Market Update – June 2016 Quarter


Much of the recent market news has been dominated by ‘Brexit’ and what it all means. Since June, markets have recovered, however the long term implications for the UK, and more broadly the EU, are unclear.

Global equity and bond markets completed a quarter of generally solid returns despite the late quarter uncertainty generated by the United Kingdom’s referendum result in favour of leaving the European Union.

The economic news was mixed in the quarter. In the US, the Federal Reserve left its official interest rates unchanged in June, saying it needed to see clear signs of economic strength before raising rates for a second time. US GDP grew at an annual rate of 1.1% in the first quarter.

In April, reported annual GDP growth of 6.7% for the first quarter, representing a continuing slowdown from growth rates of recent years, though retail sales and investment growth came in ahead of market expectations.

In late April, the Euro Zone reported that the economy in that region grew at its fastest pace in five years in the first quarter, helped by falling unemployment and lower energy costs.

The Reserve Bank of Australia in May lowered its official cash rate to historic lows of 1.75%, citing China’s slowdown and weaker-than-expected local inflation. The RBA is now expected to reduce interest rates again in the second half of 2016 on global volatility and low inflation concerns. However, the Australian economy continues to perform above expectations with robust growth and reasonably strong employment.

Bond markets rallied strongly through the quarter to take long-term yields to record lows in many markets by the end of the period.

Markets seem to have absorbed and overcome recent events, probably as a result of global interest rates moving even lower and the US Federal Reserve (the Fed) likely to delay any increase in the cash rate. At the same time, US economic data has continued to remain robust with the most recent payroll figure printing well above expectations and US manufacturing and non-manufacturing surveys indicating a recovery in July 2016.

Asset Class Returns

The following outlines the returns across the various asset classes to the 30th June 2016.



Benchmark data are Bloomberg AusBond Bank Bill Index (cash), Bloomberg AusBond Composite Index (Australian bonds) Citigroup World Gov Bond Index hedged to $A (global bonds), S&P/ASX300 Property Trusts Accumulation Index (Australian property securities), S&P/ASX200 Accumulation index (Australian shares) and MSCI World Index ex Aust (unhedged in $A global shares).

Returns shown for periods less than 1 year are periodic returns, while returns of 1 year and more are annualised.

Interest Rates

At its 5 July meeting, the RBA left the cash rate on hold at 1.75%, as it takes time to assess the impact of the UK Brexit referendum on financial markets and the global economy. The Bank noted that markets have continued to function effectively, with low borrowing costs and accommodative monetary policy globally, but warned the global impact may be difficult to discern.

Inflation remains low, with the March quarter headline CPI recording an unexpected drop to 1.3%, and the underlying rate falling to 1.7% (still well below the 2-3% target). The Bank expects inflation to remain low for some time, given subdued labour costs both in Australia and globally. As has been the case in recent years, a disorderly downturn in China represents the key risk to the Australian economy.

Nonetheless, Australia has ample room to ease interest rates and, given the relatively low level of government debt and a typically responsive currency, it has the policy levers to support the economy.

Australian Shares

The Australian share market experienced its weakest Australian financial year performance since 2012, with resources and financial sectors being the primary contributors to the flat performance. However, for all the uncertainty, global share markets enjoyed a positive quarter overall.

The main reasons for market weakness include:

  • Large capital raisings in the bank sector to satisfy new capital rules
  • Continued weakness in the resources and energy sectors with weak profit results in the interim reporting season
  • Increased competition amongst the big retailers like Woolworths and Wesfarmers
  • Increased uncertainty over the global economic recovery has also driven a more risk-averse approach.

The top 20 largest stocks on the ASX drastically underperformed compared to the broader market, with the ASX20 posting a negative return of 7% for the year. The ASX 20 is heavily overweight underperforming banks, resources, telcos and consumer staples sectors and underweight the outperforming consumer discretionary sector.

The underperformance of the mega-cap end of the market over the last year has been so severe that it has almost reversed a multi-year trend of outperformance that began in 2008.

Conversely, small-cap resources outperformed expectations, posting a total return of 14 per cent, largely due to stellar performance in gold stocks, which rose 94 per cent over the course of the past financial year.

Yield stocks in particular outperformed, with infrastructure posting the best returns for the year at 40 per cent, followed by real estate investment trusts at 25 per cent and utilities at 24 per cent.

The following outlines the best and worst performing stocks in the Australian sharemarket (ASX 100) for the 2016 financial year.


Global Shares

Following Brexit, global equity markets fell in June, resulting in Global markets finishing FY16 mixed with the broad MSCI World Index (AUD) finishing up just in the black, with the US market gaining over 7% while European & Asian markets were down. In country terms, the top performing developed equity markets included New Zealand, Canada, Norway and the US. Brazil, the Philippines and Indonesia led emerging markets. The list of laggards was dominated by European markets.

A 3% fall in the AUD/USD helped buffer the falls in many international markets and boosted US equity market returns. Moving forward, the AUD/USD is expected to remain under downward pressure given the RBA retains an easing bias while the US Fed is expected to retain a hiking bias.


Fixed interest markets were boosted by the Brexit uncertainty, where long-term yields declined sharply.
Australian bonds returned 1.3% in June, with Brexit pushing the Australian 10-year Treasury yield to a low of 1.98%, following a pre-Brexit close of 2.25%. Australian government bonds returned 1.5% during June, while Australian corporate bonds were hampered by the flight to safety, returning only 0.7%.

Globally, government bond yields underwent further compression in June, benefitting (as yields fall, bond prices rise) from a Brexit induced flight to quality. Bond markets are also anticipating more accommodative monetary policy from central banks.

Listed Property

Real estate investment trusts (REITs) performed strongly across domestic and global markets.
The S&P/ASX 200 A-REIT Accumulation Index returned 3.5% in June, with expected further easing from central banks likely to prop up the yield trade for some time yet. Concerns remain about excessive gearing and overpricing in some cases, driven by persistently low interest rates.


Globally, REITs are positioned to gain from Brexit, with 10-year yields forced down further as a result, and they are likely to continue to appeal to investors looking for cover as any effects on the global economy are felt.