June 2010 - Market Review

The market turmoil that occurred in May continued to impact investor sentiment into June. The declining likelihood of a recovery in the US along with continued speculation surrounding bailout packages for European sovereigns and question marks around growth in China, eliminated any hope of a relief rally in June.

Financial Markets

Equity markets fell, as early gains were more than offset by the negative returns experienced in the last week of the month. In the Australian market investors flocked from pro-cyclical stocks to more defensive sectors, with the Industrials, Consumer Discretionary and Financials sectors being the hardest hit. Conversely, the Telecommunications, Utilities and Consumer Staples sectors posted the greatest returns. Material stocks were impacted by the 'flight to safety', along with the continued impact of the Resource Super Profit Tax debate. However, as investors fled to gold stocks, the sector held up relatively well.

In the World bond markets, the price of government bonds rallied to exceptionally low levels as investors continued to move to the 'safety' of US and German government bonds. Australians government bonds performed in a similar fashion, with the RBA keeping cash rates on hold during June.

Despite equity markets appearing to be cheap based on forward earnings, the mood in the markets has returned to one of caution, as demonstrated by the recent de-risking by investors and the 'flight to safety'. Question marks remain with regards to the size and timing of the recovery in the developed markets and whether the emerging markets are strong enough to drive global economic growth in the absence of developed world growth. Sovereign bond yields appear to be expensive and are discounting a recession. With regards to Europe, investors will need to see a combined political effort to regain confidence.

Source: JANA Investment Advisers Pty Ltd