Market update

July 2018

Markets performed well during July, providing a positive start to the new financial year. International share markets finished with a strong 2.5% return, helped by a robust US share market (despite some wobbles in the technology sector) and Europe which gained an impressive 3.9%. Performance of the Australian share market wasn’t quite as strong. The S&P/ASX 200 recorded a respectable 1.4% return, thanks in part to a strong recovery in the telecommunications sector. The Australian fixed income market provided a modest 0.2% return, but this is to be expected in a low yield environment.

US

US economic data remains strong with growth up 4% (annualised) over the June quarter and unemployment remaining low. Importantly, inflation also remains low at around 2% with little sign of rising any time soon. Given the strong economic growth, the US Federal Reserve is expected to gradually raise interest rates over the coming year. The size of these rate hikes will depend on employment, inflation and consumer spending conditions. US interest rates are important for Australia as the large Australian banks use the US as a source of funding for their business.

Europe & Asia

Economic fundamentals in other key markets also remain strong, with Eurozone indicators pointing to further economic growth. The European Central Bank left rates on hold as expected and remains positive on the outlook for the region as a whole. Growth of the Chinese economy slowed slightly, but at 6.7% p.a. is still one of the strongest growth patterns in the world. US/China trade war concerns have however negatively impacted the Chinese share market.

Trade tensions again played a central role during the month, but the tone has been mixed. On the one hand tensions between the US and Europe seem to have moderated somewhat with talk of eliminating tariffs altogether, but US/China tensions remain with tariffs going into effect over June and July.

Australia

In addition to the global landscape, we also remain watchful over domestic issues such as the housing market which continues to show signs of weakness in Sydney and Melbourne after years of tremendous gains. However, with unemployment and inflation remaining relatively low and corporate profits remaining strong there are no signs of imminent danger domestically. The Reserve Bank of Australia is expected to keep rates on hold for the next year.

Facebook plummets

Although share market gains were strong in July, it wasn’t smooth sailing for all investors. Late in the month investors in Facebook suffered a staggering one-day loss of around 20% when the company announced weaker than expected results. This is the second time this year the company has made news for the wrong reasons, with this latest episode providing insight into how sensitive investors can be to an otherwise excellent performer failing to meet expectations. The fallout wasn’t limited to Facebook either, with Amazon, Apple, Netflix and Google also suffering. The chart below plots their combined performance (the NYSE FANG+ index) compared to the wider US equity market index (S&P 500 Index). As a group these companies significantly underperformed over the month but have generally outperformed over the past year.

 

Summary

Although markets were strong again in July, and economic fundamentals remain strong, we continue to believe that returns over the next few years are unlikely to be as strong as they have been in recent years. Noting that short term market movements are all but impossible to predict, we remain quite optimistic over the medium to long term. We look forward to updating you again next month.

 


1 Source: Bloomberg Finance L.P.  Past performance should not be regarded as an indication of future performance.

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