The last quarter, and more particularly, the last month has seen a fairly negative bias across most Australian and international equity markets. Commodity prices fell slightly and gold has continued to plummet. The Australian dollar has also been decreasing, posting losses against all the major currencies. But economically, this might not be such a bad thing.
Interest rates are being closely watched after the Reserve Bank decided to hold cash rates at 2.75% in June. RBA Governor, Glenn Stevens explained that the mining downturn has driven a significant depreciation of the Aussie dollar over the past three months. This depreciation has increased the attractiveness of local exports and provided support to our otherwise challenged economy.
In international debt markets, the Federal Reserve in the USA rescinded its indefinite support of fixed income markets causing global corporate bonds to fall 2.36% and emerging market debt to plunge over 4% for the month.
Australian equities followed the global markets down in June, with the ASX 300 falling 2.4% for the month. Small caps were the worst performers falling by 7.15%. Information Technology and Materials sectors were the worst affected, falling 6.96% and 10.26% respectively in the month of June. The materials sector has been significantly impacted by the rapid fall in the price of gold by 22.71% over the last 12 months. This and the follow-on effects have driven some gold stocks down over 50%.
As is often the case during a downturn, the defensive healthcare sector outperformed the market, rallying by 1.33%. Property also stayed fairly strong against other industries, with Australian REITs only declining 1.02% in June.
In international equities, the Fed’s announcement that they will wind back quantitative easing sooner than previously expected unbalanced markets. Global equities subsequently declined by 2.43% during the last month of the June quarter. Losses in China continued from previous months, with the MSCI China index slipping 7.07% in June, and the HSBC Manufacturing PMI falling to 49.2 which is seen as a slight contraction of the Chinese economy. (A number above 50 signifies expansion, below 50 signifies contraction).
Over the coming three months we are looking for three slow but realistic shifts in the market,
- We expect the USA will continue down the forewarned path of reducing its quantitative easing, bringing to fruition something the market already expects. This could cause some market instability around announcements.
- We see the continued weakness in commodity prices and Asian markets driving a gradual and painful weakness across the mining economy in Australia and a continued flow through to other sectors.
- And the conclusion of the Federal Election period should bring the end of the inactivity that results from political uncertainty.