Risk markets strengthened further as at last month, helped by a rise in oil prices this year, signs of a Q2 rebound in US economic growth and growing acceptance to the fact the Federal Reserve may raise US interest rates.
World equities (ex-Australia) in local currency terms rose 1.7%. Australian equities outperformed on a local currency basis with a 3.1% gain, helped by the RBA’s rate cut and an associated weakening in the $A. On an unhedged basis, global stocks outperformed local stocks, with a 5.8% gain in $A terms due to $A weakness.
The RBA rate cut also supported listed property and bonds, which gained 2.6% and 1.3% respectively.
Listed property remains the best performing asset class over the past 12 months.
Despite some strength in recent months, commodities remain the worst performing asset class on a 12-month basis.
Although risk markets have enjoyed a rally since mid-February, we retain a cautious view due to equity market valuations and sluggish earnings performance.
While recent US economic data suggests the economy has improved in Q2, there are mixed implications for risk markets. While the improvement should help support corporate earnings, there is the matter of risk with near-term increase in US interest rates and a higher $US to consider.
Domestically, the RBA reacted to the lower than expected March quarter consumer price index report by cutting rates, and leaving open for further rate cuts given it has forecast a sub-2% underlying inflation rate over the next year or so. The RBA now appears to be targeting a lift in wage inflation (from current levels of just over 2%), which in turn requires a lower unemployment rate and above-trend economic growth. If so, it should be positive for the economy and local equities, even at the risk of further inflating Sydney and Melbourne property markets.
As regards the commodity markets, cutbacks in US production has helped oil prices to firm, while weakening Chinese demand and still ample supply has produced a relapse in iron ore prices.
All up, we take a view not to be over exposed on growth assets, retain some exposure to the property sector and to unhedged international equities due to forecast weaker Australian dollar.