Investment update for August 2016
Strengthening US Dollar has global influence
Global context
Following strong returns from domestic and international markets in July, the Australian equity market retraced slightly in August. Global markets achieved marginal positive performance, with emerging markets outperforming developed markets.
The Australian equity market performance largely revolved around reporting season. The market traded between small gains and losses as corporates either exceeded or missed market expectations. The Reserve Bank of Australia (RBA) cut the cash rate by 0.25% to 1.5% in early August but the move failed to encourage the equity market higher. Financials performed poorly, while bond proxy stocks, such as Utilities, lagged as US Federal Reserve commentary was hawkish about a US interest rate hike.
International markets
The MSCI World ex-Australia Index (hedged into AUD) gained 0.7% over the month. Ireland (5.9%) and the Netherlands (3.4%) outperformed the broader market, while Denmark (-5.8%) and Finland (-1.0%) underperformed. The MSCI Emerging Markets Index (3.7%) outperformed developed markets.
In the US, market volatility remained very low and sentiment was constrained by the increased probability of an interest rate hike in 2016. The Bank of England cut interest rates and announced a £170 billion stimulus package, which saw European equity markets performing well in early August. However, the remainder of the month saw weakness in European markets, as the strengthening US Dollar weighed on mining and energy production stocks.
Performance of Asian markets was relatively positive. The Nikkei Index rose 1.9% on speculation the Bank of Japan would continue its stimulus program in September. In China, the Shanghai Composite Index rose 3.6%, propelled by the People’s Bank of China initiating its first 14-day liquidity injection in many months.
Australian markets
The S&P/ASX300 Accumulation Index fell 1.6% in August. Small Cap stocks also fell 1.6% for the month, whereas Large Caps stocks (-1.8%) underperformed the broader market. IT (4.6%) and Energy (2.4%) stocks outperformed, however Telecoms (-6.5%) and Utilities (-5.7%) were the worst performing sectors.
Currency
The Australian dollar depreciated in August against the USD (-1.1%). This resulted in returns to international equities of 1.3% on an unhedged basis.
The Australian dollar was trading at US$0.7514 as at 31 August 2016.
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
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