July 2021 Review – Chinese concerns lead to patchy equity market results


  • Share market returns were inconsistent across major markets in July, with a significant sell-off recorded in China.

  • The Australian market was led higher by resource stocks in anticipation of strong earnings announcements and higher dividends.

  • Bond markets remained unconcerned about rising inflation, with yields drifting lower again.


International equities

A better-than-expected earnings reporting season in the United States provided a renewed source of confidence for investors who pushed the U.S. S&P 500 Index further into record territory with a 2.4% gain. Other major markets were more subdued. Although the U.K and Germany had flat results, other European markets were mainly positive. There is now considerable focus on the U.K. asit provides a potential blue-print for the full reopening of economiesthat have achieved high COVID vaccination rates. Although there has been a lift in COVID infections across developed economies over recent weeks, this doesn’t appear to have had a major impact on share markets. The exception is Japan, where a marked rise in case numbers coincided with a sharp decline in the Nikkei Index of 5.2% last month.


Returns in China (down 7.3%) and Hong Kong (down 9.6%) were significantly impacted by renewed government regulatory action. Chinese authorities announced major reformsto the education sector, effectively banning profit making enterprises from school curriculum related education. The changes are believed to address concerns over the heavy use of these services in China, creating inequality and higher costs for families raising children. These costs are viewed as one of the reasons China has been unable to significantly increase its birth rate despite authorities abandoning the one child policy due to concerns over the ageing of the population. The education reforms follow a period increased regulatory activity impacting listed businesses in China, particularly in the Information Technology sector.


Australian equities

Gains on the Australian market were marginally behind the global average, with the S&P ASX 200 Index advancing 1.1%. The resource sector (up 6.6%) was a major contributor to this rise, with investors encouraged by the likelihood that end of year earnings results would confirm that continued high commodity prices lifted both the size of profits and also dividends from the sector. Although the majority of commodity prices continued to rise over July, there was a pullback in the price of iron ore (down 9.9% in $US terms) due to expectations of reduced volume demanded from China.


The more domestically focussed cyclical stocks were impacted by COVID related lockdowns, with the consumer discretionary sector falling 0.5% and financials slipping 1.4%. Conversely, defensive sectors performed better, with both healthcare and consumer staples rising. It was also a positive month for utilities, with some merger and acquisition activity suggesting that lagging listed valuations were becoming attractive to private and institutional buyers.


Following a large jump of 13.4% in June, the Information Technology sector continued to exhibit high volatility,with the sector falling 6.9% in July. In annual terms, the rise of the Technology sector of 24% is now below the overall market increase of 29%.


Fixed Interest & Currencies

Although not changing its cash rate target, the Australian Reserve Bank did announce a slight adjustment to its monetary policy settings last month. The change related to the size of the bond purchase program that is associated with the central bank’s quantitative easing initiative. Previously, the RBA had been purchasing approximately $5 billion in government bonds per week in the 5- year to 10-year maturity range, with the objective of managing interest rates lower across the yield curve. This purchase program is now expected to be reduced to $4 billion per week. The change reflects an acknowledgement that the economic recovery has been faster than expected. However, despite this change and the confirmation that annual inflation had jumped from 1.1% to 3.8% in the June quarter, longer term bond yields continued to drift lower, with the 10-year yield falling from 1.49% to 1.14%. Similarly in the U.S., where annual inflation has now surpassed 5%, the 10-year Treasury yield fell from 1.45% to 1.24%. The bond market’s assessment is clearly that inflationary spikes are temporary, and that monetary policy will remain loose for an extended period.


The downward trend in the Australian currency also continued last month. Weaker iron ore prices as well as the fact that Australian bond yields fell by more than U.S. equivalents, contributed to a 1.8% drop in the $A to $US 73.8 cents. There was a similar decline in the $A against the Euro. The weaker currency was positive for investors holding global assets on an unhedged basis, with the $A value of foreign currency domiciled investments appreciating as a result.


Important Information

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 performance.


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