Global equity markets posted weak returns in May 2019, reversing some of the upward trend that has defined the calendar year thus far. For example, the US share market was down by 6.4%, the Japanese market was down by 7.4% and the UK market was down by 2.9%.  By contrast, the Australian share market rose 1.7% over the month, making it a standout performer. The value of the Australian Dollar decreased against most major currencies, and investment grade credit spreads broadly widened.

Going into the Australian Federal election on the 18th of May, polling data suggested that Labor would form the new Government by a comfortable margin despite proposing a suite of tax policies targeting negative gearing, franking credit refunds and capital gains tax concessions. However, the Liberal/National Coalition secured a majority in the House of Representatives, and was largest represented party in the Senate, despite being unable to achieve a controlling number of Senate seats. The surprise Coalition election victory prompted a rally in the Australian stock market.

Meanwhile, political turmoil in the UK is coming to a head on the Brexit issue. Early in the month Prime Minister Theresa May tried one final time to modify her Brexit deal. After gaining little traction, the proposed changes did not reach a vote, and on the 24th of May the Prime Minister announced her resignation effective on the 7th of June. Boris Johnson, a strong pro-Brexiteer, is currently the favourite to replace her among Conservative Party candidates.

On the trade war issue, negotiations conducted in Washington during May between China and the US appear to have stalled. President Trump increased tariffs from 10% to 25% on US$200 billion of Chinese imports, in addition to the 25% tariffs already imposed on US$50 billion of Chinese imports. In addition, the US banned American firms from using Huawei technology or conducting business with the company without official permission. This had the effect of preventing Huawei from using American technology, potentially crippling the company’s business model. In retaliation, China imposed 25% tariffs on US$60 billion of US imports, threatened to withhold essential rare earth metal exports, and proposed to blacklist certain US firms. Also of concern to global investors was President Trump’s threat to impose a 5% tariff on Mexican goods if its government does not stop the flow of migrants into the United States.

Equities

Equity markets reversed some of their returns for 2019 during the month of May. Developed markets returned -5.7% in local currency terms, with all major equity markets outside of Australia falling at least 2%. Emerging markets underperformed developed markets over the month by 0.9% whilst the Australian stock market posted a positive result of 1.7% during May.

The highest returning sector in Australia was Telecommunications, followed by Health Care and Materials. The worst performing sectors were Consumer Staples, Information Technology and Energy, with Utilities being the only other sector to post a negative return for the month.

From a developed market sectoral perspective all major sectors produced negative returns. Utilities and Health Care were the best performing sectors, whilst Information Technology, Energy and Consumer Discretionary declined in excess of 7%.

Bonds

Bond yields across the curve decreased in Australia on the back of investors revising their growth and interest rate expectations downwards. The Board of the Reserve Bank of Australia left the cash rate unchanged at 1.5% in May, while its Governor, Philip Lowe, noted that there was still spare capacity in the economy.

At month-end, the two-year Australian government bond yield had fallen by 0.21% whilst the ten-year yield fell 0.33%. Falling bond yields are positive for short term bond investment returns.

Overseas, yields fell in all major developed economic regions, with ten-year yields declining further than shorter-term bond yields.

Currencies

With domestic interest rates falling further relative to global peers (except the US), the Australian Dollar came under pressure in May. The Australian currency fell against most global peers over the month, with falls of 4.4%, 3.4% and 1.6% registered against the Yen, Swiss Franc and US Dollar respectively. However, the AUD did manage a modest rise against both the British Pound and the Chinese Renminbi.

The Australian Dollar finished the month at 0.6938 US Dollars falling approximately 1.1 US cents.

Commodities

WTI crude oil fell 16.3% during May as the combination of trade war threats and overfull US crude stockpiles drove prices downward despite the threat of hostilities between Iran and the US.

Industrial metals dropped 5.6% on average, with iron ore the strongest performer and copper the weakest. Precious metals had a mixed month with gold rising but silver declining in value.

Performance of key markets:

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	1.7	7.6	11.1
International Shares	MSCI World Ex Aust Unhedged A$	-4.4	6.3	8.8
International Shares	MSCI World Ex Aust Hedged A$	-6.0	0.3	0.6
US Shares	S&P 500 Index	-6.4	3.1	3.8
UK Shares	FTSE 100 Index	-2.9	-2.3	-2.5
Japanese Shares	Nikkei 225 Index	-7.4	-5.9	-5.3
Australian Property	S&P/ASX 200 A-REIT Index	2.5	14.5	17.0
Australian Fixed Interest	Bloomberg AusBond Composite Index	1.7	8.4	9.0
Australian Cash	Bloomberg AusBond Bank Bill Index	0.2	1.8	2.0
Currency	AUD/USD	-1.6	-6.3	-8.3