Investment update for June 2020
Markets struggled to rebound as COVID-19 continued to spread
The past financial year started with unresolved US-China trade tensions but then the COVID-19 pandemic triggered the largest global recession since at least the early 1900s. Despite reduced infection rates in some countries, the virus continues to spread globally. Restrictive containment measures have contributed to sharp rises in unemployment and dramatic falls in travel and global production. Economies have started to reopen slowly but activity is still below previous levels and in some cases there has been a reintroduction of restrictions as new COVID-19 cases have started rising again. In addition, a dispute between Saudi Arabia and Russia contributed to the oil price falling precipitously during the year. The price has roughly doubled from the lows in April but is still around 40% lower than a year ago.
Policy responses to the pandemic have been unprecedented. The US Federal Reserve and the Reserve Bank of Australia (RBA) have cut rates to almost zero. Central Banks have implemented very large quantitative easing, including the RBA for the first time, and governments have provided large fiscal support.
Markets experienced extreme volatility. Equity markets fell abruptly and then rebounded very strongly. The result over the past 12 months was a small positive from US and Japanese equities, a negative in Europe and a large negative from UK equities, (also detrimentally impacted by Brexit). Emerging market equities produced a small negative return, although some countries such as China were positive while others more impacted by the pandemic and oil prices, such as Brazil, were negative. Australian equities also had a negative return over the financial year. The Energy sector produced particularly large negative returns and financials were negatively impacted by the pandemic and ongoing regulatory issues.
Property has been particularly hard hit, both the immediate impact of reduced demand, and the expectation that it will accelerate the trends of online retail and working from home. Although listed property prices have rebounded strongly, the return for the year is a large negative. Listed infrastructure experienced the same pattern of returns but not as large a negative return, with utilities performing relatively well, while airports have been particularly hard hit.
Bond yields fell over the year providing solid returns from government bonds. Credit spreads initially increased very sharply and then contracted, so that overall corporate bonds only moderately underperformed government bonds over the year. The Australian Dollar fell materially, at one point it was below US$0.58, but it has subsequently recovered. Over the year, the Australian Dollar only depreciated by a small amount against the US Dollar, Euro and Japanese Yen, and appreciated a small amount against the British Pound, which was negatively impacted by Brexit.
In the June month, markets have been relatively more restrained as economies that open up are offset by increasing spread of the virus. Equity markets globally, including Australia, produced positive returns. However, Australian listed property and global listed infrastructure produced negative returns after strong returns in May. Commodity prices continued to rebound in June in response to increasing economic activity.
There was little change in yields in June, with bonds producing small positive returns, while corporate bonds produced higher returns as credit spreads contracted further. The Australian Dollar continued to appreciate against all major currencies in June.
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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