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Overview
Global stock and bond markets posted broad gains in the second quarter, as economies re-open and central banks offer their stance on inflation developments.
Volatility across equity markets fell to pre-pandemic levels. Renewed demand for oil pushed prices higher and energy stocks topped the sector performance list. Utilities dragged.
- Bonds partially recovered from a rough first quarter. High-yield bonds continue to outpace government and corporate bonds.
Global shares
Share markets posted broad gains in the second quarter. Volatility ebbed, driven by the dynamics of a recovering economy: the reality of higher inflation, a mixed picture on employment, and continued support from central banks. This shift came as the Federal Reserve indicated in June that it may raise rates somewhat sooner than expected, albeit not likely until 2023.
A wide divergence in sector performance during the first quarter narrowed in the second, with all but the utilities sector posting gains. By the end of the second quarter, one of the most dominant trends from late 2020 and the first quarter began to fade: the outperformance of value stocks over popular growth stocks. Still, with central banks (and especially the Federal Reserve) still injecting enormous stimulus, markets weren’t spooked. Some factors stayed constant from earlier developments: resurgent economic activity boosting the price of oil, and in turn, energy stocks. In fact, oil prices rose 20% in the quarter and 94% over the past year. In this context, emerging markets showed resilience to a regulatory clampdown in China towards mega-tech companies, with the broad emerging-markets basket matching developed markets for the quarter.
Key stats (in local currency terms, unless otherwise specified) (12-month returns in brackets): US (USD): +8.6% (+40.8%); Japan (YEN): 0.2% (+28.4%); Europe Ex UK: +6.7% (+29.4%); UK: +5.8% (+17.4%); Emerging Markets: +3.8% (+36.1%). IT was the best performing sector for the quarter at +11.5%; Financials (+48%) and Consumer Discretionary (+47.2%) were strongest on a 12-month view.
Australian shares
Australian shares broadly reflected global themes. The relatively small IT sector led the way for the quarter (+12.1%) while Consumer Discretionary (+48.6%) and, index-heavyweight, Financials (+41.1%) fared best over the financial year, again given renewed confidence in the economic outlook.
Key stats (ASX 200) (12-month returns in brackets): +8.3% (+27.8%).
Bonds
Bond markets, following a rough first three months of 2021 where prices were hit by fears of rising inflation, saw investors return in the second quarter. Updates from central banks influenced bond market participants, with a return of investor interest resulting in a reversal of some of their lost ground. The U.S. faring better than European equivalents, while Australian bonds performed better than global peers, in general. In riskier fixed-income markets, high-yield bonds continue to outpace core and corporate counterparts.
Key stats (in local currency terms) (12-month returns in brackets): Australia: +1.5% (-0.8%); Global: +0.9% (-0.2%).
Global property & infrastructure
Domestic and global listed property performed strongly, as economies begin to reopen. However, returns from listed infrastructure were more muted.
Key stats (in local currency terms) (12-month returns in brackets): Australian listed property: +10.7% (+33.9%); Global listed property: +9.0% (+30.2%); Global listed infrastructure: +1.8% (+17.2%).
Currencies
Increased volatility was also evident in the currency market, with the U.S. dollar perking up in June after sharply declining for most of the quarter. In contrast, the Japanese yen, British pound, Euro and Australian dollar all initially saw relative strength only to weaken as the quarter ended. The Fed’s hinting at higher rates and a more aggressive stance on inflation was a telling development here.
Changes to the Balanced Portfolio over the June quarter
- The fund reduced its exposure to risk assets rotating into Australian and Global Bonds from Australian equities. Broadly, Australian equity valuations are less attractive than 2020 on the back of strong performance.
- Following from strong gains, we took profits in the fund’s exposure to cyclical names in emerging markets and US Banks.
- Proceeds from profit-taking in cyclical names were rotated into industrials and consumer companies in Japan and the US. These companies have selected for their potential to display resilience should a less benign macroeconomic environment of higher interest rates and inflation eventuate.
- Seeking to remain opportunistic, we repositioned the fund’s energy exposure. Reducing some US energy names that had performed strongly since they were added in 2020 and into what we view as more attractively priced European energy companies.
Positioning & Outlook
Share markets have continued higher, pricing in much positive and hopeful sentiment around economies reopening. Many of the risks that investors focused on appear to be overtaken with an understandable desire to “return to normal”. Optimism feels good, but from these lofty heights should be a sign for caution for investors. As equity markets continue higher, they are more prone to react to any negative news. Vaccines and plans for increased government spending are certainly supportive, but we are not yet out of the woods. As such, we must be increasingly nimble to take advantage of attractively priced opportunities when they arise. Alongside this backdrop of economic uncertainty and broadly elevated valuations, we look to position the portfolio to navigate a variety of economic environments.
Broadly expensive equity markets lead to stock selection being particularly important. We look for investments that continue to appeal and believe are key to contributing to your portfolio returns over the longer term. To that end, we have sought investments whose valuations are relatively attractive, including European energy. We have also added non-cyclical companies that should prove resilient if economic growth falters or higher inflation and interest rates eventuate. Among these are US consumer companies and Japanese industrials.
The Balanced fund maintains a healthy cash holding which offers a buffer against equity market pull backs while providing the the resources to take advantage of asset price weakness which offers attractive long-term expected returns.
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