June 2021 Review – Equity rally continues as bond yield curve flattens

Updated: Feb 24

  • Share markets advanced further in June, drawing confidence from ongoing policy support in the U.S.

  • Despite some lift in shorter term bond yields, long term yields declined.

  • Encouraged by the fall in longer term yields, “growth” stocks bounced back, with the I.T. sector posting the strongest returns.

International equities

Boosted by confirmation of the U.S. Government’s $579 billion new infrastructure spending plan, the U.S. market led global equities higher last month, with a gain of 2.3%. Also contributing to this growth was a strong bounce back from the I.T. sector. The valuation effects of lower longer term bond yields saw a strong return of support for “growth” styled equities, many of which reside in the U.S. Information Technology sector. Gains elsewhere were more muted, although European markets consolidated on recent strong performances as their economies continued to normalise after the extended lockdown.

Asia posted the weakest results of the major regions over June, with China, Hong Kong and Japan all recording negative returns. Japan’s economic data continues to fall short of expectations, with factory output in May dropping 5.9% as the country has been forced to reintroduce various COVID-19 related restrictions. In contrast, China’s economic data remains relatively solid, although having recovered from the COVID lockdowns earlier, the economy is no longer enjoying the same level of policy support as most developed economies currently are.

Australian equities

Australia matched the increase of the U.S. last month, with the S&P ASX 200 Index rising 2.3%. Information Technology was the strongest performing sector, gaining 13.4% following the previous month’s 9.9 decline. “Buy Now Pay Later” leader, Afterpay, made a significant contribution to the sector’s gain last month, rising by 27%. Energy stocks attracted some support following a prolonged period of underperformance, with the sector advancing 4.0%. An 11.2% jump in the WTI oil price no doubt encouraged investors. However, gains elsewhere across the resource sector were less impressive with both BHP (up 1.5%) and Rio Tinto (up 2.4%) failing to keep pace with the 11% gain in the global iron ore price last month.

Following a strong increase in May, the financial sector was flat over June. This was despite some evidence that record high housing loan approvals were having an impact on the overall balance of housing loans outstanding, which have now grown by nearly 5% in annual terms. Signalling renewed investor confidence in the reopening and underlying strength of the economy was a gain of 5.5% in property trusts. Both industrial and office property attracted support, as indicated by respective gains in Goodman and Dexus of 9.7% and 4.5%.

In a possible sign that investors are now looking more favourably on stocks that are trading at cheaper valuations, both the utilities (up 3.5%) and consumer staples (up 5.3%) sectors outperformed the broader market average last month. These two sectors have been significant underperformers over the past year.

Fixed interest and currencies

Despite the ongoing evidence of economic recovery, and further data demonstrating significant reductions in unemployment, Australian longer term bond yields continued to decline from their February peak. During June, the Australian 10-year bond yield dropped by 0.12% to 1.49%. The equivalent yield in the U.S. remained close to the Australian yield at 1.45%. The loss of the upward momentum in bond yields over the past quarter is likely to reflect a consensus view that inflationary pressures being experienced currently will prove to be “transitory” and not result in a material structural shift away from the low inflationary environment. This is despite a spike in U.S. inflation of 5% in the year to May. There were, however, some indications from members of the US Federal Reserve Bank that interest rate expectations have lifted and there was also some dispersion in views amongst members as to when US monetary policy should be “tapered”. However, whilst the revelation of these views did see some short term bond yields rise last month, there was no increase at the longer end of the yield curve.

Suggestions from members of the US central bank of an earlier than forecast lift in interest rates is in contrast to the Australian Reserve Bank, which has maintained a consistent view that cash rates would not be shifted until 2024. The possibility that any rate increases in Australia would lag those of other developed economies put downward pressure on the $A last month. This $A depreciation came despite further commodity price rises and exceptionally strong Australian trade accounts. Against the $US, the $A dropped from US 77.3 to US 75.2 cents over the 3 month period and was also 0.2% weaker against the Euro at €0.632.

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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