Market update

The June quarter saw a battle between geo-politics and economics. The quarter was characterised by healthy gains across the US markets, a tepid performance for the European bourses and strong rises across Asia, with the exception of China’s Shanghai Composite Index.

Political bickering in Washington was a constant backdrop over the quarter, as investors also dealt with inconsistent economic data.

In May, the Federal Reserve started the process of unwinding its US$4.5 trillion ($6 trillion) balance sheet, and in June, the Federal Reserve delivered a 0.25 per cent interest rate rise, with the federal funds target now between 1% – 1.25%. 

On the markets, three winning months in the quarter pushed the S&P 500 index 2.6 per cent higher, while the narrower Dow Jones Industrial Average gained 3.3 per cent. Despite a heavy tech sell-off in June, the Nasdaq Composite Index gained 3.9 per cent for the quarter. It was the seventh straight winning quarter for both the Dow Jones and the S&P 500, while the Nasdaq banked its fourth quarterly rise in a row.

European stock markets were also impacted by politics over the quarter, which saw elections in France and the United Kingdom. 

This contributed to a weak quarter for the UK stock market, which declined by 0.1 per cent after falls in April and June. But in both Europe and the UK, solid company earnings and improving economic data supported markets.

Despite a weakening in June in Germany’s manufacturing and services sector, the Munich-based Ifo Institute for Economic Research’s index of business sentiment reached its most bullish level since the country’s reunification in 1991.

On the markets, the pan-European STOXX 600 lost 1.2 per cent for the quarter, leaving it still however with a solid 18.2 per cent rise for the year to date. In Germany, the DAX index gained 0.1 per cent for the quarter, and the FT- 100 ended in the red by 0.1 per cent.

In Asia, China’s first-quarter GDP growth figure came in slightly better than expected at a 6.9 per cent annual rate, up from 6.8 per cent in the fourth quarter of 2016. The Shanghai Composite Index lost ground in both April and May, before a 2.4 per cent lift in June saw it close out the quarter with a 1 per cent fall.

In Japan, the export recovery continued, with the country’s exports growing at an annualised rate of 14.9 per cent in May, almost double the April figure of 7.5 per cent.

Net profit at Japanese companies for the March 2017 year-end climbed to a record high, with nearly 30 per cent of firms reporting their highest-ever profit. The Nikkei index responded to this improving backdrop with three winning months, gaining 6 per cent for the quarter.

The Australian market struggled over the quarter, hit by a proposed levy to the major banks announced in the Federal Government’s budget, and mounting concerns around the Australian residential property market. With the four largest Australian banks accounting for more than a third of the benchmark S&P/ASX 200 Index by market capitalisation, the market gauge responded with losses in May and June, which resulted in a 1.6 per cent loss for the quarter. For the 2016-17 financial year, the S&P/ASX 200 Index benchmark gained 9.3 per cent, or 14.1 per cent with dividends included.

Where to from here?

With volatility in share prices, being a forward measure of market risk and investor ‘fear’, the below chart shows the relative ‘calm’ the US S&P 500 share market has had over the last financial year when compared to the previous year. With less volatility (‘fear’) in the markets, we have seen strong returns from share markets, both in Australia and overseas.

Looking ahead, with markets at record levels, and various events on the horizon such as the tightening of interest rates, the US government’s promised delivery of tax cuts and infrastructure spending, and future ‘unknowns’ like the outcome of Brexit negotiations, we expect volatility to increase during the course of 2018.

We do expect markets to continue to rise supported by an overall improving global economy. This will be driven by improving corporate profitability, concerted central bank policy stimulus and a general sense of positive business and consumer confidence.

Closer to home we are seeing housing affordability take centre stage, which in turn has had an impact on the Reserve Bank of Australia’s (RBA’s) interest rate policy as it seeks to both stimulate economic growth and put upward pressure on inflation.

Speak to Wynyard Park Private Wealth to discuss your investment options.

Source: BT Financial Group as at 30 June 2017