Equities rise against the geopolitical tide

Market Watch July 2016

Sharemarkets shrugged off dramatic world events to rise strongly in July.

The latest market rally occurred despite the world's soft economic environment, writes Mark Rider.

In July, sharemarkets shrugged off the volatility that followed Brexit and the failed coup in Turkey. The US sharemarket (S&P 500 index) reached a record high of 2175 as investors’ risk appetite returned.

As the following chart shows, investor sentiment returned to more neutral levels after hovering below the lower threshold level indicated for much of the last year.

Investor sentiment

Source: Bloomberg, ANZ Wealth

Economic data generally soft

The latest sharemarket rally occurred in a month where the economic environment was generally soft, led by disappointing growth in the US.

The US economy grew at an annualised rate of 1.2 per cent, well below the market consensus of 2.6 per cent. This slowdown justified the US Federal Reserve (Fed) taking a more cautious stance and leaving interest rates on hold.

Growth continued in Europe with second-quarter gross domestic product for the region at 1.6 per cent. In Britain, consumer sentiment and business confidence deteriorated with Brexit causing a slowdown in economic momentum.

Across in Japan, economic data remained soft as indicators of inflation continued to slide back. This prompted the government to announce further fiscal stimulus.

In China, credit growth remained strong, continuing to provide support to the industrial sector. Second-quarter GDP growth of 6.7 per cent (year on year) exceeded market expectations as government policies took effect.

In Australia, consumer sentiment, building approvals and credit all softened. When second-quarter data showed core inflation rising at an annual pace of 1.5 per cent, well below the Reserve Bank of Australia’s target band of 2 per cent to 3 per cent, the RBA acted by cutting interest rates by 0.25 per cent in August.

Asset class summary for July

Global developed sharemarkets were up 4.1 per cent in US-dollar terms, led by strong gains in European shares (up 5.1 per cent in local currency terms), the UK FTSE index (up 3.4 per cent) and Japanese shares (up 6.2 per cent).

Emerging market shares were up 4.7 per cent in US-dollar terms as an improvement in sentiment saw a return of investment flows back towards this category.

Australian shares outperformed other developed markets, up 6.4 per cent in the month, as higher bulk commodity prices drove the resources sector sharply higher.

Global fixed income returned 0.7 per cent as central banks continued to favour monetary easing over tightening. It was a similar story for Australian fixed income, with expectations of further rate cuts by the RBA.

In currencies, the “risk on” environment saw a softening in the US dollar against most major currencies. The Australian dollar rose by 2.0 per cent, which hurt returns from unhedged investments. The New Zealand dollar was up 0.9 per cent following a bounce in milk prices.

Major asset class performance - July (%)

Sector 1 mth 3 mths 12 mths 5 years
Australian shares 6.4 7.0 2.9 9.4
Global shares (hedged) 4.1 4.9 -0.1 12.7
Global shares (unhedged) 2.0 4.0 -3.9 16.4
Global emerging markets (unhedged) 2.9 5.6 -4.1 4.7
Global small companies (unhedged) 3.2 5.0 -1.9 17.2
Global listed property 4.7 11.0 17.4 13.7
Cash 0.2 0.5 2.2 3.1
Australian fixed income 0.7 3.4 6.4 6.5
International fixed interest 0.7 3.3 8.8 7.6

Note: Data is correct as at July 31, 2016.
Source: JP Morgan, ANZ Wealth

Indexes: Australian shares - S&P / ASX300 Accumulation. Global shares (hedged/unhedged) - MSCI World ex Australia. Global emerging markets (unhedged) - MSCI Emerging Free Net in AUD (unhedged). Global small companies (unhedged) - MSCI World Small Cap exAustralia. Global listed property - FTSE EPRA/NAREIT Developed Rental Index exAustralia (hedged). Cash - Bloomberg Bank Bill. Australian fixed income - Bloomberg Composite Bond All Maturities. International fixed income - Barclays Global Aggregate Bond Index (hedged).

See the CIO Market Watch report for July.