Originally published by BetaShares
GLOBAL MARKETS
The S&P/ASX 200 (total return) broadly matched global market performance, rising by 0.2% after a sharp 2.8% decline in May. After a drop of 7.7% last month – in the wake of the Federal Government’s new tax on banks – the financial sector rebounded 1.6%. Resource stocks, however, declined 2.1% as iron-ore prices stabilised after significant falls in previous months. The weaker US dollar saw the Australian dollar firm, which meant local equities outperformed global stocks on an unhedged Australian dollar basis. Reflecting global trends, local 10-year bond yields rose from 2.4% to 2.6%, though the market continues to expect no change in official rates over the remainder of the year. The MSCI All-Country World Equity Total Return Index (hedged) inched ahead only 0.3% in June,after recent solid monthly gains. Weakness in oil prices hurt energy stocks, while concerns over valuations also dragged down tech stocks. A lift in bond yields – reflecting more hawkish comments from a number of central banks – also slowed the global equity advance. The US dollar fell due to heightened policy tightening expectations outside of the US, which in turn provided some support to agricultural prices, though not gold (or oil!).
The rebound in US 10-year bond yields – from 2.2% to 2.3% - was the first monthly advance since January and helped to weaken fixed income and listed-property returns.
AUSTRALIAN MARKETS
The S&P/ASX 200 Index (total return) broadly matched global market performance, rising by 0.2% after a sharp 2.8% decline in May. After a drop of 7.7% last month – in the wake of the Federal Government’s new tax on banks – the financial sector rebounded 1.6%. Resource stocks, however, declined 2.1% as iron-ore prices stabilised after significant falls in previous months. The weaker US dollar saw the Australian dollar firm, which meant local equities outperformed global stocks on an unhedged Australian dollar basis.
Reflecting global trends, local 10-year bond yields rose from 2.4% to 2.6%, though the market continues to expect no change in official rates over the remainder of the year.
OUTLOOK
After solid gains in recent months, global equities consolidated in June in the face of a few new challenges. Most particularly, more central banks are talking about policy tightening, even as lower-than-expected inflation and economic growth outcomes in the US have reduced fears of aggressive further policy action from the Fed this year. There are also concerns that the US technology sector has reached high valuations and is accounting for an undue proportion of US equity market gains.
That said, the outlook for global equities remains encouraging due to the still quite benign inflation backdrop and broadening global economic recovery. Low inflation means central banks – such as the European Central Bank – should remain very cautious in winding back stimulus measures, and would likely backtrack at the first sign of economic weakness or financial market instability.
What’s more, while there should be some downward pressure on equity market valuations as and when bond yields rise, a broadening in the global economic recovery continues to bode well for at least moderate earnings growth and catch-up equity gains in Europe and Japan.
Despite some concerns to the contrary, even the tech-heavy Nasdaq 100 Index is still trading on a price-to-forward earnings ratio modestly below its long-run average. At the same time, fears of an anti-EU backlash in Europe have eased, as have the impeachment risks surrounding US President Donald Trump.
Favoured global investment themes include Japanese equities and global banks . European stocks are also performing well as growth improves and political fears ease. Irrespective of bond yields and the US dollar, the US Nasdaq 100 Index should also continue to be supported by rising US corporate earnings.
