Domestic Equities outperformed in July 2019

Global equity markets posted positive returns in July 2019 to start the new financial year. The Australian share market led the way returning 2.9% over the month, whilst the US and UK stock markets increased by 1.4% and 2.2% respectively. The value of the Australian Dollar decreased against most major currencies, and investment grade credit spreads broadly contracted (i.e. the market’s perceived riskiness of lending to high quality companies fell).

The Federal Reserve (Fed) cut interest rates by 0.25% (to 2.25%) at the end of the month citing ‘muted’ inflation minimise the risk of a global slowdown. At the start of the month, the Reserve Bank of Australia (RBA) cuts Australian interest rates by 0.25% to a record low of 1.0%. The European Central Bank (ECB) kept rates unchanged. The Chairman of the ECB, Mario Draghi, suggested the ECB rate will remain at its record low level of −0.4% for the next 12 months.

Boris Johnson, the successor to Theresa May as the Prime Minister of the United Kingdom, was appointed by the Queen on the 24th of July. Mr. Johnson comfortably won the Conservative Party leadership election as expected, with 66% of the vote. In his first speech as Prime Minister he promised to United Kingdom citizens they would leave the European Union with or without a deal on 31 October. Boris Johnson has made significant changes to May’s cabinet and has filled the chamber with pro-Brexiteers. The House of Commons is currently in recess for six weeks for their summer break. The House will return on 3 September, leaving just 8 weeks to negotiate the terms of an exit deal or run the risk of a “no deal” exit. The UK parliament is strongly against a no deal exit; however, there are legal and political complexities on both sides leading to an unpredictable outcome. Currently there remain several options each with a feasible chance of occurring, including: no deal, an extension to the deadline, an early general election, a deal (different to May’s) being negotiated and accepted or a second referendum being the main candidates.

Global tensions rose throughout July over the situation in Iran. Earlier in the month Iran reported that their uranium stockpile was in breach of the 2015 nuclear accord. Despite the US pulling out of the agreement first, they have cited the breach as concerning. Iran has stated they are open to negotiations with Europe and even the US if the sanctions imposed by the US are lifted.

Little progress was made in resolving the trade war between the US and China during July. President Trump mid-month threatened a further $325 billion in tariffs on Chinese imports despite a tenuous truce agreed between himself and President Xi at the previous G20 summit. A new round of negotiations will begin early August. However, President Trump didn’t wait to announce a new 10% tariff on $300 billion of Chinese imports, not yet subject to duties.

Equities

Equity markets broadly started the 2019/20 financial year on a strong note. Developed markets returned 1.2% in local currency terms, with most major equity markets providing positive returns. Emerging markets underperformed developed markets over the month by 2.2% whilst the Australian stock market led the major stock markets and posted a result of 2.9% during July.

The highest returning sector in Australia was Consumer Staples, followed by Health Care and Information Technology. The worst performing sectors were Materials, Energy and Financials. However, all Australian equity sectors delivered a positive return for the month.

From a developed market sectoral perspective, the returns for the month were mixed. Communication Services and Information Technology were the best performing sectors returning above 3%, whilst Energy, Materials and Health Care were the worst performing sectors and the only sectors to post negative returns.

Bonds

Both the two-year and ten-year Australian government bond yields fell by 0.14%, which is the second consecutive month of reductions by this amount . Falling bond yields are positive for short term bond investment returns.

Overseas, both two-year and ten-year yields fell in all major developed economic regions except the US and Japan. The US government two-year bond yield increased further than its corresponding ten-year term, whilst Japanese yields remained broadly neutral over two-year and ten-year terms in-line with their stated policy of yield curve control.

Currencies

The Australian dollar weakened against the United States Dollar, Japanese Yen, Chinese Renminbi and Swiss Franc, due to a bearish economic outlook on Australia from a global perspective. However, the AUD remained broadly neutral with the Euro and increased against the British Pound during July.

The Australian Dollar finished the month at 0.6845 US Dollars, decreasing by approximately 1.8 US cents over the month.

Commodities

WTI crude oil increased marginally by 0.2% in July whilst Brent crude oil fell 2.1% in value as deteriorating global growth forecasts weighed on the demand for oil.

Industrial metals rose 0.6% on average, with iron ore again the standout performer rising 3.9% following strong Chinese demand and Rio Tinto cutting its full-year output target. Of the precious metals, gold stayed relatively flat and silver saw a strong increase of 6.2% for the month.

Performance of key markets:

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	2.9	2.9	13.3
International Shares	MSCI World Ex Aust Unhedged A$	2.3	2.3	11.7
International Shares	MSCI World Ex Aust Hedged A$	1.1	1.1	4.1
US Shares	S&P 500 Index	1.4	1.4	8.0
UK Shares	FTSE 100 Index	2.2	2.2	2.3
Japanese Shares	Nikkei 225 Index	1.2	1.2	-2.5
Australian Listed Property	S&P/ASX 200 A-REIT Index	2.6	2.6	21.2
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.9	0.9	10.4
Australian Cash	Bloomberg AusBond Bank Bill Index	0.1	0.1	1.9
Currency	AUD/USD	-2.5	-2.5	-7.8

Returns are for periods to 31 July 2019. Past performance is not an indication of future performance.