Market Commentary - June
Glenmore Asset Management
Globally equity markets were positive in June. In the US, the S&P 500 rose +6.5%, the Nasdaq was up +6.6%, whilst in the UK, the FTSE 100 appreciated +1.2%. The strength in the US indices was again driven by mega cap technology stocks. In Australia, the All Ordinaries Accumulation Index rose +1.94%. Materials and Financials were the top performing sectors, whilst Healthcare underperformed (driven by a negative earnings update from index heavyweight CSL). On the ASX, large cap stocks outperformed small caps, continuing a trend that has been in place for the last 18 months. We believe this trend will reverse once there is more clarity over the number of interest rate hikes required by the RBA to reduce inflation to its targeted 2-3% range, which should see small/mid caps on the ASX perform strongly vs large caps.
Bond yields in both Australia and the US increased, with the Australian 10 year bond rate rising +42bp to close at 4.02%, whilst its US counterpart rose +22bp to 3.88%. In both cases, increased investor expectations of "higher inflation for longer" was the driver, with inflation proving more difficult to reduce to targeted levels than central banks would like. Consumer spending in particular, continues to be more resilient than expected despite ongoing headwinds from cost of living pressures.
Whilst investor sentiment remains very cautious towards small/mid cap stocks, we continue to see numerous examples of mis priced stocks, which are well positioned to outperform once the current interest rate hiking cycle is complete. At this stage, our view is that the RBA will increase rates 2-3 more times to bring inflation to acceptable levels. Given the lagged impact of monetary policy, we expect inflation to continue to fall over the next 6-12 months.
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