Monthly economic update with MLC, July 2020

Funds Management

by Clive Tompkins

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MLC Asset Management Senior Economist Bob Cunneen discusses the strong return in global shares over July, compared with the Australian share market's modest gains.

Global share markets delivered a strong return in July with a 4 per cent gain. However, we have to bear in mind that we also saw a very strong Australian dollar performance, so that reduced the gain on an unhedged basis only down to 1.1 per cent. The key drivers of the strong global share performance were a very robust gain in the United States, with the Standard and Poor's 500 Index up more than 5 per cent. The other share market that performed very strongly was China's share market, which recorded a gain of more than 9 per cent.

There were a couple of key drivers for the robust performance in July. In the case of both the US and China, we saw very strong gains for retail spending as well as industrial production. So, that indicates that there is a recovery story going on. There's also very supportive measures by the central banks in both countries. We've got very low interest rates. We've also seen the central banks expand their balance sheets. For the Chinese share market in particular, what we’ve seen is the central bank give guidance to the banks themselves to increase lending. So, that's very supportive for shares.

By contrast, the Australian share market only delivered a modest gain of 0.6 per cent in July. There were a couple of strong sectors. The Material sector, such as resources shares, delivered very strong gains of up 4 per cent for July because of the strong gains in commodity prices. So, if we looked at iron ore, the iron ore price is above US$100 a ton. If we look at the gold price, it's approaching $2,000 per ton. So, these are very strong indicators for corporate profits in the mining sector.

Now, by contrast, the energy sector fell. So, the energy sector, if we think about oil prices, they're still weak. There's also concerns about asset write-downs in that sector. So, the Australian share market delivered a very modest performance in July.

Regrettably, the Australian economy still looks like it is weak. We have seen some positive data in terms of the June employment, with a gain of more than 200,000 jobs. However, we've seen a continued rise in the unemployment rate, such that the unemployment rate now stands at 7.4 per cent, compared to 5 per cent earlier this year.

So, the virus is still having an impact. And we can see that particularly with July's consumer sentiment. News that the Melbourne virus outbreak has required a lockdown in Melbourne itself has unfortunately caused a fall in consumer sentiment. So, this potentially indicates that the recovery for the Australian economy will be further delayed, but bearing in mind that we've got very low interest rates, and we've got the Federal Government with a very assertive stimulus program, that ultimately suggests there is a recovery on the horizon.


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