Encouraged by quarterly earnings results in the US, share markets advanced again over April.
The rotation from “growth” to “value” stalled as buyers moved back into I.T. stocks to take advantage of lower prices.
Following the sharp increase in the March quarter, bond yields pulled back slightly last month.
Despite the tragic COVID crisis gripping India, share markets continued their upward trend last month. The US market led this performance with the S&P 500 Index gaining 5.3%. In addition to positive quarterly earnings results, investors also took confidence from President Joe Biden detailing large expenditure plans across infrastructure and education.
Confirmation that this expenditure would be funded in part from higher corporate and capital gains tax did not deter investors. Leading economic indicators continued to show a recovery taking place in Europe, with the vaccine rollout contributing to this positive outlook. The UK market advanced 4.1%, with Germany slightly more subdued with a 0.9% gain, following a very strong March quarter. There was less cause for optimism in Japan, where daily new COVID cases rose steadily over the month and the Nikkei Index fell 1.3%.
The COVID crisis continued to weigh heavily on emerging economies, and this was reflected in relative share market performance. Despite strengthening commodity prices, share market returns in Latin America and Eastern Europe were negative; however, a small pick-up in Chinese stocks meant the overall emerging market index finished the month in positive territory.
Australia lagged the global market average slightly last month. The S&P ASX 200 Index rose by 3.5%, with the strong bounce back in Information Technology stocks (up 9.7%) not benefiting the local market as much as it did in the US where it is a more dominant sector. None-the-less, the larger Australian sectors did well with the outlook for banking profits continuing to improve as lending volumes rise and housing prices continue to strengthen. The financial sector increased by 3.1%. Similarly, resources rallied 5.4%, with iron ore reaching new record high prices, accompanied by strength in most base metals, particular copper, which gained 11.8% over the month. Despite further strength in the oil price, energy stocks slipped 4.9% over the month.
There was less enthusiasm for the more defensive sectors last month. After a strong March, utilities gave back some gains with a 1.2% decline. Consumer Staples were also negative, dropping back 2.5%. Utilities stand out as the one sector still in negative territory on an annual basis, with valuations 13.4% lower. This partially reflects difficulties in electricity generation and distribution, where regulatory uncertainty and lower demand has weighed on prices. It is also consistent with global markets where infrastructure investments have significantly lagged the broader equity market.
Fixed Interest & Currencies
Despite acknowledging the underlying strength of economic recovery, central banks continued to commit to maintaining current interest rate settings. The US Federal Reserve suggested that any signs of inflation in the coming months are likely to be transitory, thereby justifying the maintenance of low interest rates despite some evidence of price increases across the economy. This ongoing commitment to current monetary policy settings saw longer term bond yields pull back slightly following the increase in the March quarter. For the second consecutive month, the US and Australian 10-year bond yields were identical, finishing the month at 1.65% - a fall of 0.09% from the March close.
The Australian dollar appreciated US 1.7 cents over April, to finish the month at US 77.8 cents. Stronger commodity prices supported the $A as did a weaker $US. The $A was actually weaker against the Euro by 1.2% last month. As indicated in the accompanying chart though, the $A has been relatively stable over recent months, following the rapid recovery from the depreciation that took place in the COVID crisis of 2020. The value of the $A will remain a key variable in the RBA’s monetary policy deliberations, with any signs of further currency strength likely to encourage the central bank to maintain loose policy settings in order to avoid the negative growth impact of a rising $A.
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged).
General Advice Disclaimer
This document has been prepared by Sage Advisers Pty Ltd (AFSL 238039). Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Should the reader wish to avail of using the above investment philosophy they should only do so firstly seeking personal financial advice through a financial planner. Past performance is not a reliable indicator of future performance.