Investment update for June 2019
A year of slowdown, trade tension and shifting monetary policy
Over the financial year, there was an overall slowdown of global economic growth, particularly in Europe, Japan and China, with global trade and manufacturing activity slowing notably. Heightened trade tension was a key issue throughout the year, despite hopes that the US and China would negotiate a settlement.
In Australia, falling house prices contributed to weak consumer spending and dominated the market. Driven by the iron ore price, which almost doubled over the year, exports were very strong and produced the largest trade surplus since the 1970s.
There was a major shift in monetary policy over the year, from tightening to an expectation of easing. The US Fed was a key driver of the volatility in equity markets over the year. Shares around the world fell sharply when further tightening was expected in late 2018, but then rebounded strongly in 2019, as the Fed indicated more supportive policy going forward. The result was a solid positive return from equities, while economies were weaker. Europe equities produced a small positive return but both Japan and UK equities were negative. The Brexit process remained unresolved and a new Prime Minister was appointed in July.
Emerging market equities produced a small positive return for the year, weighted down by trade concerns and weaker commodity prices. Australian equities were a standout performer over the financial year. Resources stocks were particularly strong, benefiting from the rise in the iron ore price. Australian banks recovered late in the year as the cuts in rates and the Federal election result contributed to signs that house prices would stabilise. Bonds, particularly Australian bonds, provided strong returns over the year. The change in monetary policy stance saw bond yields globally fall significantly. Australian bond yields are now materially lower than in the US, which has rarely occurred.
The Australian dollar fell over the year, supporting unhedged international equity returns. The US dollar and Japanese yen were the strongest currencies, while the British pound was relatively weak, due ongoing Brexit uncertainty. In June, the highly anticipated G20 meeting held in Osaka resulted in a declaration of another trade truce with Trump agreeing to hold off additional tariffs on China and allowed US companies to resume sales to Huawei Technologies. Equity markets responded positively to the news and produced strong returns across regions. However, the ongoing uncertainty will continue to be a key driver of markets going forward.
For the June quarter itself, employment growth moderated, consumption growth was muted and housing construction fell. As market expectations of the US Fed cutting rates increased, we saw the RBA lower the cash rate by another 25 basis points, and the Australian dollar rose against the US dollar.
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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