Despite weaker economic data, global share markets continued to march high over August.
Company earnings results for the period ending June were generally positive.
Bond yields in the U.S. bounced off recent lows, whereas Australian yields were broadly unchanged.
The United States once again led the global equity market higher, with the S&P 500 Index pushing through new record highs with a 3.0% gain. There were similar rates of increase across Europe and the U.K., with concerns over higher daily COVID case numbers being tempered by rising rates of full vaccination. By the end of August, the European Union had reached the 70% of adult full vaccination target. Japan also participated in the equity market gain, with the Nikkei Index advancing 3.0% after a period of relative under performance in recent months. The continued share market rally across most developed economies took place despite some signs of moderation in economic growth data. Purchasing Manager Indexes (PMIs), which are an early economic indicator, were below expectations last month – across both manufacturing and services. Share markets did, however, take some comfort from comments by the U.S. Federal Reserve Chair, Jerome Powell, suggesting any tapering of bond purchases in the near term should not be seen as a sign that interest rates were about to increase.
Signs of weaker economic data were also apparent in China, with manufacturing and retail sales indicators falling short of expectations. Chinese and Hong Kong equity markets finished the month largely unchanged, failing to recover any of the significant losses of recent months. Investors remain concerned over a step up in regulatory action that has materially impacted on the Information Technology and Education sectors this year. Elsewhere across emerging economies, equity markets performed much better, with South Asia (up 8.1%) and Eastern Europe (up 4.2%) contributing to an overall Emerging Market Index gain for the month of 3.2%.
Profit reporting on the Australian share market wasn’t as strong as the US reporting season, but the results were generally positive, albeit with limited future earnings guidance. The S&P ASX 200 Index rose 2.5% over August, bringing the annual gain to 28.1%. There was a high level of disparity in returns across sectors last month, with Information Technology generating the largest gain of 17.0%. Buy-Now-Pay-Later stock, Afterpay, made a significant contribution to this increase with a jump of 38% following the announcement that US company Square Inc had agreed to purchase all of the issued shares in Afterpay via a scheme of arrangement. Corporate actions were also significant in the resources sector, with the announcement that BHP’s oil and gas business planned to merge with Woodside. Should the merger proceed, the new expanded Woodside business would be owned 52% by existing Woodside shareholders and 48% by existing BHP shareholders. In addition, BHP announced that they would be cancelling their secondary listing on the London exchange, effectively consolidating this into their Australian listing. Despite these corporate actions, both the resource and energy sectors declined in value over August, with respective falls of 8.8% and 3.9%. Weaker iron ore prices, which dropped 23% over the month, impacted heavily on the resource sector.
As was the case in July, the more defensively positioned sectors on the Australian market performed well, with healthcare (up 6.8%), consumer staples (up 6.9%) and property trusts (up 6.3%) all recording significant price gains. The financial sector also attracted strong support with evidence of higher premium margins across insurance companies boosting the price of QBE (up 9.6%), IAG (up 10.7%) and Suncorp (up 12.3%).
Fixed Interest & Currencies
Central banks across the globe have maintained a commitment to low interest rates despite some evidence of higher inflation and improving economic conditions for much of the past year. In Australia, the current lockdowns are likely to have delayed any consideration of a shift in interest rates. Benign wages growth data for the June quarter would have re-enforced this view, with little evidence that a sharp spike in job vacancies over the period generated any material wages growth or inflation. Australia’s Wage Price Index rose just 0.4% in the June quarter, creating an annual rate of increase of 1.7%.
Australian bond yields drifted marginally lower over August, with the 10-year government bond yield finishing the month down 0.02% at 1.12%. In contrast, yields in the United States bounced off recent lows, with the 10-year Treasury yield rising from 1.24% to 1.30%. The widening in the gap between Australian and U.S. yields is likely to have contributed to the continued decline in the $A, which fell US 0.5 cents over the month to US 73.4 cents. The large decline in iron ore prices, for the second consecutive month, is also likely to have had a negative impact on the $A, which has now fallen US 4.9 cents over the past 6 months.
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 YrIndex, Barclays Global Aggregate ($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 (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