During the month we have seen significant strength in commodity markets, with the Oil and Iron Ore price significantly rebounding. This has greatly assisted the Australian resource sector, which has been a great place not to invest for a while, and has seen prices rebound 40% from its lows early this year.
Following a brief retreat early in the month, the Australian share market continued to recover from its February lows, with the S&P/ASX 200 Index finishing only slightly below 2016’s starting value. Returns on Australian equities, as measured by the S&P/ASX 200 Accumulation Index, were 3.37% in April and -4.93% over the year to end, down on March’s returns but still promising for equities investors.
Large gains from Materials (14.19%) and Energy (7.65) drove returns, with softer growth from Financials (1.68%) as the market digested mixed earnings results from the big four. Industrials returned only 1.58% during the month, but are still the highest performing sector over a 12-month period, returning 15.26% to the end of April. Losses from Consumer Discretionary (-1.36) and Utilities (-0.39) weighed down index returns. Small cap shares underperformed slightly in April, with the S&P/ASX Small Ordinaries Accumulation Index returning 3.04%, but small caps have continued their out-performance over a 12-month period, providing better protection against market falls through 2015 and into the start of 2016.
With central banks holding the line on rates, global markets were largely flat or downward pointing towards the end of the month. Following the Federal Reserve’s announcement that rates would be kept on hold, the S&P 500 Index slid -1.42% to end the month up 0.27%. Likewise, European markets were down following inaction from the ECB, with the German Stock Index (DAX) losing -3.80% to end the month up 0.74%, and the UK Index dropping -2.19% to finish up 1.09%. European markets continued to brace for the UK’s Brexit vote, to be held in June, with the Bank of England planning to offer additional liquidity options for banks around the date of the referendum. The Brexit vote has been blamed for some of the recent market turmoil, and the BoE faces a significant challenge in in how it frames its messaging around future interest rates changes. Financial markets were supported by rising commodity prices, with crude oil sitting comfortably above US $45/b late in the month, although market returns have moderated since March. The MSCI World ex Australia Index gained 1.19% in April, with weak results from Asian markets.
Listed Property (REITs) & Infrastructure
The S&P/ASX 200 A-REIT Index retuned 2.80% in April, under-performing the market but still an attractive source of yield for investors, helped by an even more dovish RBA following weak inflation figures at the end of the month. Concerns remained among some investors about the perceived risk associated with high A-REIT valuation multiples, including potentially unsustainable distributions, but property supply and demand fundamentals have continued to hold up outside of mining-exposed Perth and Brisbane. In the US, REITs returned -2.19% in USD terms, although it remains one of the most resilient high-yield sectors and popular for dividend and retirement portfolios, attracting large inflows of foreign capital.
Australian bonds returned a modest 0.26% in April as a rise in longer-dated yields constrained bond values. Recent declines in share and oil prices have made low risk assets attractive, although confidence is slowly returning to the market. The Australian 10-year Treasury yield rose from 2.49 to 2.52 after reaching a high of 2.65 during the month, while 2-year yields fell slightly from 1.89 to 1.86. The Bank of America Merrill Lynch US High Yield Option-Adjusted Spread fell from 8.37 to 7.59 during April, easing recession worries. Government bond yields underwent significant expansion in April, despite a softening in the Fed’s outlook and the ECB’s expanded asset purchase programme.
Read the full market update here – Monthly Market Update – April 2016