The recent trend of a weakening United States (US) dollar (USD) and rising commodity prices continued in July 2017. As a consequence, emerging markets equities once again outperformed their developed counterparts. The MSCI Emerging Markets (UH) index rose 1.8% in Australian dollar (AUD) terms despite an appreciation of the AUD over the month. Asian emerging markets continued their positive run with the Shanghai Stock Exchange (SSE) Composite (+2.5%) and the Hang Seng (+6.6%) increasing while the S&P BSE 500 (India) (+5.5%) also increased, bouncing back from a poor June. Domestically, the S&P/ASX 300 Index was flat over July, while the S&P/ASX MidCap 50 Index detracted 1.6%. The major banks experienced a reversal over July following a weak second quarter of 2017. Another consequence of the weakening USD and rising commodity prices, particularly iron ore prices, has been a rising AUD, which detracted from unhedged Australian investor returns. This development has increased pressure on the target cash rate of the Reserve Bank of Australia (RBA), with RBA Governor, Philip Lowe, noting the ‘appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast’.
The broad Australian equity market was subdued over July, with the S&P/ASX 300 Index remaining flat over the month. The highest positive performer was the S&P/ASX Small Ordinaries Index, increasing 0.3% for the month, while the S&P/ASX MidCap 50 Index was the sole negative performer, decreasing by 1.6% over the month. The best performing sectors were Materials (+3.5%) and Financials (+1.3%). The weakest performing sectors were Healthcare (-7.5%) and Telecom Services (-4.2%). The largest positive contributors to the return of the index were BHP, Westpac and ANZ, with absolute returns of 11.3%, 4.8% and 3.6% respectively. In contrast, the most significant detractors from performance were CSL, Telstra and Aristocrat Leisure with absolute returns of -8.6%, -4.1% and -10.1% respectively.
The broad MSCI World ex Australia (NR) Index was up 1.5% in hedged terms and down -1.7% in unhedged terms over the month, as the AUD appreciated against the major currencies. The strongest performing sectors were Materials (+0.5%) and Telecommunication Services (+0.5%), while Healthcare (-3.8%) and Consumer Staples (-3.4%) were the worst performers. In AUD terms, the Global Small Cap sector decreased by 1.7% while Emerging Markets increased by 1.8%. Over July, the NASDAQ rose 3.4%, the S&P 500 Composite Index rose by 2.1% and the Dow Jones Industrial Average increased by 2.7%, all in US dollar terms. In local currency terms, major European equity markets experienced weaker returns as the CAC 40 (France) decreased 0.5%, the DAX 30 (Germany) decreased 1.7% while the FTSE 100 (UK) increased by 0.9%. In Asia, the Japanese TOPIX was up 0.4%, the SSE Composite (China) was up 2.5% and the Hang Seng Index was up 6.6%. The Indian BSE 500 also increased 5.5% over July.
The AUD appreciated against major currencies over June, finishing with an increased Trade Weighted Index of 67.3 on 31 July 2017. The AUD appreciated against the USD (+4.1%), the Euro (+1.0%), the Yen (+2.4%) and the Pound Sterling (+2.9%). On a trade-weighted basis, the local currency increased 2.7% over the month.