Monthly Economic & Market Update
How the different asset classes have fared:
(as at 30 June 2015):
Asset Class
Cash1
Australian Bonds
International Bonds3
Australian Shares4
International Shares Unhedged5
International Shares Hedged6
Emerging Markets Unhedged7
Listed Infrastructure Unhedged8
Australian Listed Property9
International Listed Property
Unhedged10
1 mth
%
3 mth
%
6 mth
%
YTD %
1 yr %
3 yr %
5 yr %
10 yr %
0.18
0.56
1.23
1.23
2.60
2.85
3.65
4.70
-0.93
-1.99
0.63
0.63
5.63
4.82
6.44
6.25
-1.14
-2.18
0.54
0.54
6.25
5.76
6.97
7.10
-5.40
-6.25
3.32
3.32
5.67
14.47
9.36
7.02
-2.66
-0.11
9.46
9.46
25.18
26.12
15.43
6.27
-3.74
-1.37
5.61
5.61
17.09
22.17
14.40
5.32
-3.00
0.08
9.61
9.61
16.51
14.16
5.66
8.02
-5.00
-2.69
3.28
3.28
15.60
20.88
12.57
6.63
-3.97
-2.33
6.67
6.67
20.20
18.29
14.23
2.32
-4.27
-8.59
1.41
1.41
22.91
18.82
14.71
1
Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3JPM GBI Global Ex Australia TR
Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6MSCI World ex Australia NR AUD Hedged (as at
04.05.15), 7MSCI EM NR AUD, 8S&P Global Infrastructure NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global
REITs NR AUD
Summary
June has been a difficult month, with many markets recording negative returns during the
month. Over the past year returns remain solidly positive with excellent returns from
unhedged international shares.
Australian Economic Conditions
The latest economic data indicates that Australian economic growth is likely to continue to
be subdued and that these conditions are expected to continue into 2016. Australia has a
weak mining sector, a strong domestic housing construction industry, and a consumer who
is struggling with sustaining spending with very flat wages growth. On balance this points to
an economy with modest growth prospects.
Cash
The Reserve Bank of Australia (RBA) decided to maintain the official interest rate at 2.0% in
its June meeting, following the quarter of a percent reduction in May. Whether the RBA
deems further cuts are warranted will be dependent on economic and financial conditions in
the coming months. Market expectations are that rates will remain unchanged for sometime.
1
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The bank is caught between concerns about the risks of fuelling the property bubble if rates
are cut further, and concerns about a weakening mining sector if they are not cut again
soon.
Australian Bonds
There has been a continuation of rising local bond yields with the rate at around 3% at the
end of June. Australian long bond yields generally follow global bond markets which have
been moving off ultra low levels in recent weeks. Rising bond yields push down bond values,
and bonds fell in value over the past month.
Australian Equities
The Australian share market has had a good run and now seems to be taking a breather.
Earnings growth is forecast to be fairly flat over the next 2 years. The market is at the upper
end of its normal valuation range.
This suggests that with fairly modest expectations for economic growth, that the Australian
share market will likely deliver modest returns in the coming year. There is some possibility
of stronger returns if interest rates are cut aggressively, similarly a much weaker than
expected Chinese economy could, if it comes to pass; push the market lower.
International Economic Conditions
The US economy continues to improve and offers the brightest prospects for growth in 2015.
In Europe there are a few green shoots emerging but structural problems remain and the
Greek economic and political crisis continues to introduce an unpredictable element into any
forecasting. China is slowing to a more manageable and sustainable model of economic
growth as its economy matures.
International Shares
International shares have been boosted by the falling value of the A$, a trend we think is
likely to continue. US shares are very expensive on a wide range of valuation measures, and
this market is at some risk of a correction. Other international share markets offer more
reasonable valuations.
Selectively then opportunities remain in international equities. We believe that active
management is best positioned to identify these opportunities whilst reducing the impact of
the risks.
Emerging Markets
We remain cautiously optimistic about emerging markets shares. In China, equity markets
suffered a correction at the end of June, following strong growth earlier in the year. While
Chinese shares may have gotten ahead of themselves, valuations in the broader range of
EM markets seem quite attractive.
2