Investment update for June 2023
Global stocks delivered positive returns in June which was supported by resilient economic growth and improved market sentiment.
US equities performed well throughout the month, continuing from the strong rally over recent months. The US Federal Reserve kept interest rates unchanged which supported equity valuations. The VIX equity market volatility index fell to its lowest level since before the COVID-19 pandemic. However, it is just a few large technology firms, with upbeat earnings expectations, that are carrying the rally.
A revised GDP growth report revealed a technical recession in the Euro area. This was negative information for European stocks, but the index rebounded, closing the month with moderate gains, followed by improved industrial production data.
Australian equities returned a small positive return in June. Resources stocks outperformed with a strong return, driven by a spike in the iron ore price, while the Energy sector had mixed performance. The oil price experienced fluctuations, supported by increased demand but also impacted by speculation surrounding a potential US-Iranian nuclear deal versus OPEC announcements of oil production cuts. The large pharmaceutical stock, CSL, took a hit after it announced a large loss from currency movements.
Government bond yields increased in June, leading to a small negative return for the global government bond index. The US Federal Reserve paused interest rate rises but pointed to more hikes on the way, as the US market digested approximately $1 trillion in new Treasury issuances following the passage of the debt ceiling legislation.
The Bank of England, the European Central Bank, the RBA, and other central banks all raised rates, and provided indications of additional future rate rises and tightening. Australian government bond yields experienced larger increases, resulting in a larger negative return for the Australian bond index in June.
The Australian dollar appreciated strongly in June, which was supported by the RBA increasing interest rates compared to the steady stance of the US Fed, together with the strong iron ore price.
The financial year was characterized by shifting financial markets. Early in the financial year, there was instability due to rising inflation, central bank actions, geopolitical tensions, and concerns about a possible global recession. However, economic activity remained resilient and later in the year global markets rallied on the expectation that central banks were approaching the end of rate hikes as inflation moderated, a mild winter in Europe defusing the energy crisis, and China’s reopening from COVID restrictions.
Concerns in the banking sector, particularly the collapse of Silicon Valley Bank and Credit Suisse, caused volatility, but overall global equities produced very strong returns over the financial year. The stock market rally has been particularly driven by the performance of large technology stocks linked to advancements in artificial intelligence.
In Australia, stocks fluctuated throughout the year as different factors impacted the market. Resources stocks produced very strong returns whilst commodity prices weakened over the year.
China’s economy encountered difficulties in the reopening recovery and from the ongoing slump in the property market. Chinese equities produced a negative return for the financial year, contributing to a moderate positive return overall for emerging markets.
Global listed property and infrastructure delivered negative returns for the financial year, as bond yields rose, while Australian listed property and infrastructure had moderate positive returns.
To combat inflation, central banks raised interest rates significantly, which added to instability in bond markets. Bond yields increased over the year. The Australian bond index was a small positive return compared to negative returns from global bonds, which started the financial year at lower yields.
Central bank policy also contributed to volatility in currency markets. The Australian dollar depreciated as commodity prices fell and other central banks raised rates more, while the Japanese Yen weakened, with the Bank of Japan retaining very supportive monetary policy.