Investment commentary – 30 June 2017

Provided by Mercer.

The global equity market index continued to move slightly higher in June, closing out a solid first six months of 2017.

The S&P 500 closed 0.6% higher despite a late-month fall; although this was countered by weak equities across Europe. Asian emerging markets were also positive as the Shanghai Stock Exchange (SSE) Composite (+2.4%) and Hang Seng (+1.4%) both gained. Domestically, the S&P/ASX 300 gained a modest 0.2% over June, led by the Financials and Health Care sectors. A resilient Australian dollar detracted from unhedged Australian investor returns as it rose against all major currencies.

Economic growth moderated in the United States (US) and China, while readings from the Eurozone and Japan surprised on the upside. According to the recent World Bank Global Economic Prospects report, growth in advanced and emerging economies is expected to accelerate to 1.9% and 4.1% respectively for 2017.  Core inflation remains low, which has tempered reflation expectations. Central banks in developed economies, however, are taking on a more hawkish tone in signalling tighter monetary policies moving forward.

During the month, the US Federal Reserve (Fed) hiked the cash rate to 1.25% and expects to start a “gradual” shrinking of its $4.5 trillion balance sheet in 2017. Currently, the CME Group’s Fed Watch Tool is estimating roughly a 60% chance of at least one additional hike by the end of 2017.

On 20 June 2017, MSCI announced the historic (but long awaited) step of including domestically-listed Chinese stocks into its global equity benchmark universes. As expected, there will be a lead time of 12 months between the announcement and implementation. The initial weighting is expected to be in the neighbourhood of 0.5% of the MSCI Emerging Markets Index. The China A-shares will also be included in the MSCI All Countries World Index.
  • The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged again in its early July meeting at 1.50%, the cash rate has remained at this level since August 2016.  RBA Governor, Philip Lowe, noted that forecasts for economic growth in the global economy have risen while Labour markets are also experiencing a gradual tightening. Australia is nearing the end of its transition following the mining boom, with business investment picking up in the non-mining related sectors. A depreciating exchange rate since 2013 has aided this transition, while the RBA is hoping to contain a rising Australian dollar, which could hold back the positive transition. The increased demand in China, along with improving conditions in the global economy overall have seen commodity prices rise to higher levels than a year previously.  As a result, Australia’s national income and Terms of Trade have improved, however, the prices of iron ore and coal have seen a sharp reversal of this growth recently, while medium-term risks involving the high level of debt in the Chinese economy also remain. Australian labour force conditions remain mixed but forward-looking indicators predict growth in employment over the longer term. Wage growth remains slow, putting a restraint on household consumption; meanwhile the unemployment rate is expected to decline gradually over time. Inflation is expected to continue to grow with the improving economy, although headline inflation has declined recently in response to dropping oil prices. With the gradual improvements in the economy and expected gradual increasing level of inflation, the RBA believed it was appropriate to leave the rate unchanged.
  • Australian seasonally adjusted employment increased 42,000 in May, well above expectations for a 10,000 rise while April figures were revised up to 46,100. The unemployment rate decreased to 5.5%, below market expectations of 5.7%. The participation rate increased to 64.9%, above the expected and previous monthly figure of 64.8%. Part time jobs decreased by 10,100 while full time jobs increased by 52,100.
  • Australian building approvals decreased 5.6% month-on-month (MoM) to be down 19.7% for the year to May, and below previous levels of 4.4% and -17.2% for respective periods ending April.
  • US Non-Farm Payrolls increased by 222,000 in June and there was an upwards revision to 152,000 increase for May (from 138,000). The unemployment rate increased to 4.4% in June from 4.3% in May.
  • The Institute for Supply Management (ISM) Manufacturing Index increased to 57.8 in June, above consensus for 55.3, and above the 54.9 recorded in May. Furniture & Related Products, Non-metallic Mineral Products and Paper Products reported the largest growth while Apparel, Leather & Allied Products, Textile Mills and Primary Metals contracted over the month. The ISM Non-Manufacturing Index increased to 57.4 in June, above consensus for 56.5, and above the 56.9 for May. Agriculture, Forestry, Fishing & Hunting, Wholesale Trade and Management of Companies & Support Services were the most significant contributors while Retail Trade and Finance & Insurance reported smallest growth and Other Services contracted over the period.
  • US gross domestic product (GDP) was revised for Q1 2017 to 1.4% quarter on quarter (QoQ) annualised, above expectations for 1.2%, and below the 2.1% growth recorded in Q4 2016.
  • The Caixin Manufacturing Purchasing Managers’ Index (PMI) in China increased to 50.4 in June from 49.6 in May, above expectations for 49.8. A reversal from the decline in the previous month, due to stronger increases in production and new orders, which prompted companies to increase purchasing activities. However, manufacturers still engaged in decreasing their workforce and inventory following quiet client demand overall. This activity culminated in a drop in business optimism to its lowest level for the year.
  • European Core consumer price index (CPI) increased to 1.1% over the year to June, above expectations for 1.0%. The unemployment rate remained flat at 9.3% in May, while MoM CPI decreased from 0.4% in April to -0.1% in May.
  • The Eurozone composite PMI decreased to 56.3 in June, from 56.8 in May, steadying the rapid economic growth from the previous period, as Spain experienced their fastest rate of growth in almost two years, while Ireland, France, Germany and Italy experienced slower expansion but solid levels in retrospect.
  • Eurozone seasonally adjusted GDP estimate was increased to 1.9% year-on-year and 0.6% QoQ for Q1 2017, from 1.7% and 0.5% respectively.


The broad Australian equity market slightly rose over June, as the S&P/ASX 300 Accumulation Index increased 0.2% for the month. Returns were mostly positive across the market spectrum, with the highest positive performer being the S&P/ASX Small Ords, increasing 2.0% for the month.  The sole negative performer was the S&P/ASX Mid 50 Accum, decreasing by 0.2% over the month.  The best performing sectors were Healthcare (+6.1%) and IT (+1.9%). The weakest performing sectors were Energy (-6.8%) and Real Estate (-4.1%). The largest positive contributors to the return of the index were CBA, CSL and ANZ, with absolute returns of 4.0%, 6.9% and 3.0% respectively.  In contrast, the most significant detractors from performance were Wesfarmers, BHP and Woodside Petroleum with absolute returns of -5.7%, -2.3% and -6.8% respectively.

Global Equities

The broad MSCI World ex Australia (NR) Index was up 0.1% in hedged terms and down -2.6% in unhedged terms over the month, as the Australian dollar appreciated against the major currencies. The strongest performing sectors were Financials (+1.7%) and Healthcare (-0.3%), while Telecommunication Services (-5.9%) and Utilities (-5.3%) were the worst performers. In Australian dollar terms, the Global Small Cap sector decreased by -1.4% while Emerging Markets decreased by -2.0% in unhedged Australian dollar terms.

Over June, the NASDAQ returned -0.9%, the S&P 500 Composite Index rose by 0.6% and the Dow Jones Industrial Average increased by 1.7%, all in US dollar terms. In local currency terms, major European equity markets experienced negative returns as the CAC 40 (France) decreased -2.7%, the DAX 30 (Germany) decreased -2.3% and the FTSE 100 (UK) decreased by -2.4%. In Asia, the Japanese TOPIX was up 3.0%, the SSE Composite (China) was up 2.4% and the Hang Seng Index was up 1.4%. The Indian BSE 500 decreased -0.2% over June.

Real Assets

The Real Assets sector experienced mixed returns globally but negative domestically over June. The FTSE Global Core Infrastructure index returned -1.0% while Global REITs increased 0.6% (both in Australian dollar hedged terms). Domestic REITs posted a decrease of -4.5% in June, while Australian Direct Property (NAV) returned 0.5% on a lagged basis.

Fixed Interest

Global bond markets were active over June as yields rose across the duration spectrum. The Barclays Capital Global Aggregate Bond Index fell 0.2% while the Citigroup World Government Bond (ex-Australia) Index fell 0.3% over the month. Ten-year bond yields increased for the US (+10bps to 2.30%), the UK (+22bps to 1.19%), Germany (+17bps to 0.47%) and Japan (+4bps to 0.09%). Two-year bond yields also expanded over the month. Yields rose in the US (+11bps to 1.37%), in Germany (+17bps to -0.58%), Japan (+5bps to -0.11%) and the UK (+23bps to 0.36%) over June.

Domestically, Australian 10-year bond yields increased 21bps to 2.60% while five-year (+28bps to 2.18%) and two-year (+19bps to 1.74%) bond yields also increased. As a result, Australian bond returns for existing holders were weak over June. The Bloomberg Ausbond Bank Bill Index produced the highest return of 0.1%, while the Australian Composite Bond Index returned -0.9% for the month.

Currency Markets

The Australian dollar appreciated against major currencies over June, finishing with an increased Trade Weighted Index of 65.5 on 30 June 2017. The Australian dollar appreciated against the US dollar (+3.0%), the Euro (+0.9%), the Yen (+4.3%) and the Pound Sterling (+1.6%). On a trade-weighted basis, the local currency increased 2.7% over the month.


Following the descent of iron ore to $58 per metric tonne in May 2017, from its peak in February 2017 at US$92 per metric tonne, iron ore saw a reversal over June, increasing 9.5%, to finish at US$63.50 per metric tonne on 30 June 2017. The S&P GSCI Commodity Total Return Index fell 4.8% for the month. Gold prices finished the month at US$1,243.47 per ounce, decreasing 1.9% over the period, while the oil price decreased by 4.4% to $47.82 per barrel over June.

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