Global equities increased modestly in July, with Overseas Developed Shares rising 1.1% in hedged terms.
US equities in particular reached fresh highs in the second half of July, largely driven by technology stocks, however markets pulled back following an indication from the US Federal Reserve (Fed) that the 0.25% rate cut, to a range of 2.00% to 2.25%, was not necessarily the beginning of an easing cycle.
Dovish sentiment from the European Central Bank (ECB) and People’s Bank of China (PboC) continued, whilst trade tensions again escalated and poor economic growth outside of the US continued to play on the minds of investors. The futures market currently has two rate cuts priced in for the ECB and an additional rate cut from the US Fed by the end of this year.
Globally, Information Technology and Communication Services were the best performing sectors for the month, returning 4.7% and 4.6% respectively. Meanwhile, energy continued its lag from the month prior. Whilst producing relatively smaller returns compared to earlier months this year, both growth and defensive asset classes have continued their run of positive returns.
Geopolitical risks remained elevated over the month as the civil unrest in Venezuela continued, anti-government protests in Hong Kong intensified and Boris Johnson was elected the new Prime Minister of the United Kingdom, displaying his full support for the Brexit deal. The US Dollar strengthened against the British Pound and most major currencies on the back of strong inflows.
The strong dollar contributed to a lower return (+0.6%) in emerging markets, as measured by the MSCI Emerging Markets index. The US and China trade dispute escalated with the US administration considering an additional 10% tariff on $300 billion of Chinese imports on top of the 25% tax rate coming into effect on 1 September 2019. Trade and geopolitical tensions continued to weigh on global growth, with manufacturing purchasing managers’ index (PMIs) declining further.
The US Fed cut rates by 25bps in July, the first rate cut since the global financial crisis. Bond markets delivered mixed results over the month, with sovereign bond yields continuing to fall. Emerging market debt continues to be one of the highest returning asset classes, after Australian Real Estate Investment Trusts (A-REITs), over the past 12 months to July 2019. Within emerging markets, 15 countries including Russia, Argentina, South Africa and Turkey, proceeded to cut their interest rates. The credit spreads on both investment grade and high yield bonds declined over July, as investors continued to search for yield in global markets.
The Australian equity market continued its strong run from the June quarter, with the S&P/ASX 300 returning 3.0%, outperforming its hedged overseas counterpart by 1.9%. Domestic Small Caps rallied in July (+4.5%) and broadly speaking, outperformed the majority of asset classes. In sector terms, Consumer Staples (+9.6%) led the Australian equity.
- The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged in its early August meeting at 1.0% per annum (pa), following a drop from 1.25% in July 2019. Key considerations in making this decision were in the interest of supporting employment growth and providing greater confidence that inflation will remain consistent with the medium-term target. RBA Governor, Philip Lowe, noted that the outlook for the global economy remains reasonable, however downside risks have increased due to trade disputes and the slowdown in international trade has contributed to slower growth in Asia.
- Employment growth has been strong over the past year, despite the unemployment rate recently rising slightly to 5.2%, and this growth has also led to some pick up in wage growth in the private sector. Inflation pressures remain subdued however, inflation is anticipated to pick up in the June quarter. The RBA estimates underlying inflation to be around 2.0% in 2020 and to move slightly higher after that. There are tentative signs that house prices are now stabilising in Sydney and Melbourne, with credit conditions also stabilising. The recent decision to lower the cash rate to 1.0% is aimed at filling the spare capacity within the economy, assisting in reducing unemployment and providing more stable progress towards the inflation target, however the board is ready to ease monetary policy further if needed.
- Australian seasonally adjusted employment increased by 500 in June, far below expectations for a 9,000 rise while May figures were revised to an increase of 44,300. The unemployment rate remained at 5.2% for June, in line with expectations. The participation rate remained at 66.0%, above expectations for 65.9%. Part time jobs decreased by 20,600 and full time jobs increased by 21,100.
- Australian building approvals decreased 1.2% month-on-month to be down 25.6% for the year to June, compared to previous levels of +0.3% (revised) and -19.2% (revised) for respective periods ending May.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 51.2 in July, below consensus for 52.0, and below the 51.7 recorded in June. Of the 18 manufacturing industries, Wood Products, Printing and Related Support Activities and Furniture and Related Products were the top contributors, while Apparel, Leather and Allied Products, Fabricated Metal Products and Primary Metals were the largest detractors over the month. The ISM Non-Manufacturing Index recorded 53.7 in July, below consensus for 55.5 and below the 55.1 for June. Of the 18 nonmanufacturing industries, the top performers in July were Accommodation and Food Services, Utilities and Professional and Scientific and Technical Services. Arts, Entertainment and Recreation, Agriculture, Forestry, Fishing and Hunting and Retail Trade were the largest detractors over the month.
- US Non-Farm Payrolls increased by 164,000 in July, below the previous 193,000 increase (revised) for June. The unemployment rate remained at 3.7% over July.
- US gross domestic product (GDP) estimate for Q2 2019 is 2.1% quarter on quarter (QoQ) annualised, above expectations for 1.8%.
- The Caixin Manufacturing PMI in China recorded 49.9 in July, in line with expectations. The indicator signalled a marginal deterioration in operating conditions in July.
- An estimate of the European Core Consumer Price Index (CPI) recorded 0.9% over the year to July, below expectations for 1.0%.
- The Eurozone composite PMI decreased to 51.5 in July, below 52.2 for June, but in line with expectations.
- The initial estimate released for Q2 2019 Eurozone seasonally adjusted GDP was 1.1% for year-on-year (YoY) and 0.2% QoQ.
The Australian equity market outperformed its hedged overseas counterpart index over the month, as the S&P/ASX 300 Index increased 3.0%. The S&P/ASX Mid 50 was the strongest relative performer, increasing 4.9%, while the S&P/ASX 50 was the weakest, increasing 2.5% over the month.
The best performing sectors were Consumer Staples (+9.6%) and Healthcare (+6.0%), while the weakest performing sectors were Materials (+1.2%) and Energy (+1.5%). The largest positive stock contributors to the index return were CSL, NAB and Wesfarmers, with absolute returns of 6.9%, 7.3% and 8.9% respectively. In contrast, the most significant detractors from performance were Rio Tinto, Woodside Petroleum and Fortescue with absolute returns of -4.4%, -4.1% and -7.4%, respectively.
The broad MSCI World ex Australia (NR) Index increased 1.1% in hedged terms and 2.3% in unhedged terms over the month, as the Australian dollar (AUD) depreciated against the USD and Japanese yen. The strongest performing sectors were IT (+4.7%) and Communication Services (+4.6%), while Energy (-1.0%) and Materials (-0.3%) were the worst performers. In AUD terms, the Global Small Cap sector was up 2.4% and Emerging Markets was up 0.6% over July.
Over July, the NASDAQ increased 2.1%, the S&P 500 Composite Index increased by 1.4% and the Dow Jones Industrial Average increased by 1.1%, all in USD terms. In local currency terms, major European equity markets experienced mixed returns as the FTSE 100 (UK) increased 2.2% while the CAC 40 (France) decreased by 0.3% and the DAX 30 (Germany) also decreased by 1.7%. In Asia, the Japanese TOPIX increased (+0.9%), while the Hang Seng (-2.3%), the Chinese SSE Composite (-1.6%) and the Indian S&P BSE 500 (-6.3%) decreased over July.
The Real Assets sector was mostly positive for investors over July. The FTSE Global Core Infrastructure index remained flat and the Global Real Estate Investment Trusts (REITs) increased by 1.1% over the month (both in AUD hedged terms). Domestic REITs increased 2.6% over July, while Australian Direct Property (NAV) returned 0.9% on a one-month lagged basis.
Global bond markets were positive over July as yields decreased across most major regions. The Barclays Capital Global Aggregate Bond Index (Hedged) increased 0.7% over the month and the FTSE World Government Bond (ex-Australia) Index (Hedged) also increased 0.7%. Ten-year bond yields increased in the US (+1bps to 2.01%) and in Japan (+1bps to -0.16%), but decreased in the UK (-22bps to 0.61%) and Germany (-15 basis points (bps) to -0.48%). Two-year bond yields also experienced mixed movements over the month with the US (+13bps to 1.88%) and Japan (+1bps to -0.21%) increasing while German bond yields decreased (-4bps to -0.78%), along with the UK (-19bps to 0.43%).
Returns for existing domestic bond holders were positive over July, with 10-year yields (-14bps to 1.19%), five-year yields (-17bps to 0.87%) and two-year yields (-12bps to 0.86%) all decreasing. Of the Bloomberg Ausbond indices, the Inflation Index produced the highest return, increasing 1.5% over the month, while the Bank Bill Index return was 0.1% over the month.
The AUD Trade Weighted Index fell to 59.5 over July, down 1.0% from the previous month. The AUD appreciated against the Pound Sterling (+2.4%) and the Euro (+0.1%) whilst it depreciated against the Japanese Yen (-0.9%) and the US dollar (-1.8%).
Iron Ore increased 3.9% over July, finishing the month at $121.0 per metric tonne. The S&P GSCI Commodity Total Return Index increased 1.6% over the month. Gold prices finished the month at US$1,427.68 per ounce, increasing 1.1% over the period, while the oil price decreased 3.2% to $64.71 per barrel over July.
Source: Mercer LLC