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Key Market Trends – bond-driven equity rally
May’s US-China trade fears gave way to central bank easing hopes in June, with a further decline in bond yields helping power a rebound in global equity markets. New dovish signals from the US Federal Reserve saw the $US weaken while the $A firmed – despite an RBA rate cut. The weaker $US and central bank easing hopes also pushed many commodities higher.
In terms of major trends, equities, gold and iron-ore are pointing up while bond yields, the $A and and oil are still pointing down. While the $US has weakened of late, this partly unwinds strength earlier last year, with the trend still mixed.
Asset Class Performance – gold shines as $US weakens
Gold was the best performing of our seven major asset classes in June, rising 8% in $US terms. Supported by falling bond yields, A-REITs also produced a good return of 5.9%, followed by global and Australian equities. Bonds produced solid, albeit smaller returns, reflecting capital gains as yields fell.
Across the seven benchmark asset classes we track, growth assets are still generally outperforming defensive assets in terms of momentum rank**, with Australian listed property (A-REITs) and Australian equities outperforming global equities. Among defensive assets, gold now has the strongest relative performance rank – while cash is no long “king” and has the worst relative performance rank of all the asset classes.
Global Equity Trends – technology, property and quality
As seen in the table below, across BetaShares currency-hedged global equity sector/thematic funds higher gold prices contributed to further strong returns for gold mining stocks (MNRS). In terms of relative trends, MNRS, European equities (HEUR) and health care stocks (DRUG) remain the strongest performers, although only MNRS has a positive relative trend.
Across unhedged global equity sector/thematic funds, technology exposures with an Asian tilt – such as RBTZ and ASIA – rebounded especially well last month, after trade-related falls in May. That said, relative momentum still favours NDQ, QLTY and HACK – with the former two exposures also displaying a positive relative trend compared to global unhedged equities.
Australian Equity Trends – resources and property
Ongoing strength in iron-ore prices and a subdued $A saw further solid gains in local resource stocks (QRE) in June. Yield-sensitive property and infrastructure stocks (RINC) also performed well. As seen in the table below, across BetaShares Australian equity sector/thematic funds, resources, infrastructure and our fundamentally-weighted Australian equity index (QOZ) are enjoying the strongest relative momentum, with the former two exposures displaying a positive relative trend against the market.
Cash, Bond and Hybrid Trends
Across BetaShares Australian cash, fixed-income and hybrid funds, post-election interest saw further solid gains in our actively managed hybrids fund (HBRD), while declining bond yields contributed to further gains by our long duration corporate bond ETF (CRED). Falling yields and tightening credit spreads continue to favour fixed-rate bonds and hybrids over floating rate bonds (QPON) and cash (AAA).
Market Fundamental Outlook
The rebound in US stocks last month helped push valuations to the upper half of their range in recent years, with the price-to-forward earnings ratio reaching 16.8. Forward earnings, by contrast, rose only a marginal 0.3%. That said, falling interest rates remained supportive of valuations given that the US equity-to-bond yield gap also pushed higher, to be in the upper half of its range of recent years.
One concern for the market is if there is a major move back up in bond yields, especially if an easing in trade tensions causes central banks (especially the US Fed) to wind back recent dovish rhetoric. Another concern is earnings, with modest downward revisions again evident in June. While current US earnings expectations still imply 12-month growth in forward earnings of around 10%, allowing for further downgrades, my base case is for 12-month US earnings growth of only 5%.
On the upside is the risk that central banks could ease policy in coming months even if trade tensions ease, due to a renewed desire to push inflation up given still relatively subdued price and wage pressures. This could lead to an improvement in the earnings outlook (or at least a levelling out in downgrades) and a possible “melt-up” in equity valuations due to low interest rates.
While the outcome of the US-China trade dispute remains unclear, my base case view is that a trade truce will ultimately be reached before it leads to a serious dent in the global growth outlook – if only because this could threaten US President Trump’s re-election chances next year.
Given the already strong equity gains so far this year, however, these mixed late-cycle forces suggest as a base case relatively more muted gains in equities – though not necessarily a deep correction – over the remainder of the year.
*Trend: Outright trend is up if the relevant NAV return index is above its 12-month moving average and the slope of the moving average is positive, and down if the index is below this moving average and the slope of the moving average is negative. No trend is displayed in all other cases. Relative trend is based on the ratio of the relevant return index to its broader Australian or global benchmark index.
**Asset Benchmarks Cash: UBS Bank Bill Index; Australian Equities: S&P/ASX 200 Index; Australia Bonds:Bloomberg Composite Bond Index; Australian Property: S&P/ASX 200 A-REITs; International Equities: MSCI All-Country World Index, unhedged $A terms; Gold, Spot gold price per tonne in $US.
*** 6/12 month momentum rank based on equally-weighted average of 6 & 12 month return performance.