Quarter 2 of 2019 continued the ebullient nature of the previous quarter with another 3 months of positive returns for investors of all persuasions.
Global stocks advanced and several key market indexes hit record highs. Investor sentiment improved as central banks around the world made it clear that the era of easy monetary policy is far from over. Diminishing trade tensions near the end of the quarter also contributed to market gains as world leaders met in Japan to discuss trade and other issues at the G-20 summit.
The theme for this quarter was the continuing and increasing support offered globally by central banks. Realising their folly in 2018, and with a concerted effort not to allow this wobble to happen again, the ECB and the US Federal Reserve unequivocally backed the market.
ECB President Mario Draghi, reacting to weakening economic data, said the central bank may consider a number of stimulus measures, including the resumption of a previously halted bond-buying programme and cutting rates further into negative territory. The ECB’s key policy rate stood at –0.4% in June. Draghi’s comments drove European stocks and bonds higher as investors cheered the likely extension of loose monetary policy.
The Fed left interest rates unchanged at its June meeting and expressed a dovish tone that led yields to decline. The 10-year Treasury yield fell by 41 basis points to 2.00%, its lowest level since 2016. As a direct result, returns were positive across bond sectors with Investment-grade corporates the best performers, advancing 4.5% for the quarter.
With regards to equities, the US equities touched new all-time highs, rising 4% for the quarter. Elevated trade tensions with China rattled markets during the previous quarter, but have eased during Q2. Investors also took comfort in the growing likelihood of an interest rate cut in the coming months and, as a result, the S&P 500 Index has risen 19% year to date, its best calendar first half since 2007.
Asia-Pacific and Emerging Market returns were mixed; Japanese stocks in Yen terms fell modestly and trailed other major global markets as exports remained weak.
Economic data was mixed as trade weighed on the Japanese economy. Industrial production rose at its fastest monthly clip since last October and core machinery orders increased for the first time in 2019. Retail sales rose 1.2% in May, the largest gain of the year, suggesting that Japanese consumers are stocking up ahead of a consumption tax hike planned for October. However, the spectre of the US-China trade friction hammered Japan’s exports, which recorded their sixth consecutive monthly decline in May. The Nikkei Flash Japan Purchasing Managers’ Index slipped to 49.5 in June as new orders declined at the fastest pace in three years.
Interestingly, Australia led the region’s stock markets higher. Australian stocks gained 9% as the central bank moved in dovish lock-step with other central banks and cut interest rates, while voters unexpectedly re-elected the country’s centre-right prime minister. The Reserve Bank of Australia cut the cash rate by a quarter-point to 1.25% amid trade uncertainty, falling housing prices and an uptick in joblessness, which has weighed on consumer spending. Elsewhere, stocks rose 7% in Singapore, 6% in New Zealand and 1% in Hong Kong.
Emerging markets’ stocks fluctuated due to bouts of volatility tied to the US-China trade talks, concerns over China’s slowing economy and election uncertainty in several countries. Many emerging markets’ currencies gained against the dollar, boosting returns for local currency bonds. Overall, the MSCI Emerging Markets Investable Market Index finished essentially flat, putting its year-to-date gain at 10%.
Looking at the remainder of the year, it is difficult not to be positive about equity markets. The importance of central bank policy cannot be underplayed and the recent announcement by the President of the New York Federal Reserve, John Williams, that, “It’s better to take preventative measures than to wait for disaster to unfold”, has effectively signalled to the market that the Fed will do whatever it takes, ala Mario Draghi and the ECB.
That is not to dismiss the potential for heightened levels of volatility in our own domestic market as we lead up to Halloween. However, this is a “known known” and as such, we have positioned our portfolios to take possible advantage of this increased uncertainty opportunity.
Yet real and meaningful diversification is the only reliable tool we have in the kit and this remains at the forefront of our investment approach, ensuring that the returns our clients expect and require are achieved over the longer term, throughout all market conditions.
