Market Commentary

The S&P/ASX 200 Accumulation Index returned 1.7% during May. Global equity markets fell sharply in the month, with the Australian market bucking the trend to post a positive return. Developed markets marginally outperformed emerging markets which also posted negative returns. In major global developed markets, Japan’s Nikkei 225 was one of the worst performers, down 7.4%. The S&P 500 was down 6.4% and the Euro Stoxx 50 was down 5.1%. The UK’s FTSE 100 returned -2.9%.

The cash rate remained unchanged in May at 1.50%. Following a speech from Governor Lowe in April indicating that the Reserve Bank of Australia (RBA) will “consider the case for lower interest rates” at their June meeting, the market has broadly priced in two 25 basis point rate cuts by September.

The latest domestic economic data releases were mixed in May. Employment growth rose a larger than expected 28,400 positions in April, but the unemployment rate edged higher to 5.2%. The NAB Business Conditions index fell 4 points to +3 in April, while Business Confidence was flat. Residential building approvals for April fell a larger than expected 4.7%, with year-on-year approvals remaining negative at -24.25%. National CoreLogic dwelling prices continued their fall, down 0.5% in May. This sees the year-on-year decline at -7.3%, the lowest since February 2009. Retail sales were higher than expected, up 0.3% in March.

In company specific news, Vocus Group received a non-binding takeover offer from EQT Infrastructure at AUD 5.25 per share. The stock was up 17.4% for the month. At the end of the month, Melco Resorts bought a 19.99% stake in Crown Resorts from majority shareholder CPH Crown Holdings at AUD 13.00 per share.

Sector returns were mixed during May. The best performing sector was Communications (7.3%). Other sectors posting positive returns included Healthcare (3.3%), Materials (3.1%), Real Estate (2.7%), Financials (2.6%), Consumer Discretionary (1.9%) and Industrials (0.1%). Consumer Staples (-4.2%) was the worst performing sector for May, with Information Technology (-4.0%), Energy (-3.8%) and Utilities (-0.8%) also posting negative returns.

The Communications sector was the strongest performer in May driven by sector heavyweight Telstra (8.0%). Nine Entertainment (18.9%) and Vocus Group (17.4%) also aided sector performance, with Vocus benefitting from a non-binding takeover offer.
The Healthcare sector performed strongly during the month. Sector heavyweights CSL (3.5%) and Cochlear (6.8%) were the main contributors to the sector.

The Materials sector also outperformed the market during May. A strong contribution came from Fortescue Metals (20.6%) supported by the rise in iron ore price and also the announcement of a special dividend. Rio Tinto (5.2%) and Newcrest Mining (8.8%) were also key drivers of sector performance this month.

The Energy sector also underperformed the market. Oil Search (-9.4%) and Santos (-6.3%) were the key detractors. The sector suffered due to a decline in crude oil prices in May, while Oil Search faced additional headwinds in the form of political tensions in Papua New Guinea due to a change in Prime Minister.

The Information Technology sector lagged the market. Link Administration (-21.4%) was sold off following a warning that earnings would be lower than expected. Computershare (-6.5%) also detracted from the sector.

The Consumer Staples sector was the largest underperformer in May. This was largely driven by Treasury Wine Estates (-12.5%) and A2 Milk (-8.0%) which both gave up last month’s outperformance on concerns over a slowdown in key export market, China.


The recent escalation in the US-China trade war, including the export restrictions placed on Huawei and technology sharing by US companies, has led to a now-consensus view that as well as correcting trade imbalances, the US administration is seeking to constrain the rise of China. If accurate, this portends a more protracted and divisive trade war with a permanent constraint on technology transfers.

This has seen a significant “risk-off” trade and flight to safety, which has seen bond yields fall precipitously. Equally, gold has rallied and growth sensitive commodities, such as oil and copper, have seen large price corrections. Equity markets have not avoided this de-risking event, with global markets selling off sharply in May. Furthermore, within equity markets, this flight to safety has also continued with defensive and yield sensitive sectors continuing to outperform.

Essentially, markets are pricing that this impasse will have significant implications for global growth and corporate profitability. The inversion of the US yield curve is read as implying a 40% probability of recession. These moves reflect a growing belief that President’s Trump and Xi will need to see significant economic pain before any compromise is sought, let alone achieved.

Investors are now paying a record premium for safety, which reflects the inherent uncertainty of a potential paradigm shift in the global economic framework, with Trump unilaterally dismantling the rules-based, free-trade system that has been built since the Second World War.

We have previously noted that the recent premium paid for safety is largely unprecedented and further, has never been sustained at such levels. While this remains the case, the change in the environment leaves us cautious in regard to how and when this premium will normalize. As a result, we are reluctant to further add to our exposure to the more economically sensitive parts of the market.