MONTHLY MARKET REPORT: JUNE 2020

Monthly Market Report: June 2020

Emerging Markets Rally in June

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP®

Developed Markets losing steam

Developed Markets Continue to Rally

In the month of June, international developed stock markets returned 3.42%. Pacific ex Japan and Europe ex UK recorded returns of 8.01% and 4.86%, respectively. The U.K. and Japan lagged the broader market. Through the first half of the year, the U.S. market is down -2.45% and, international developed markets are down -11.49%. Monetary and fiscal stimulus have helped prop up markets. The European Union is currently negotiating a ~$800 billion fiscal stimulus package while the U.S. government is also considering another round of fiscal stimulus.

Volatility increasing in emerging market equities

Chinese Equity Market Positive YTD

Broader emerging markets posted a 7.30% return for the month. China and Korea recorded returns of 8.98% and 8.09%, respectively. Russia and Mexico lagged other markets in June. The Chinese equity market is now positive for the year, recording a YTD return of 3.51%, which has outperformed other emerging and developed equity markets. China’s ability to control the spread of COVID-19 has helped its economy. Its coal consumption is already back to pre-pandemic levels as is oil demand. Chinese air traffic is down only 30% versus January levels. If other countries can enforce proper COVID-19 safety measures, then business activity will surely pick up.

Global Sector

Information Technology Pushes Market Higher

Materials and information technology recorded returns of 4.47% and 7.27%, respectively. Infrastructure and healthcare lagged other sectors in June. Information technology, healthcare, and telecommunications have positive returns through the first half of 2020. Information technology continues to lead the way as the products and services of many technology companies were instrumental in helping people and businesses operate normally; however, valuations are steadily increasing.

Domestic Equity Factors

Large-Cap Growth Stocks Continue to Outperform

In June, value underperformed growth in the small-cap space and large-cap space. Momentum recorded a gain of 4.06%. Relative valuations between value stocks and growth stocks are close to historical highs based on the price to book valuation metric. Growth stocks have held up better this year, but their future earnings may not justify the higher valuations. Momentum and large-cap growth strategies performed well during the past one- and five-year periods.

Foreign Equity Factors

Foreign Small-Cap Companies Bounce Back

In the international developed markets, value outperformed growth in the large-cap space, but underperformed in the small-cap space. Momentum recorded a gain of 4.57% while small-cap emerging market stocks posted a return of 7.80%. Foreign momentum strategies have performed well year to date and over the past twelve months.

Liquidity Providers

Interest Rates Remain Low

In June, the three-month Treasury bill index returned 0.01% for the month. Interest rates on Treasury bills and money market funds are close to 0%. Savers may face low rates for a long period of time, which will negatively impact retirees and people close to retirement. The CPI increased by 0.38% year over year through May.

Deflationary Hedges

Treasuries Continue to Reward Investors

The returns of deflationary hedges were mostly positive for the month. Emerging market bonds and short-term government bonds returned 2.91% and 0.07%, respectively. Long-term government bonds are up 20.97% year to date. The Bloomberg Barclays U.S. Agg Bond Index returned 0.63% in June. Riskier forms of credit such as high-yield bonds, leveraged loans, and BDCs recouped some of their losses from earlier in the year.

Inflation Sensitive Investments

Gold Prices Continue to Climb

Inflation-sensitive investment returns were mostly positive for the month. WTI crude oil posted a gain of 8.69%. Natural gas dropped by -10.78% in June. Gold bullion is up 16.73% YTD, outperforming many other assets. Gold miners have also outperformed as they provide levered exposure to the gold price. Inflation-indexed bonds have a positive return in 2020, but this is primarily due to the decrease in interest rates.

World Currencies

Australian Dollar Appreciates vs U.S. Dollar

Over the past three months, the U.S. dollar depreciated against most major currencies except the Japanese Yen and the British Pound. The unprecedented amounts of U.S. fiscal stimulus may weigh on the U.S. dollar in the medium-term to long-term.

Brandon Yee, CFA, CAIA – Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.

 

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