JUNE 2019 QUARTER MARKET OVERVIEW & MARKET OUTLOOK
By Patrick Malcolm
We are pleased to provide our Market Overview for the June 2019 quarter and our Market Outlook going forward.
While it was a volatile ride, Financial Year 2018/19 proved to be an excellent year for investors. Returns for all the growth asset classes were strong, helped by events late in the Financial Year including a shock Federal election result and the RBA re-commencing its interest rate easing cycle.
Index results over the quarter, and for the Full Financial Year 2018/2019 are shown in the table below:
|Australian Shares (S&P/ASX 200 Accumulation Index)||7.97%||11.55%|
|International Shares (MSCI World ex–Aus in AUD)||5.28%||11.95%|
|A–REITs (S&P/ASX 200 A–REIT Accumulation Index)||4.07%||19.32%|
|S&P/ASX Small Ordinaries Accumulation Index||3.75%||1.92%|
Other important figures as at 30 June 2019 were:
|RBA cash rate||1.25%||1.50%||-16.66%|
|90-day Bank Bill Swap rate||1.29%||2.07%||-37.68%|
|10-year Government Bond rate||1.32%||2.649%||-50.17%|
|Australian dollar||US 70.13c||US 74.05c||-5.29%|
Halfway through the Financial Year, increasing concerns about global growth dominated markets with weaker economic indicators coming out of the US, Europe, and China all pointing to global activity slowing. However, early in 2019, investors pushed these concerns aside with Australian shares rallying strongly, finishing the Financial Year at its highest ever closing level. This was the seventh straight Financial Year of positive total returns for the Australian share market.
Most sectors of the Australian market had a great Financial Year. Resources were again healthy returning 15.97% with Iron Ore prices reaching 5-year highs. Australian Small-Cap stocks struggled with investor sentiment favouring large-cap stocks, and A-REIT’s had another stellar year benefiting from lowering bond yields, both domestically, and around the world. International shares (MSCI World in AUD) had a great year returning 11.95%, again outperforming the Australian Share market.
Leading into Financial Year 2019-20, a combination of the recent election result ensuring that there will be no immediate changes to the franking/imputation credit system, 10-year Australian bonds yielding just 1.32% (30 June 2019), and the RBA dropping the cash rate to 1% in early July, the hunt for yield appears to have pushed valuations of the Australian market to historically high levels. Some caution now needs to be exercised.
With dividend yields of good quality Australian shares and bond yields falling so dramatically, the gap between the two has rarely been wider. In response to this, income-seeking investors have pushed valuation to “stretched” levels, but it is important not to “buy yield” instead “invest for yield” meaning that the price you pay for the attractive yield of Australian shares must be considered.
After several strong investment years, and valuations appearing fully priced, it is reasonable to expect a lower return environment. With slowing global growth, a weaker domestic economy, continued geopolitical risks and enhanced valuations, markets are likely to be more volatile in the coming 12 months. As always, having a well-diversified portfolio but perhaps being a little more cautious in the next 12 months may prove to be wise.