Investment commentary - 30 June 2016

13/07/2016
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.
The market news in June 2016 was dominated by the United Kingdom (UK) referendum decision to leave the European Union (EU).

The market news in June 2016 was dominated by the United Kingdom (UK) referendum decision to leave the European Union (EU). The most immediate impact to financial markets following the revelation came through a plunge in the Pound Sterling – dropping to some 30-year lows the day of the referendum count. The immediate market and currency volatility was unpriced due to few correctly predicting the result.  Going forward, the implications of the ‘Brexit’ vote are highly significant for the UK, although the impact is difficult to quantify given the ongoing political uncertainty. The impact on Europe and the rest of the world is clearly smaller, but even harder to forecast as it depends upon the level of economic and political contagion of the UK decision.

Many markets have since recovered following the initial frantic period. Notably the S&P 500 Composite Index closed out the month marginally ahead (+0.3%), the S&P/ASX 300 Accumulation Index closed the month 2.4% behind after having fallen 3.1% on the day of announcement, and the FTSE 100 finished 4.7% ahead; helped by a lower Pound Sterling.  A resilient Japanese Yen meant the TOPIX fell -9.6% over the month.

Highlighting the value of diversification in investment portfolios, bond markets rallied hard over June.  United States (US) 10-year bond yields fell 34 basis points (bps) to 1.49% as the Citibank World Government Bonds Hedged Index rose 2.4% over June.
 

SIGNIFICANT DEVELOPMENTS

  • The Reserve Bank of Australia (RBA) left the interest rate unchanged in its July meeting, at 1.75%.  RBA Governor, Glenn Stevens, noted in his release that Australian growth is continuing despite a large decline in business investment. Inflation remains quite low and is expected to for some time given very subdued growth in labour costs and very low cost pressures elsewhere in the world. Lower interest rates have been supporting domestic demand and a lower exchange rate has helped the trade sector. He also noted that most markets have continued to function effectively for the initial period following the UK referendum. This wary but optimistic stance is consistent with previous recent statements.
  • Australian seasonally adjusted employment rose 17,900 in May, ahead of expectations for 15,000 while April employment was revised up from 10,800 to 11,600. The unemployment rate remained at 5.7%, in line with market expectations. The participation rate was steady at 64.80%, behind expectations for 64.90%. However, part time jobs rose 17,900 while full time jobs were flat. In trend terms employment increased by 3,700 while the unemployment rate was flat at 5.7% and the participation rate fell 0.1% to 64.8%.
  • Australian Retail Sales rose 0.2% month on month (MoM) in seasonally adjusted terms over May, behind expectations for 0.3%, following a 0.2% increase in April. The strongest gains were in other (+0.5%) and the weakest was department stores (0.0%). In trend terms, retail sales rose 3.3% year on year (YoY), down from 3.4% over the year to April.
  • The Australian house price index was released for Q1, showing a 0.2% reduction in house prices for a 6.8% 12 month growth rate ending March 2016. This trailed expectations for a 0.8% quarter increase and a 7.5% year on year increase.
  • US Non-Farm Payrolls increased by 287,000 in June, well above expectations for 180,000 while there was a downward revision of 6,000 to the prior two months employment. The unemployment rate rose to 4.9%, above expectations for 4.8%, but the participation rate rose to 62.7% from 62.6%. Wages rose 0.1% MoM and 2.6% YoY, from 0.2% and 2.5% over the month and year, respectively to May.
  • The Institute for Supply Management (ISM) Manufacturing Index rose to 53.2 in June, ahead of consensus for 51.3, and 51.3 in May.  Printing and related support activities, textile mills and petroleum & coal products experienced the largest growth while electrical equipment, appliances & components and transport equipment were the most significant declines. The ISM Non-Manufacturing Index increased to 56.5 in June from 52.9 in May, and ahead of expectations for 53.3. Mining, arts and entertainment & recreation were the most significant contributors while educational services, professional and scientific & technical services were the largest detractors.
  • US Headline consumer price index (CPI) rose 0.2% MoM and 1.0% YoY to May, behind expectations for 0.3% and 1.1%, respectively. Core CPI rose 0.2% MoM and 2.2% YoY, on par with expectations for the month.
  • The China Caixin Manufacturing PMI printed 48.6 in June, behind expectations for 49.2 and behind the 49.2 reading in May. Production and new orders both declined. Meanwhile, the official purchasing managers’ index (PMI) decreased to 50.0 in June, in line with expectations.
  • European Core CPI estimates indicate an increase to 0.9% over the year to June, from 0.8% in May, ahead of estimates for 0.8%. The unemployment rate fell to 10.1% in May, in line with expectations.
 

AUSTRALIAN EQUITIES

The Australian equity market was negative over June, with the S&P/ASX 300 Accumulation Index returning -2.4% for the month. There were negative returns across the market cap spectrum, with the weakest performer being the ASX 50, returning -2.6% for the month. The best performing sectors were Utilities (+5.6%) and Property Trusts (+3.5%). The weakest performing sectors were IT (-7.6%) and Financials ex Prop (-5.9%). The largest positive contributors to the return of the index were Newcrest Mining, Scentre Group and Fortescue Metals, with absolute returns of 20.6%, 6.0% and 17.6% respectively. In contrast, the most significant detractors from performance were CBA, NAB and Westpac with absolute returns of -4.0%, -5.7% and -3.7% respectively.
 

GLOBAL EQUITIES

The broad MSCI World ex Australia Index was down 1.2% in hedged terms and 3.8% in unhedged terms over the month, as the Australian dollar appreciated over June. The strongest performing sectors were Utilities (+2.2%) and Energy (+1.5%), while Financials (-8.5%) and Consumer Discretionary (-6.2%) were the worst performers. In Australian dollar terms, the Global Small Cap sector fell 4.5% while Emerging Markets returned 1.2%.
Over June, the NASDAQ returned -2.1%, the S&P 500 Composite Index returned 0.3% and the Dow Jones Industrial Average returned 0.9%, all in local currency terms. European markets experienced mixed results, with the FTSE 100 (UK) up 4.7%, DAX 30 (Germany) down 5.7% and the CAC 40 (France) down -5.3%. In Asia, equity markets saw mixed results, with the Indian BSE 500 up 2.5%, the Hang Seng Index returning 1.4%, the SSE Composite (China) returning 0.4% and the Japanese TOPIX falling 9.6%.
 

REAL ASSETS

The Real Assets sector saw broadly positive returns over June with Global Core Infrastructure returning 4.0%, and Global REITs returning 3.1% (both in Australian dollar hedged terms). Domestic REITs posted a return of 3.5% in June to be up 24.6% for the financial year to date, while Australian Direct Property (NAV) returned 0.5% on a lagged basis.
 

FIXED INTEREST

Global sovereign bonds produced relatively strong returns over June for hedged Australian investors, with yields falling over the period. Ten-year bond yields fell across most developed economies with Germany (-27bps to -0.13%), the UK (-54bps to 0.90%), the US (-34bps to 1.49%) and Japan (-12bps to -0.23%) all experiencing falls. Two-year bond yields saw a similar result with the UK (-32bps to 1.11%), the US (-29bps to 0.58%), Japan (-6bps to -0.30%) and Germany (-13bps to -0.65%) all experiencing falls. Global Bond indices were positive for hedged investors, with the Barclays Capital Global Aggregate Bond Index returning 2.0% and the Citigroup World Government Bond (ex-Australia) Index returning 2.4% over the month, both on a fully hedged basis.

Domestically, Australian 10-year bond yields fell 32bps to 1.98% while five-year (-18bps to 1.65%) and two-year (-10bps to 1.60%) bond yields also fell. As a result, Australian bond returns were also relatively strong for the month. Australia Treasury Bond Index returned 1.8% while the Australian Composite Bond Index also returned 1.3% for the month.
 

CURRENCY MARKETS

The Australian dollar strengthened against most currencies over June, finishing at US$0.745 with a Trade Weighted Index of 62.5. The Australian dollar appreciated significantly against the Pound Sterling (+12.4%) following the outcome of ‘Brexit’. It also appreciated against the US dollar (+2.8%) and the Euro (+3.0%) while depreciating against the Yen by 5.4%. On a trade-weighted basis, the local currency rose 1.3% over the month.
 

COMMODITIES

In commodities, the S&P GSCI Commodity Total Return Index fell 2.6% for the month. Gold prices finished the month at US$1,321.07 per ounce for an 8.8% rise over the period. The oil price fell marginally over June, by 0.9% to $49.62 per barrel. Iron ore prices rose over the month, by 6.9% to US$54.5 per metric tonne.
 

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