The Australian equity market produced returns of nearly 3% for the month to kick off the new financial year, continuing this calendar year’s stellar returns in excess of 20%.
The RBA delivered a rate cut in July, the second in as many months, taking the official cash rate to 1% in order to boost a subdued economy. This, coupled with the Morrison government providing additional tax rebates to low- and middle-income earners, shows a willingness by the government to provide stimulus to the economy in the form of monetary and fiscal policy with Treasurer, Josh Frydenberg, even going as far as encouraging Australians to spend their tax refunds “at the local shop.
Offshore markets also fared well, albeit with some underperformance against the Australian market. The US equity market returned 1.4% in July bringing the 2019 return above 20%. Despite this good return, the final two days of the month saw a 1.3% drop in the index as it became apparent that the US and China’s ongoing trade dispute was far from over. This was particularly evidenced throughout the first week of August which saw the US impose additional tariffs on Chinese imports and China retaliate by devaluing its currency in order to discourage capital moving offshore. This remains a key area to watch over the coming months as a resolution still seems some way off.
Bonds continued to perform strongly with Australian government bonds producing another 1% return in July and taking the one-year return above 11%. Australian government bond yields are now trading at all-time lows, finishing the month at 1.2%. Bond yields generally fall when economic growth is weak and generally coincides with a weak equity market. As discussed, however, this is far from the case and is leading many market commentators to ask the question, “which is right: the bond market or the equity market?” The answer will become apparent in the future. For now, we are continuing to assess all risks in light of the current economic climate and position the fund accordingly in order to deliver the best returns we can for our members.