Please find below the latest BetaShares Global Market Review, which summarises developments across major asset classes over the past month and provides our view on the outlook. The main theme last month was equity market weakness, principally due to renewed fears over the Greece/Eurozone outlook.
The Month in Review
It wasn’t a great month! Fears regarding Greece, combined with pre-existing concerns regarding share price overvaluation, weakened Australian equities again last month. Global equities also fell, but less than in Australia. Rising bond yields – due to ongoing strength in the US economy and Fed tightening fears also hurt bond returns. The $A was broadly steady against the US dollar while commodities rose due to a surge in agricultural prices owing to a bout of wet weather across America’s grain belt,
All up, after a strong run from mid-2014 until around March 2015, global equity markets have since paused for breath. With bonds also under pressure from rising yields, commodities have emerged as the best performing asset class in recent months, thanks to a tentative recovery in grain and oil prices. Over the past year, however, commodities are still in last place, while US equities are in the lead.
Our broad medium-term asset allocation views remain in place. Against the backdrop of low inflation and a gradual global economic recovery, we continue to favour equities over bonds and cash, and remain underweight commodities. Within the equity space, moreover, we favour unhedged international equities (particularly US) over Australian stocks.
That said, the global equity market rally has paused in recent months, reflecting the technical need to consolidate the strong gains from mid-2014 to earlier this year. Helping provide the fundamental basis for this inevitable pause has been stretched price-to-earnings valuations (i.e. prices ran ahead of earnings), and simmering fears about when the US Federal Reserve will begin raising interest rates. The recent flare up in Greece has added to the weakness over the past month.
Our core view, however, is that the Greek problem will be contained – even if Greece defaults and even if it leaves the Euro zone, other peripheral European countries are better insulated from contagion due to fiscal improvement, and the European Central Bank remains well equipped to support their markets if need be.
We also retain the view that ongoing low US inflation will mean the Fed raises interest rates gradually, and in a manner that – as history suggests – does not overly disrupt the equity market. The first Fed rate hike now looks likely in September 2015.
Closer to home, Australia’s sluggish economic growth and corporate earnings performance – together with a still stubbornly high $A – should mean the local equity market continues to underperform.
Indeed, after a period of strength, due to Chinese stock rebuilding, it now appears that spot iron-ore prices are correcting back down and could retest previous lows. Against this backdrop, we still expect the RBA to cut interest rates to 1.5% later this year, and the $A to reach US68c. Accordingly, despite the prospect of higher global bond yields, we continue to favour financials over resources in the local equity market.
Although a useful source of diversification in a balanced portfolio, we remain tactically underweight bonds and commodities. Bond returns should continue to suffer as global bond yields gradually rise – due to Fed tightening – from currently still quite low levels. That said, the rise in bond yields will be contained by likely continued low global inflation.
Low inflation, in turn, leaves the commodity outlook challenging. While commodity prices appear to have bottomed out in recent months, the broader backdrop remains one of ample supply in many markets and subdued demand. A return to better US growing conditions, for example, could soon see agricultural prices head down again.