Investment update for July 2014
Global volatility expected to rise
July was awash with geopolitical events. Violence continued to rage in Iraq and Syria as the Islamic State (formerly ISIS) declared a caliphate in the territory it controls, while tensions also flared in Gaza. Arguably the biggest event in terms of impact on investor sentiment was the tragic downing of flight MH17, which was allegedly shot-down by Russian separatists in Eastern Ukraine. Major Western nations (and regions) responded by imposing additional sanctions on Russia, mostly targeting the weapons, energy and finance sectors. Risk assets underperformed as investors showed a clear preference for ‘safe haven’ assets such as government bonds and the US Dollar. The VIX, a measure of expected volatility, rose sharply following an extended period of benign conditions. US economic data was broadly strong, with second quarter GDP posting a strong result following the weak, weather-impacted, first quarter. The US Federal Reserve continued to taper its quantitative easing (QE) program, and reduce monthly bond purchases by USD 10 billion. Finally, on 30 July, Argentina defaulted on its debt after holders of 2033 Discount Bonds did not receive their coupons. This was linked to the ongoing legal dispute between Argentina and holdout investors in earlier defaulted bonds.
A 2% gain saw emerging markets outperform developed markets for the third month in a row. The returns achieved by larger emerging markets were spanned by an 8% rise by China and an 8% fall by Russia. In between lay Brazil and South Korea, which both increased by 2%, while India, Mexico, South Africa and Taiwan all made marginal gains. Other markets in positive territory included Indonesia (up 8%) and Turkey (up 4%) while double-digit gains were achieved by Egypt, Qatar and the UAE. Eastern European markets, however, all suffered losses led by Hungary’s 11% decline. Sector performance varied from 5% gains from telecoms and financials to a 2% loss from energy. The IT sector fell by 1% although it remains the top performing sector in 2014 (up 15%).
The S&P/ASX300 Accumulation Index (4.4%) strongly outperformed hedged overseas equities as better than expected production updates from index heavyweights Rio Tinto and BHP Billiton saw their stock prices soar. As expected, the Materials sector was the strongest performer and all sectors produced a positive absolute return. Small cap stocks marginally outperformed large cap stocks, while Property Trusts also outperformed the broader Index and unlisted Australian property.
The Australian Dollar (AUD) weakened against most major developed market currencies and this was most pronounced relative to the US Dollar (USD). The USD moved higher early in the month following better than expected US labour market data, while the ongoing tapering of QE reinforced investor expectations that short term US interest rates will rise in the years ahead. The Euro was the weakest performer as lower interest rates and depressed economic conditions acted as a headwind.
Broad stock market performance – July 2014
|Performance (income and capital gain or loss) %|
|Australian Shares (S&P/ASX 300 Accumulation)||4.4||3.6|
|International Shares (MSCI AC World ex-Aust) hedged||-0.7||3.6|
|Unlisted property (Mercer Unlisted Property Funds Index (Pre-tax))*||0.5||2.4|
|Global Bonds (Barclays Global Aggregate (Hedged))||0.5||2.2|
|Cash (UBS Bank Bills)||0.2||0.7|
|Check out AvSuper’s weekly returns and quarterly performance results Please note that past performance is not always a reliable indicator of future performance.|
*Estimate as at 11 August 2014 Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
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