prospect of changes to franking credits, which allowed some respite for the banks, and policy continuity on negative gearing and capital gains tax discounts was positively received by the residential real estate names. Materials also got a boost, supported by the rise in the iron ore price, with Fortescue Metals benefiting further from the announcement of a special dividend. On the negative side, selected consumer names struggled on concerns over a slowdown in key export market China and previous high-flier Afterpay stumbled as it was hit with an anti-money laundering audit by AUSTRAC.
First quarter GDP proved to be weaker than expected, with GDP growth over the year a full percentage point below trend at 1.8%. Spending by government continued apace, 5.7% higher over the year, though private sector demand remains anaemic.
Cash and Fixed Interest
The Reserve Bank of Australia (RBA) cut rates by 0.25%, which was broadly expected in light of a recent speech by RBA governor Philip Lowe, where he recognised that an unemployment rate below 5% was unlikely to be inflationary. Given the current spare capacity in the labour market as well as the subdued growth in both GDP and inflation, the market is expecting further rate cuts in the months ahead. The yield on the 10-yr government bond, at 1.3%, is close to record lows.
While the US Federal Reserve is yet to pursue a similar course of rate cuts at this stage, the removal of the word ‘patient’ from its official policy meeting statement, together with the comment that it will ‘act as appropriate to sustain the expansion’, has been interpreted by the market as a precursor to easing activity. The yield on the 3-month treasury bill has moved towards 2%, as has the yield on the US 10-yr government bond. Any challenges to growth from trade tensions may further pressure the US Federal Reserve to act.
Property – AREITs
AREITs have raced ahead again in recent weeks as several significant events have supported the sector. The surprise election win for the Coalition means that the residential market is no longer faced with the prospect of the removal of negative gearing and the reduction of capital gains tax discounts. APRA has also recently proposed reducing the 7% serviceability buffer requirement for new mortgages and the rate cut by the RBA in June has been a further positive. Perhaps the biggest factor for the AREITs universe more broadly has been the sharp fall in 10-year government bond yields, from 1.79% at the end of April to 1.3% today.
Underlying property values are close to mature-cycle levels. The AREIT market overall appears relatively expensive on a price to Net Asset Value (NAV) basis, albeit significantly bifurcated between sub-sectors that are in vogue, such as office and industrials, and those that are not, particularly retail. Distribution yields remain attractive relative to bonds.
For more information on the markets contact your financial adviser.
Sources: Zurich Insurance Group, Renaissance Asset Management, American Century Investments, Lazard Asset Management, Wells Fargo Asset Management, Bloomberg.
Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated June 2019, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Past performance is not a reliable indicator of future performance and should be used as a general guide only. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich.
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