August was a strong month for growth assets with share market returns ranging from 2.5% to 8%. This is perplexing when we consider that COVID-19 cases globally are now over 25 million and the pandemic is not contained in some countries/regions. However, central banks globally continue their “whatever it takes” rhetoric with the US Federal Reserve de-prioritising its historical 2% inflation rate target in favour of a new “inflation averaging” framework that will allow inflation to run above the previous 2% target before any central bank intervention i.e. interest rate hikes. This change in policy saw yield curves steepen which led to losses for traditionally long duration fixed income benchmarks for the month.
Australian Gross Domestic Product (GDP) fell 7% in the June quarter, following a 0.3% fall in the March quarter. This confirms that Australia has entered its first recession in almost 30 years. The RBA still remains on hold however at their September meeting they announced that they have extended their Term Funding Facility to $A200bn that will enable commercial lenders to borrow at 0.25% for three years.
The Australian equity market gained 3.1% for the month with the Technology and Consumer Discretionary sectors the strongest contributors to performance whilst Utilities and Communication Services were two of the poorer performing sectors for August. Reporting season saw steep falls in profits for many companies due to COVID; market participants looked through past results, focusing instead on forward guidance on earnings. The ASX Small Ordinaries rose by 7.2% for the month. Australian listed property returned 8.0% in August as reporting season wasn’t as bad as the market was anticipating.
International equities rose by 6.2% on a currency-hedged basis. A higher AUD (up 3.5% against the USD to close at US$0.739, and modestly higher against other currencies) reduced the return for unhedged investors to +3.5% for the month.
The Australian yield curve lifted in August with the 10-year government bond yield rising by 16bps to 0.98% whilst the 2-year government bond yield fell by 2bps to 0.25%. In the US both the 10-year and 2-year government bond yields rose, the 10-year by 18bps to close at 0.71% and the 2 year by 2bps to close at 0.13%.
Benchmark Returns 31 August 2020
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