Global equities finished a turbulent June 2018 marginally ahead as measured by the MSCI World ex Australia Index (hedged to the Australian dollar (AUD)). Detractors included emerging markets, specifically Brazil and China, while North American markets edged marginally higher. The domestic market was able to avoid some of the troubles and rose 3.2% to be up 13.2% as measured by the S&P/ASX 300 Index over the year to 30 June 2018, outperforming many major international counterparts.
In recent weeks, rising trade tensions dominated the headlines although market pressure eased somewhat after the United States (US) administration indicated it would pursue a more nuanced stance on tariffs. Market volatility remained fairly contained despite a number of additional geopolitical challenges. Ongoing Brexit negotiations, political turmoil in Germany and Italy, debt concerns in Turkey and Argentina as well as the upcoming elections in Mexico and Brazil all weighed on sentiment. However, generally positive US economic data helped to support equity markets during the month.
Global economic growth continues to be solid with the International Monetary Fund (IMF) forecasting net growth of 3.9% in 2018. However, leading indicators such as the Purchasing Managers’ Index (PMI) show early signs of economic moderation. Also, growth does appear to be diverging as indicators for the Eurozone are surprisingly disappointing.
Monetary policy has started to turn less stimulative as major central banks are planning to gradually remove their support. In June, the US Federal Reserve (Fed) increased its benchmark rate for the seventh time since the start of the tightening cycle in December 2015; to a range of 1.75% to 2.00% and is suggesting four additional rate hikes by the end of 2019. The European Central Bank (ECB) left its policy rate unchanged but announced plans to end the asset purchase program by the end of this year. Central banks in Japan, Switzerland and the United Kingdom (UK) maintained their current policies. Meanwhile, headline inflation edged up in the US and the Eurozone to policy targets.
Crude oil moved sharply higher as geopolitical tensions in Iran and Venezuela weighed on supplies while demand remained strong following robust economic growth. Members of the Organisation of the Petroleum Exporting Countries (OPEC), and Russia, have agreed to raise production starting in July. However, oil finished June at $79.4 per barrel, up 19.3% year to date despite losses during May. Other commodity markets were flat during June and continue to lag oil so far in 2018. Gold prices declined to a six month low, owing to a stronger US dollar (USD).
The Australian equity market outperformed its hedged international developed counterpart index over the month, as the S&P/ASX 300 Index increased 3.2%. The S&P/ASX 50 Index was the strongest relative performer, increasing 3.7%, while the S&P/ASX Small Ordinaries was the weakest, increasing 1.1% over the month.
The best performing sectors were Energy (+7.7%), Consumer Staples (+5.9%), Utilities (+5.9%) and IT (+5.9%), while the weakest performing sectors were Telecom Services (-5.5%) and Industrials (0.6%).
The largest positive contributors to the return of the index were CBA, Westpac and Wesfarmers, with absolute returns of 5.2%, 5.8% and 8.8% respectively. In contrast, the most significant detractors from performance were Telstra, Ramsay Health Care and AMP with absolute returns of -5.8%, -11.8% and -8.1% respectively.
The broad MSCI World ex Australia (NR) Index increased 0.3% in hedged terms and 2.3% in unhedged terms over the month, as the AUD depreciated against most major currencies. The strongest performing sectors were Consumer Staples (+5.1%) and Utilities (+4.5%), while Industrials (-0.2%) and Financials (+0.5%) were the worst performers. In AUD terms, the Global Small Cap sector was up 2.1% and Emerging Markets decreased by 1.8%.
Over June, the NASDAQ increased 0.9%, the S&P 500 Composite Index increased by 0.6% and the Dow Jones Industrial Average decreased by 0.5%, all in USD terms. In local currency terms, major European equity markets experienced negative returns as the FTSE 100 (UK) decreased 0.2% while the DAX 30 (Germany) also decreased by 2.4% and the CAC 40 (France) decreased by 1.0%. In Asia, the Japanese TOPIX (-0.8%), Hang Seng (-4.5%), Indian S&P BSE 500 (-1.6%) and the Chinese SSE Composite (-8.0%) all decreased over June.
The AUD depreciated against the USD over June, ultimately finishing with a lower Trade Weighted Index of 62.6 on 30 June 2018. The AUD depreciated against the Yen (-0.6%), the Pound Sterling (-0.8%), the Euro (-2.0%) and USD (-2.4%). On a trade-weighted basis, the local currency decreased 0.3% over the month.