New Zealand



For the month of April the Reserve Bank of Australia (RBA) left the cash rate on hold at 1.5%. The housing markets were a cause for caution and concern, with continued growth in the Melbourne and Sydney markets mismatching slower growth in other parts of the country. The Board also noted mixed figures in the labour market, where unemployment has slightly risen.

In the first couple of days of May the Board yet again decided to leave interest rates at 1.5%, unchanged for the past eight consecutive months. The Bank’s forecasts for the Australian economy have also not changed much, with economic growth expected to increase gradually over time. Labour market indicators remain mixed, unemployment data remains sound, whilst wage growth remains slow.

The Board met in June to yet again announce no changes to the cash rate. The Board reiterated concerns about low core inflation. Slow growth in real wages remained a concern – firstly putting a strain on household consumption, and secondly falling behind rising household debt levels. The housing market seemed to be at the forefront of decision making over the past three months, with continued rising prices remaining a concern.

The RBA once again made no change at the July meeting; however the minutes of the meeting released on the 18th of July included some interesting comments. Board members hinted at the potential to bring the cash rate to a “neutral rate” of 3.5% in the future. Investors assumed these comments were a signal that interest rates may be entering a new rising phase. The Board’s comments reflected the sentiments of most major international central banks, who now seem focused on “normalising” interest rates.

Fixed Income

April saw global yields fall as they continued the downward trend from the previous month; global bonds returned 0.74%, and Australian government bonds returned 0.79%. Australian 10- year Treasury yields fell 12 basis points to 2.58%; US counterparts returned 2.28% respectively.

Global yields fell further in May, continuing the trend from March; as investors increased their fixed income holdings. Global bonds returned 0.64%, the US 10- year Treasury yield fell to 2.2%, Australian government bonds returned 0.15%, and Australian 10- year Treasury yields fell to 2.39% – the lowest since November 2016.

Global yields pushed higher in the month of June and July, but have since settled back given Janet Yellen’s cautious comments about the pace of US interest rate rises. The market view remains that the US Federal Reserve will increases rates again in December this year. The combination of potentially slower interest rate rises in the US and faster rises in Australia put a rocket under the $A, which remains around the $0.79 level.

Australian Equities

The Australian equities market had a mixed month in April, returning 1.03%. The Materials, Energy, and Consumer Staples sectors weighed on performance, while gains came from the Industrials sector. After complications in its US business caused Brambles to make losses in the previous months, the company came back strong during April to gain +10.59%. This followed the announcement that it is on track to meet its 5% sales growth target; with the stock finishing the month at $10.34 per share.

The month of May saw Australian equities post a pullback of -2.75%. Losses were driven by the Financials sector (-7.16%) after having rallied on positive sentiment since November 2016 – ANZ (-11.24%) and Westpac (-9.26%) were hardest hit amongst the big four banks. The Materials sectors also posted an overall loss despite mixed results amongst companies. May’s market conditions generally benefitted income stocks, with Telstra gaining 4.27% alone.

The Australian market was relatively unexciting in June as the otherwise thrilling financial year came to an end, gaining a meagre 0.17%. The Healthcare and Financials sectors led the market gain. Despite leading throughout the year, Materials have been trending downwards since the end of January.

The Australian market has been having an interesting time through the month of July, with intraday volatility prevalent. APRA’s new regulation on bank capital supported the big four banks, with the new requirements already factored into the big banks’ capital plans. Healthcare also had a blow as CSL shares dropped following the Bioverativ’s law suit, however, the company’s impressive run continued with the shares bouncing back, lifting the whole healthcare sector.

International Equities

In the global environment, the MSCI World Index gained 3.57% in $AUD terms, boosted by Europe and emerging markets. US markets continued to rally during the month with the S&P 500 gaining 3.05% in AUD terms, despite a poor GDP growth figure of 0.7%. With US valuations starting to look a little on the high side, investors are holding out for the Trump administration’s proposed tax cuts to be made law. Tax cuts would be beneficial for company earnings and lend support to the current market valuation.

The EuroStoxx 600 Index rose 5.79%, as Emmanuel Macron looked to be the winner in the presidential election. The UK, Japan, and Chinese markets also made modest gains, and the MSCI Emerging Markets Index was up 4.24%, supported by gains from the Taiwanese and Indian markets.

For the month of May the MSCI World Index gained 2.68% in AUD terms, once again supported by Europe and emerging markets. The Eurostoxx 600 Index increased 5.38% and the MSCI Emerging Markets Index rose 3.43% with strong performance in the Chinese, Hong Kong, and Korean markets. In the US, the S&P 500 gained 1.87% in AUD terms.

The MSCI World Index fell 2.54% in AUD terms during June, dragged down by the European markets, and the MSCI Emerging Index also fell 1.97%. The US market showed signs of slowing down in June – the S&P 500 fell -2.34% in AUD terms, as the US central bank was unable to halt US dollar weakness late in the month.

In July the US Consumer Discretionary sector, particularly “bricks and mortar”, were being negatively impacted by Amazon’s purchase of Whole Foods. Tech stocks were also down slightly month to date, but remain in a continued upward trend. Overall, July may well end up negative for global equities as a result of a jump in the $AUD post the release of the RBA’s July minutes.

Alternatives Strategies – Hedge Funds

Hedge Fund strategies were largely flat over the quarter, with sector returning 0.03% across a broad range of strategies according to the Credit Suisse Hedge Fund Index.  Contributors to performance were exposure to Emerging Market equities and Long / Short Equity, while Managed Futures continued to detract from performance. Managed Futures, which benefit from trending prices across a wide range of markets, were unable to sustain early positive momentum in the quarter.

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