Financial markets were dominated by politics both locally and abroad, making May an interesting month.
Domestically, Scott Morrison was re-elected to serve another term and forming a majority government, which defied pollster expectations. The news sparked a further bounce in the S&P/ASX 200 Index, which finished the month 1.7% higher. Analysts largely point to Liberal’s pro-business policies as the reason for the jump.
The markets generally experienced a big rotation, with the banks bouncing nearly 10% in the week immediately following the election as investors gained comfort in the fact that there would be no changes to tax policies, which may have affected franking credit claims and negative gearing on housing. Similarly, housing-related stocks and mortgage brokers performed well with Mortgage Choice finishing the month over 40% higher.
The continued strength in May has seen the market now climb 15.5% since the beginning of the year, making it the best start to the year for, at least, the past 30 years. It remains to be seen whether this strength can continue, but this level of return in just five months is truly remarkable.
Offshore markets fared considerably worse as concerns about trade wars grew. The US and China both increased tariffs on exports between the two countries, which saw investors exit risky assets in favour of a more defensive stance. US and Chinese equity markets were hit particularly hard with the S&P 500 Index falling 6.4% and the CSI 300 Index falling 7.2% during May.
Equity markets generally don’t react well to uncertainty, and we have heightened levels of uncertainty right now due to the trade standoff between the US and Chinese governments. Combined with evidence of slowing US economic growth, and it becomes easy to understand why investors are getting nervous about the outlook for corporate performance.
Because of the uncertainty, defensive investments have performed well. Australian and global government bonds returned 1.9% and 1.8% respectively for the month. Longer-term returns have been equally as impressive with Australian government bonds, in particular, producing returns of 9.6% over the past 12 months. Gold was also a beneficiary of the perceived market risk with a bounce of 2.6% from its low. Investors often use gold to hedge political risk, and this seems to be the case on this occasion with a sharp climb in the price of the precious metal through to the end of the month.
We continue to monitor these events and others to provide our members with the best possible returns in light of all of the risks and opportunities that we see.