Investment update for May 2020
Australia benefits from rising commodity prices
Domestic and global equity markets rose materially over the month of May, as global risk sentiment improved. This followed declining COVID‑19 infection rates and the relaxation of mitigation measures in many countries.
The medical situation remained varied across countries. In Australia, new COVID‑19 cases have continued to decline to small numbers. In Japan, new cases were relatively low. In Europe, new cases remained material, but fell across the region. In the US, the new infection rate had fallen from peak levels (specifically in New York) but overall new cases remained significant. The equity market expansion also continued despite the negative economic data suggesting that the global economy was probably experiencing the biggest contraction since the 1930s.
Australian small caps rebounded particularly strongly in May, returning more than 10% for the month, and the ASX Resources sector also rebounded strongly, benefiting from rises in oil and iron ore prices. The combination of eased mitigation restrictions and OPEC production cuts meant crude oil doubled in price from the lows in mid-April. However, the price of oil was still well down, at nearly half the price it was earlier in the year.
Chinese equities were one of few equity markets where performance lagged in May. Partly this reflected previous relative outperformance. However, while its economy opened up ahead of much of the rest of the world, China was still not back at previous levels and there were concerns about political tensions with the US and potential new COVID‑19 outbreaks.
In a number of other emerging markets, such as Brazil, Russia, India and Indonesia, the COVID‑19 medical situation worsened but equity markets were rising from low points.
Consistent with broad equity markets, listed property and infrastructure were also up for the month, particularly Australian listed property, although international listed property was flat.
The US Federal Reserve (Fed) announced no major adjustments to policy for the month, and noted its hesitance to using negative rates. Similarly, the RBA announced its intention to not raise the cash rate target until progress is made towards full employment and it regains confidence that inflation will be within the 2-3% target band sustainably. The European Central Bank (ECB) enacted its purchase program and bought over EUR 125 bn in government and corporate bonds.
Bond yields were little changed over the month and therefore returns were broadly flat. Fixed interest markets continued to be heavily impacted by central bank activity, including bond-buying programs targeting certain bond yields. The “risk-on” sentiment also flowed through to falling credit spreads providing some additional return to corporate bonds.
The Australian dollar generally appreciated over the month, although fell against the Euro. The Australian dollar recovered a significant proportion of its fall in response to the COVID‑19 outbreak. Rising commodity prices have been a positive contributor to the increase in the currency value.
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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