Politics took center stage again in May, as global markets fell across all major regions driven by mixed signals on the status of trade talks and ongoing concerns around global growth. US-China trade negotiations broke down over the month as the US government increased the tariff rate on $200 billion of Chinese goods from 10% to 25% and China responded by increasing the tariff range from 5-10% to 5-25% on $60 billion of imports from the US, prompting broad weakness across equity markets. The US Government added Chinese tech giant Huawei Technologies to the ‘Entity List’ on security fears, widening the restrictions to Chinese firms’ access to American technology. President Trump continued to turn up the rhetoric over the month, announcing intentions to impose a new tariff of 5% on all Mexican imports in a bid to force Mexico’s government to act on border security and migration.
The other major development was the continued fall in yields of fixed interest securities, particularly in the US, as market participants priced in deeper rate cuts by the US Federal Reserve (Fed), based on an expectation of more than three cuts by the end of 2020. In general, economic data was broadly underwhelming in the month of May.
In the UK, Prime Minister Theresa May announced her resignation following the end of Brexit talks with the opposition Labour Party, which officially concluded without agreement.
In Australia, however, the Coalition victory at the May election boosted the share markets, defying the large falls in overseas markets. Market’s expectation that the Reserve Bank of Australia (RBA) would cut the official cash rate to 1.25% after 32 months on hold also supported the market.
Against this backdrop, world equity markets were pressured as risk aversion once again came to the fore but the Australian share markets defied the global trend in May. The investment returns of the major markets for one and three months, financial year, and one year to 31 May 2019 are summarised below.
Market performance – 31 May 2019 | Month | Quarter | FYTD | 1YR |
Australian Equities | 1.7% | 5.0% | 7.5% | 10.9% |
Overseas Equities (Hedged into AUD) | -5.9% | -0.5% | 0.9% | 1.2% |
Overseas Equities (Unhedged into AUD) | -4.3% | 1.6% | 6.9% | 9.4% |
Emerging Markets (Unhedged into AUD) | -5.8% | -1.9% | 1.9% | 0.1% |
Australian Property (Unlisted) | 0.5% | 1.4% | 6.5% | 8.6% |
Australian Property (Listed) | 2.3% | 6.0% | 14.6% | 17.2% |
Global Listed Property (Hedged into AUD) | -0.2% | 2.7% | 7.6% | 10.0% |
Australian Bonds | 1.7% | 3.8% | 8.4% | 9.0% |
Overseas Bonds (Hedged into AUD) | 1.4% | 3.1% | 5.9% | 6.0% |
Cash | 0.2% | 0.5% | 1.8% | 2.0% |
Australian Dollar vs. US Dollar | -1.6% | -2.6% | -6.2% | -8.4% |
Source – JANA, FactSet
In the US, the S&P 500 Index returned -6.6% over the month, which was the second-worst for the month of May since the 1960s. All but one of the eleven S&P 500 sectors fell, with the interest rate sensitive real-estate sector getting a boost as the 10-year Treasury yield fell to a 20-month low.
Australian share markets outperformed world markets, with the S&P/ASX 300 returning 1.7% in May as investors responded positively to the surprise Coalition victory, which spurred sharp moves across multiple sectors. Australian large caps stocks (2.8%) outperformed the broader market, while mid-caps (-0.6%) and small caps (-1.3%) lagged. Telecommunications (7.1%) was the best performing sector as Telstra announced it was making progress on its plans to cut costs by retiring some legacy platforms and the stock hit a 52-week high. Financials (2.6%) also bounced back following the Coalition’s win. The Consumer Staples (-4.2%) and IT sectors (-3.1%) underperformed over May. The Energy sector (-3.8%) also lagged on the back of a further slide in the price of oil which is under pressure as trade conflicts spread and US crude output returned to records levels.
The Australian Dollar (AUD) depreciated against most major trading partners over the month, falling against the USD (-1.6%), the Yen (-4.0%) and the Euro (-1.0%). Brexit concerns overshadowed Australia’s domestically generated weakness, seeing the AUD appreciate against the Pound (1.8%).
Australian bonds and Overseas bonds delivered positive returns over the month.
