Investment update for August 2020
Australian recession confirmed
Global equity markets produced strong gains over August with developed markets continuing to rebound from post-COVID-19 lows. In the US, the NASDAQ and S&P500 rallied 9.6% and 7.0% respectively. The NASDAQ (and Technology sector more broadly) is now comfortably at all-time highs. US equity returns were strong, despite uncertainty from the upcoming presidential election and ongoing high rates of COVID-19 infections. The economic backdrop remains highly uncertain. Some US activity indicators suggest reactivation has plateaued, while others suggest a strong earnings rebound. The Fed monetary policy release has highlighted two important changes to its framework; one in adopting a more flexible form of inflation, and two targeting regime and supporting continued gains in the labour market. In response, bond yields rose and bond returns were negative for the month.
In Europe, COVID-19 cases spiked in several countries with France and Spain reporting numbers as high as they were back in March. Advanced economic indicators suggest this affected business confidence. European equity and bond markets performed well over the month and Chinese equity performance was also positive. Credit support from Chinese authorities has increased, contributing to a strong economic rebound as reflected in commercial vehicle and excavator sales.
Shifting the lens to the domestic front, Australian GDP data released confirmed Australia is in recession, but contraction is at the lower end relative to most other countries. Analysis suggests that the equity market is differentiating on COVID-19 impact. Data indicated a spike in savings rate, with household savings ratio reaching its highest level since 1974. The RBA extended timing and increased the Term Funding Facility bringing the total amount made available to $200 billion. With Australian bank earnings hit hard and resources companies underperforming, Australian small caps outperformed large caps over the month.
A-REITs outperformed the broad index, recovering some of the post-COVID-19 underperformance. A-REITs remains one of the worst performing asset classes over 12 months. It was a different story for listed infrastructure, with both global and Australian markets underperforming their listed market comparables.
The AUD strengthened in August, against major currencies including a weakening US dollar. The AUD benefited from a rise in the iron ore price, reflecting an increase in China demand. Brazilian supply issues remained a key contributing factor. Broader commodities returns were mixed for the month. After a strong rally and despite some volatility, the price of gold was broadly flat over the month. Gold remains one of the strongest performing asset classes over the past 12 months. The oil price continued its strong rebound.
Please view our full investment commentary brought to you by our advisers – Frontier – for a more in depth analysis of market conditions this month. The monthly commentary can also be viewed on YouTube.
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