It’s been an eventful month for markets – the Coalition won the federal election in a surprise upset, the RBA cut rates to record lows, and US-China trade tensions re-emerged with a vengeance. Domestic markets reacted positively to the Coalition win, with some of the pessimism surrounding the housing market subsiding. The RBA’s rate cut was not unexpected, with most analysts having already priced in the cut and potentially another.
Interestingly, the market narrative has turned to the possibility of the RBA undertaking a quantitative easing (QE) program domestically, similar to what we have seen in Europe and the US. This would involve the RBA buying government and corporate bonds using cash on its balance sheet, effectively flooding the market with liquidity while keeping rates low. Should rates continue their downward trajectory and QE become a reality, it may force investors into equities, providing a tailwind for markets as we have seen in the US and Europe in recent years. This is particularly relevant for retirees, who may be increasingly forced to lift their exposure to Australian equities as a source of income.
The trade tensions between the US and China continue to adversely impact markets, contributing to bouts of volatility. The longer the trade wars drag on, the higher the probability that we will see a longer-term impact on global growth. These factors make it a challenging period for investors, where factors other than fundamentals are having a material impact on the trajectory of markets. In such an environment, we believe selective valuation opportunities will present themselves for long-term investors, however ensuring that your portfolio is diversified will be very important in navigating an increasingly volatile market environment.
The S&P/ASX 200 Index returned 1.7% in May, with the price index rising above 6,500 points to end the month at just under 6,400 as global pressures, including the re-emerging US-China trade dispute, added to uncertainty over the month. Despite the weakness, Australian large cap shares held up well compared to global indices, with the top 50 stocks rising 2.6%. The top performing sectors in May were Communications (+7.3%), boosted by gains from Nine Entertainment (+18.9%), which is making inroads outside of broadcasting with its online streaming business Stan and online property portal Domain. Telstra (+8.0%) has benefited from the ACCC’s decision to block the TPG-Vodafone merger and has regained favour from the market after horrifying investors with a dividend cut in 2018.
The Health Care sector (+3.3%) was led by Resmed (+11.3%) and Ramsay Health Care (+6.9%), while the Materials sector saw large gains from mid-tier miners and solid advances from the likes of Newcrest (+8.8%) and Rio Tinto (+5.2%), whose price hit an 11-year high on the ASX. Dragging on performance in May was the Consumer Staples sector (-4.2%), which continues to be impacted by soft retail sales and a struggling household sector. Agribusiness Costa Group (-30.3%) was hardest hit, affected by low-yielding raspberries and high water costs.
Global shares retreated in May as the re-emergence of trade fears and the adjustment of market expectations with respect to rate cuts dampened the outlook. Developed market shares, measured by the MSCI World Ex Australia Index, lost 4.3% in Australian dollar terms while emerging market shares fell 5.7%, buffeted by a rise in the US dollar. The US S&P 500 Index lost 6.4% in May, with falls from all sectors excluding property, including significant falls from the Energy (-11.7%) and Information Technology (-8.9%) sectors. IT saw large falls from equipment manufacturers such as Qualcomm (-22.4%), while Apple (-12.8%) and Facebook (-8.2%) were hit by the risk-off wave. Volatility crept back into play with the CBOE Volatility Index rising from April’s low of 12.0 points to a high of 20.6 in May.
Europe was unable to avoid the pain, with the broad STOXX Europe 600 Index falling 5.3%. Auto sector shares (-13.7%) are still exposed to potential disruptive trade negotiations with the US and the integrated nature of the global value chain means almost no participant is left unscathed. Meanwhile the sharp fall in yields has put pressure on Europe’s major banks (-11.6%), forcing some to multi-year lows. Asian markets were also hit by trade fears, with falls in Japan’s Nikkei Index (-7.4%), China’s CSI 300 Index (-6.9%) and Hong Kong’s Hang Seng Index (-8.4%).
The bond market is still expecting the Fed to ease policy through to 2020, while the US administration is showing it is prepared to keep the trade dispute with China running, and possibly even attempt to renegotiate deals with Mexico and Europe. While recent Fed comments suggest an extended period of steady rates, markets clearly see a rolling trade dispute as a key factor in favour of additional monetary support. In Europe, yields have fallen steeply, reflecting a deterioration in the economic outlook. The ECB made no changes to its key rates in June, but President Mario Draghi stated it is “determined to act in case of adverse contingencies.”
The German 10-year Bund yield hit record lows, falling from 0.01% to -0.20% in May, signifying declining confidence in the growth outlook. French yields moved from 0.37% to 0.21% and UK yields dropped 30 basis points from 1.18% to 0.89%. The fall in yields led to positive performance from bond indices, with the Bloomberg Barclays Global Aggregate Index (AUD Hedged) returning 1.4%. Markets remain spooked by the inverted US yield curve, which is a potential indicator of recession, with the spread of 10-year over 2- year Treasury yields narrowing in May from 24 to 19 basis points.
Australian listed property had a positive month in May, returning 2.5% as a drop in fixed income yields drove prices higher in what tends to be a rate-sensitive sector. Stockland (+17.5%) was the standout performer, boosted by the dissipation of some negative sentiment following the Coalition’s election win, which spelled the end for any changes to negative gearing. Mirvac Group (+7.1%) and Charter Hall Group (+5.4%)—both holders of residential developments—also gained, with Mirvac also luring investors with a 5% lift in its FY19 dividend. Shopping centres continue to struggle in the face of softer retail activity and a cautious household sector, with Shopping Centres Australasia (-1.2%) and Scentre Group (-0.5%) down in May. While Labor’s negative gearing proposals were thought to favour developers by limiting tax concessions to new stock, the improvement in sentiment has so far had a greater impact on the sector. Globally, developed market REITs fell 0.3% in Australian dollar hedged terms. In the US, REITs were flat in May in US dollar terms, with gains from Public and Self-Storage (+5.9%), Healthcare (+5.1%) and Manufactured Homes (+3.2%) and falls from Regional Malls (-7.1%), Hotels (-6.9%) and Warehouse and Industrial (-2.7%) REITs.
The Australian equity market (as measured by the S&P/ASX 200) started the year off much like the previous finished, although most of the steam had been taken out of the rally with January producing a solid +1.20% return. February was much more muted with the uncertainty of an imminent reporting season hanging over the market however with better-than-expected results, coupled with softer-than-expected domestic inflation data, March provided some highlights as Australian shares hit new record highs. The quarter ended on a high with March producing +3.27% closing the quarter off with an attractive +5.53%.
2023 made for another very interesting year in investment markets as macro / regime driven events resulted in extreme shifts in investor sentiment on an almost monthly basis. Investors chose to shoot first and ask questions later in what can best be described as a year of maximum noise.
The Australian equity market (as measured by the S&P/ASX 200) started the September quarter with a flurry but ended up in the red as the global “higher-for-longer” narrative (interest rates) coupled with the ever-increasing cost of living concerns caused consumer confidence to wane.