Share markets, property and infrastructure performed well over the June quarter. Australian shares returned 8.5% for the quarter and 13% for the 2017/18 financial year. International shares also performed well, returning 5.5% for the quarter and 15.4% for the year and were helped by a falling Australian dollar. Returns for the more defensive fixed income sector were moderate at 0.8% for the quarter and 3.1% for the year, in line with expectations and well above the 1.8% one year return for cash.
The June quarter brought optimism and concern. The US withdrawal from the 2015 Joint Comprehensive Plan of Action (‘Iran nuclear deal’) had investors concerned about destabilising the Middle East and the potential impact on oil prices and supply. Trade tensions between the US and China, ongoing Brexit negotiations and Italian politics created noise but had little overall impact on markets. The Donald Trump and Kim Jong-un meeting appeared to ease tensions with North Korea.
In economic news, the US remains strong, with solid company earnings, low inflation, tax cuts and record low unemployment supporting a 3.4% rise in the US share market over the quarter. European markets rose 3.3%, while global results varied. The UK share market increased 9.5% while China’s fell 8.9%, largely due to trade tensions and a strengthening US dollar.
Trade tensions between the US and China simmered in the June quarter as steel and aluminium tariffs commenced. The G7 summit exposed growing trade tensions between the US and other member economies, while tariffs on US exports were put in place by several major trading partners including China. Tension increased further due to reports of the US intending to limit foreign investment levels in US technology companies.
Political uncertainty in Italy drove market volatility during the quarter as investors speculated on whether a coalition government would be formed. Investors were particularly concerned an anti-Euro party would gain control and push for Italy to leave the European Union. This turmoil saw the Italian equity market drop 8% in May. An earlier rally in April strengthened the return for the quarter, which was negative 1.7%. Italian bond yields also soared before stabilising.
The Australian economy remains healthy, with unemployment dropping to 5.4% during the quarter. The Financial Services Royal Commission saw significant pressure placed on the big four banks and AMP which has had a negative impact on the share prices of financial services companies.
Continuing low inflation means the Reserve Bank of Australia (RBA) is likely to keep interest rates on hold for the short to medium term. However, increases in US interest rates have driven borrowing costs higher for many, including Australian banks, several of which increased home loan rates out of cycle and while they’ve not made the move yet the big four banks are likely to follow. This, in combination with the banks possibly tightening lending standards in the wake of the Royal Commission, takes some pressure off the RBA to increase rates. At the end of June the general view was that the next rate increase would be late 2019.
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