Share market performance in July varied depending on the region, with strong gains in the US and China contrasting with Europe and the United Kingdom where shares were notably weaker. Overall, international share markets returned 0.6% for the month and Australian shares performed similarly with a return of 0.5%. The Australian dollar ($A) continues to move upwards and finished the month above 71 US cents. Property assets have struggled recently with lockdowns having a material impact on the retail sector, while bonds have maintained their defensive characteristics with a solid 0.4% return for the month.
The increase in the pace of new Covid-19 cases in the US in the latter half of June continued in July (see chart below), but this has not held back the share market. Technology stocks in particular provided strong gains as more people are working from home, and online shopping increases. US shares rose by 5.6% over the month with the gains driven by large technology companies such as Amazon, Google and Microsoft, as well as Tesla.
US economic data over the month showed signs of gains despite the increase in Covid-19 cases. The growth in manufacturing combined with an increase in consumer confidence, although off a very low base, are positive signs for the US and global markets. Against this positive news was unemployment claims in the US continuing to rise due to parts of the country still being in lockdown. However, investors remain hopeful that a vaccine will be found, with some medical trials showing early positive signs, and this optimism has been the main driver of share markets over the past few months.
Outside the US, share markets were mixed. The Chinese share market was the standout performer returning 13.6% as that economy continues to re-open whilst the Covid-19 virus remains largely under control. The European share market was down 1.8% during July on the back of negative growth in Germany, and the UK market was down 4.4% as they struggle to get on top of the virus.
The Australian share market increased by 0.5% in July following a strong 16.5% rebound in the June quarter. The best performing sector over the month was materials (up 5.8%) due to the sharp rise in the price of gold and silver. The price of gold reached a new all-time high in July and continued on past $2,000 (USD) per ounce in early August. The price of gold can be volatile but the recent increase is seen as a ‘flight to safety’ given the uncertain times we are living in.
The Australian economy took a turn for the worse recently with the escalation in the spread of the virus in Melbourne leading to Stage 4 restrictions. Victoria accounts for around 20% of the Australian economy so these shutdowns will have a material impact on the overall economy. Unemployment has risen to 7.4% and the Reserve Bank of Australia expects it to increase to 10% by the end of the year. The government has reacted to these further lockdowns by extending the JobKeeper payments into next year, albeit at reduced rates, which will assist in reducing the level of unemployment and remove some of the short term concern for individuals out of work. It remains a critical time in Victoria as they strive to control the virus but the short-term pain in closing down parts of the economy is required to prevent a longer-term crisis.
It was pleasing to see share markets deliver positive returns overall in July, however the speed of the recovery is slowing with the realisation that the impact of Covid-19 will go on for a number of months. Given the continued uncertainty we expect share markets to remain volatile for the remainder of the year and we maintain a diversified approach to investing with plenty of cash available to reduce the downside risks whilst also taking opportunities as they arise. Overall, a cautious outlook remains appropriate in these uncertain times.
1 Bloomberg Finance L.P
2 Bloomberg Finance L.P, EISS Super
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