Shaw and Partners

The Australian share market, as measured by the S&P/ASX 300 Index, rose 1.0% during the June 2023 quarter.

The quarter began with a 1.9% return in April, followed by a -2.5% fall in May, amidst concerns around the US debt ceiling, before rising 1.7% in June, despite the RBA continuing to hike rates to the surprise of many economists, with retail spending resilience showing the health of the economy while headline inflation came in lower than expected.

During the quarter, there were concerns around the resilience of the Australian consumer of retailers, as broker surveys showed that consumers were starting to experience the negative impact of higher interest rates because higher mortgage payments were eating into the savings buffers built up during COVID. Several retailers downgraded their guidance or warned of tougher conditions, including Adairs, Baby Bunting, Best & Less, Super Retailer Group and Universal Store. With core inflation remaining persistent and employment data still strong, economists are predicting that there are further rate hikes to come.

Dividend yield was steady during the quarter. The trailing yield on the Australian share market was 5.02% at the end of June, compared to 4.31% at the end of March. Dividend income across the market totalled 0.65% for the quarter, led by the Banks sector with a 1.90% income return, followed by REITs at 1.65% and Financial Services at 1.59%.

The Australian government bond yield curve inverted during the quarter, as the shorter end of the yield curve rose significantly more than the longer end. The yield on the Australian 3-year government bond rose significantly from 2.92% to 4.05%. The Australian 10-year government bond yield, which gauges inflationary expectations more accurately, finished the quarter at 4.02%, significantly above the March end level of 3.31%. The Reserve Bank of Australia (RBA) increased the cash rate by 0.25% in each month during the quarter, leaving the cash rate at 4.10% at the end of June, aiming to prevent a wage-price spiral amidst continuing strong employment and relatively low productivity gains.

The best performing Australian equity sector was Software & Services, up 19.4% including dividends. The largest companies in the sector, Wisetech Global (WTC) and Xero (XRO), rose 22.5% and 33.0% respectively. Strong performers amongst smaller companies in the sector included Megaport (MP1; +75.2%) and Life360 (360; +53.8%). Insurance was the second-best performing sector in the quarter, rising 10.7% including dividends. This was driven by strong performance from Insurance Australia Group (IAG; +21.5%), which provided a positive trading update, and NIB Holdings (NHF; +19.9%), which provided a positive update on its outlook. All seven companies in the sector had positive returns.

Top performers during the quarter came from various sectors, with no clear theme. Leo Lithium (LLL; +105.8%) was the best performing stock in the S&P/ASX 300 index, after announcing a Cooperation Agreement with Ganfeng Lithium and raising equity to ensure it was fully funded for its Goulamina Stage 1 development. It was followed by Megaport (MP1; +75.2%), which announced FY23 and FY24 EBITDA guidance that was significantly above market consensus during its Q3 market update, and Temple & Webster Group (TPW; +70.9%). Amongst larger companies, XRO (+33.0%), James Hardie Industries (JHX; +24.9%) and Pilbara Minerals (PLS; +24.1%) were the strongest performers.

Food, Beverage & Tobacco was the bottom-performing sector during the quarter, falling -13.2% including dividends. The two largest companies in the sector, Treasury Wine Estates (TWE) and a2 Milk (A2M) returned -14.1% and -15.8% respectively. TWE was negatively impacted by earnings guidance that was lower than the market expected, due to declines in Americas & Premium Brands. The second worst-performing sector was Automobiles & Components, which fell -9.8% including dividends. The three holdings in the sector each finished with negative returns, with PWR Holdings (PWH; -13.0%) being the bottom performer.

The largest component of the S&P/ASX 300 Index remains the Materials sector with a 24.6% index weight, followed by the Banks sector with a 18.8% index weight. The Banks sector had the stronger quarter of the two sectors, rising 1.8% including dividends. Amongst the major banks, ANZ Group (ANZ; +3.4%) and Commonwealth Bank of Australia (CBA; +2.0%) were the better performers, while Bank of Queensland (BOQ; -15.4%) was the laggard in the sector, with its results showing the negative impact of competition on its Net Interest Margin and growing expenses driven by inflation and technology spend.

ex rising 6.7% in US dollar terms. The 0.3% appreciation of the US dollar versus the Australian dollar meant the returns were slightly higher in Australian dollar terms than US dollar terms. Despite the most attention being focused on the Nasdaq, which returned 13.1% during the quarter, MSCI Japan was the best-performing index, gaining 15.6% during the quarter. Rounding out the major indices were the S&P 500 and the Euro STOXX, which rose 8.7% and 2.7% respectively.

US bond yields remained volatile during the quarter. The US 10-year government bond yield finished June at 3.84%, near its peak of 3.89% during the quarter. The US yield curve finished the quarter even more inverted than the previous quarter, signalling a potential recession. The difference between US 10-year and US 2-year government bond yields is now -1.05%, compared to -0.56% at the end of March. As discussed above, the Australian yield curve also finished inverted at the end of June, albeit to a much smaller extent, as Australian short-term yields fell significantly more than long-term yields. Managing inflation continues to be the main concern for central banks.

The Bloomberg AusBond Composite (0+Y) index returned -2.9% over the quarter as longer-term government bond yields rose, offsetting the positive impact of lower credit spreads, while 3-month Bank Bills (BBSW) rose to 4.351%. The 3-month BBSW is pricing a high chance of one more rate rise in the next three months, while cash futures as of 30 June forecasted a peak cash rate of 4.56%.

Market volatility, as measured by the S&P VIX index, fell during the June quarter, as concerns of contagion from Silicon Valley Bank and Credit Suisse abated. Implied volatility on ASX/S&P 200 index options was lower than the previous quarter on average, finishing June at 10.78%.