Investment update for July 2017
APRA moves to strengthen Australian banking system
Global markets were broadly positive over the month of July, supported by a continuation of a synchronised pickup of global growth. In a recent market report, the International Monetary Fund announced increasing confidence of an acceleration in global growth, but highlighted risks that make current asset prices vulnerable to a sharp correction, including ‘rich’ equity valuations, low market volatility and economic policy uncertainty. Geopolitical risks remains heightened.
In the US, markets were supported by dovish comments by US Federal Reserve (Fed) President Janet Yellen. The Fed kept interest rates unchanged as inflation remains below the 2% target and indicated that they will begin unwinding their $US4.5tn balance sheet ‘relatively soon’. However, the absence of inflationary wage pressures (despite low unemployment levels) has left the central bank perplexed, leading to Yellen’s comment that interest rates ‘would not have to rise all that much further’ to reach a neutral level supportive of sustainable economic activity if inflation remains low. Towards the end of the month, most US corporates reported strong earnings results, with majority of S&P 500 companies beating earnings forecast.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.5% in July. In developed markets, the US (2.0%) and Switzerland (1.6%) outperformed the broader market, while Germany (-1.5%) and France (-0.5%) underperformed. The MSCI Emerging Markets Index (1.9%) outperformed unhedged developed markets.
Following recent credit downgrades, major global ratings agencies supported the Australian Prudential Regulation Authority’s latest decision to strengthen the banking system by increasing the capital required to be held by banks. The bigger buffer will make the system more resilient to shocks.
Australian equity markets were range bound through July and ended the month unchanged. The S&P/ASX300 Accumulation Index ended the month flat at 0.0%. Large Cap (0.2%) and Small Cap (0.3%) stocks marginally outperformed the broader market over the month, while Mid Cap (-1.6%) stocks underperformed. Materials (3.5%), Financials (1.2%) and Consumer Staples (1.0%) outperformed, while Health Care (-7.5%) and Utilities (-5.3%) were the worst performing sectors.
The Australian dollar strengthened significantly over the month, driven by stronger than expected economic growth in China, a sharp increase in commodity prices and a corresponding weakness of the US dollar. This resulted in a loss for unhedged overseas equities of 1.6% (in AUD).
The Australian dollar was trading at US$0.7987 as at 31 July 2017.
Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays
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