The June quarter saw markets and economics continue their path of divergence, with equity markets providing one of the strongest quarters ever seen off the March lows, whilst the economic outlook showed little improvement.
Equity markets were buoyed by extraordinary government and central bank stimulus whilst virus contraction rates began to peak in most countries around the world, providing some optimism regarding re-opening of economies and the beginning of an economic recovery. Optimism regarding the early development and availability of vaccine also assisted in boosting investor confidence and sentiment.
Government’s locally and globally continued to provide significant fiscal stimulus to fill the void created by lockdown measures. The most significant of those measures related to supporting businesses to continue paying workers and supporting those workers that have seen their hours reduced or lost their jobs. These stimulus measures are significant enough to allow most workers, and even those that have lost their jobs, to continue consuming at high levels. Central banks continued to maintain very low cash rates, continued to provide significant support to banks and the non-bank mortgage market, all whilst they intervened in bond markets to lower borrowing costs for governments and corporates.
Investors were also buoyed by better than expected economic data versus the dire expectations set in March. That’s not to say that the economic data was any better in an absolute sense, nor is the economic outlook any clearer, but investor spirits were lifted by positive economic surprises and by the lack of a 2nd virus wave and continued re-opening. We also saw positive news out of Europe pertaining to a greater fiscal union, with key players agreeing to come together to support the European recovery effort in a coordinated manner.
Also worth noting that the US political environment somehow got more toxic through the quarter with protests, riots, and the general lack of law and order hurting the economic recovery whilst increasingly the possibility of a 2nd virus wave. Polls swung firmly in favour of the Democrats and presidential hopeful Joe Biden during the quarter.
Key on most minds was the potential government reaction to future virus waves and the “fiscal cliff” whereby most of the government stimulus measures put in place in March are set to expire in the next quarter. Absent an extension of these measures, it’s fair to say that the economic and market outcomes will be significantly adversely affected from here. Given the positive momentum in markets in the quarter, it’s fair to say that investors believe significant re-lockdown measures are unlikely and that government and central banks support continues unabated from here.
The outlook remains mixed at best as we end the quarter with the prospect of rising virus cases and the re-emergence of increased lockdown measures all whilst riskier assets like equities and corporate debt continue to move higher.
Below is a summary and highlights from the movements this quarter and major changes to some of the key asset areas:
Although still well short of February highs, the Australian equity market continues to fight back, finishing the June quarter up 16.5%. Performance was spread across all sectors but those impacted more severely (cyclicals) in the March quarter (consumer discretionary +30%, energy +28%) led the charge. Information technology was the biggest mover +49% with strong momentum exacerbated by lockdown measures. Cyclical sectors still lag the defensive sectors quite considerably year-to-date.
The more volatile small cap sector (+23.9%) outperformed broader large companies during the quarter and are now outperforming the sector year-to-date.
All major developed and emerging markets finished the quarter strongly in local currency terms (double digits), but the sharp rise in the Aussie dollar brought those returns back to more reasonable levels. In the US, markets shrugged off sharp increases in reported COVID-19 cases and civil unrest; the S&P 500 returning (+7%). Emerging Markets (+5%) performed strongly as virus fears subsided, whilst Europe (+3.3%) and Asia-Pacific (+3.8%) also performed well. Sector performance mirrored the domestic markets as information technology led the way, particularly in the US.
Property & Infrastructure
The Australian listed property sector (+19.9%) came back strongly in the June quarter. Global listed property (+8.7%) and global listed infrastructure (+8.3%) performed strongly on a currency hedged basis, but the strong rise in the Aussie dollar saw unhedged returns fall into negative territory. Both sectors are well down year-to-date and remain challenging sectors going forward if lockdowns persist.
Bonds and Cash
At a headline level, bond returns were moderate in the June quarter. Australian bonds were up slightly (+0.53%) whilst global bonds (+2.3%) benefited from currency hedging in light of the rising Aussie dollar. Corporate bonds outperformed government bonds as spreads continue to tighten on solvency risks abating, assisted by central bank buying. Cash yields remained anchored low with the RBA leaving the official rate (+0.25%) untouched throughout the quarter.
Chris Lioutas, Director, Insight Investment Consultants
Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee.
With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972
Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972
Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concerns