June finished off the 2018/19 financial year with big returns across global share markets in what appeared, at the surface, to be a broad-based risk-on environment.
The Australian equity market rallied 3.7% during the month with most sectors contributing to this return (S&P/ASX 200 Accumulation Index). Not to be outdone, the US produced a staggering monthly return of 7.1% (S&P 500 Index). This brings the total returns generated from investing in Australian and US equities in 2019 to 19.7% and 18.5% respectively. This continues to be a truly remarkable period for equities with six-month returns of this magnitude not seen for 6 and 7 years respectively.
It appears this rally is being driven by sentiment, as there has been few economic surprises recently. Investors appear to believe that global central banks will support financial markets in the absence of economic growth.
Indeed, the Reserve Bank of Australia cut interest rates in June for the first time since 2016 by reducing official cash rates to record lows. Generally speaking, a central bank will cut interest rates if it sees weakness in the local economy. This appears to be the case with RBA Governor Lowe citing “subdued inflationary pressures” and “spare capacity” in the economy. Investors have seen this as a positive development and used it to further embrace the risk-on sentiment that we have seen throughout much of 2019, or the propensity for investment managers to take on more risk.
Similarly, the US Federal Reserve is expected to cut interest rates at least twice this year, having been on hold at 2.5% since 2018 after a period of gradual increases. This has buoyed investor enthusiasm with the belief that the Fed will provide stimulus to financial markets.
For now, this is playing out through exceptional gains in equity and bond markets, which we have used to deliver excellent returns for our members.
Whether the second half of the year can match that of the first is another question, something we will continue to watch very closely in light of all of the risks and opportunities.