A rally in global technology stocks lifted equity markets last quarter.
With a low technology sector exposure, Australian equities underperformed global averages, but remained in positive territory.
Ongoing inflationary pressure led to higher bond yields and negative returns from fixed interest assets.
International Equities
A significant, but narrow, rally in technology stocks was the main contributor to a strong rise on global equity markets last quarter. There was particular focus on those companies set to benefit from developments in artificial intelligence. Headlining these gains was Nvidia Corporation, which rallied 52% over the quarter following a well-received earnings revision.
The tech rally had a more significant impact on the U.S. market, which gained 8.7% overall. The U.S. has a large holding of Information Technology stocks, which now make up some 28% of the S&P 500 Index. Within this index, the Information Technology sector rose 17.2% over the quarter,bringing the calendar year to date gain to 42.8%. Strength in the tech sector helped the U.S. share market successfully fend off two key challenges. Last quarter saw the re-emergence of regional banking sector concerns.
In early May, the First Republic Bank became the second largest U.S. bank failure ever, with the majority of its assets and operations being taken over by JP Morgan Chase. Despite the size of First Republic, its collapse was well contained and did not trigger a wave of further deposit runs. Later in May, focus switched to the U.S. Government’s debt ceiling, with a deal eventually being reached between the two major parties in the House of Representatives. The deal will require that US$30 billion of additional spending cuts be made next financial year, which is equivalent to a modest 0.1% of GDP.
Outside of the U.S., share market gains were moderate, with the exception of Japan where the Nikkei Index jumped 18.4%. Share prices have reacted positively to the Tokyo Stock Exchange’s direct request to companies to improve return on capital. The initiative is expected to prompt share buybacks and other reforms aimed at improving shareholder returns. A weaker Yen over the quarter is likely to have also generated support for Japanese exporting firms.
It was another disappointing quarter in China and Hong Kong, where the economic recovery continues to underwhelm previous expectations.
Global property & infrastructure underperformed the broader equity market last quarter, returning between 1% and 2%. These asset classes are likely to have been negatively impacted by rising bond yields, making rental and infrastructure yields less attractive on a relative basis.
Concerns that tighter credit conditions in the U.S. banking sector will negatively affect property refinancing opportunities have also weighed heavily on the global listed property asset class over the past 6 months.
Australian Equities
As was the case on global share markets, Information Technology was the standout sector in Australia last quarter, with a gain of 21.1%. Other sectors produced mixed results, with lower commodity prices negatively impacting the resources sector, which fell 1.8%.
Healthcare recorded the largest decline last quarter, although the majority of the 6.6% fall can be attributed to CSL, which fell sharply in June after announcing the impact of foreign currency movements on expected earnings.
There was also a notable weakening in sentiment around consumer stocks, with expectations firming that consumer spending will soften as financial conditions for households continue to tighten. These falls in consumer stocks came despite some limited and targeted household assistance measures announced in the Commonwealth Government Budget Statement in May.
Fixed Interest & Currencies
Short-term interest rates have continued to shift higher, with the Australian Reserve Bank delivering two 0.25% rate increases over the quarter to bring the cash interest rate to 4.10%. However, both the Australian RBA and the U.S. Federal Reserve have paused interest rate increases in their most recent meetings.
None-the-less, the higher short term interest rates and the ongoing persistency of inflation pushed bond yields higher over the quarter. In Australia, the 10-year Government bond yield rose from 3.3% to 4.0%, with the U.S. counterpart increasing from 3.5% to 3.8%.
Despite appreciating over the month of June, the Australian dollar finished the quarter lower, falling from U.S. 67.1 cents to U.S. 66.3 cents. Lower commodity prices and a weaker than expected Chinese economy could be contributing to weakness in the $A. The $A was also 0.9% lower against the Euro, but was 7.7% higher relative to a softer Japanese Yen.
Important Information
The following indexes are used to report asset classperformance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($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 thourgh a financial adviser. Past Performance is not a reliable indicator of future performance.