Investment update for June 2017
Household debt risk hurts credit ratings of Australian banks
With terror attacks across Europe, more North Korean missile tests and ongoing tensions in the Middle East, geopolitical events continued to dominate headlines during June. Most notably, British Prime Minister Theresa May’s plan to consolidate parliamentary influence ahead of Brexit negotiations with a snap general election backfired and instead produced a hung parliament. In the US, the Trump administration contributed to strong performance from the US Financials sector by releasing plans to overhaul banking rules and wind back responses to the global financial crisis implemented in the Dodd-Frank Act. At the same time, further delays to US healthcare system reform led to renewed investor concern over the Trump administration’s ability to deliver.
Over the month, hawkish turns from several major central banks over the continuation of economic recovery resulted in higher interest rate expectations and a sell-off in bonds across major developed markets. The US Federal Reserve (Fed) raised interest rates by 0.25%, as expected, and announced a balance sheet normalisation program will begin this year. The Fed maintains its positive view and believes recent softness in inflation numbers and weaker than expected US data are ‘transitory’. Towards the end of the month, following its annual stress test, the Fed approved plans for 34 of the largest US banks to utilise some of their extra capital for share buybacks and dividends. This further boosted share market performance for the US banking sector.
The MSCI World Index ex-Australia (hedged into AUD) rose 0.2% over the month. In developed markets, Japan (2.7%) and the US (0.6%) outperformed the broader market, while France (-2.6%) and the UK (-2.5%) underperformed. The MSCI Emerging Markets Index (-1.9%) outperformed unhedged developed markets.
Credit rating agency Moody’s downgraded a dozen Australian banks, citing increased risks in the nation’s increasingly indebted households. Similar views have been expressed by the Organisation for Economic Co-Operation and Development (OECD) and the Bank of International Settlements (BIS). The Reserve Bank of Australia is increasingly focused on the implications of the current low interest rate environment and related financial risks.
The S&P/ASX300 Accumulation Index rose 0.2% in June. Small Cap stocks rose 2.0% for the month, while Large Cap stocks (-0.1%) underperformed the broader market. Healthcare (6.1%), IT (1.9%) and Financials (1.7%) outperformed, while Energy (-6.8%) and Utilities (-2.7%) were the worst performing sectors.
The Australian dollar appreciated against most developed market currencies in June, which resulted in a loss for unhedged overseas equities of 2.6% (in AUD).
The Australian dollar was trading at US$0.7692 as at 30 June 2017.
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
We trust you find this information useful in understanding how your AvSuper investment is performing and welcome your feedback on how we can improve the information we provide to you.