Sharp falls on the Chinese equity market and weaker commodity prices combined to push the Australian dollar to a six year low in July 2015.
In China, the Shanghai A shares Index, which had rallied an incredible 150+% in 12 months, plunged 22% from its peak in June and a further 14.3% in July, as more than 60% of all listed stocks were suspended from trading. The Chinese authorities initially responded with interest rate cuts and declared its official pension funds could invest in stocks for the first time. This was followed by Government bans on short selling; IPO's and further sales by major company shareholders.
These measures appeared to stem the bleeding, but many observers remain concerned about longer term financial or economic damage.
The prospect of a potentially negative impact on Chinese commodity demand also saw bulk, base and precious metal prices retreat sharply in July, as iron ore fell 8%, copper dropped 10% and gold eased 7%.The Chinese share market rout, weaker commodity prices and a firmer US currency also combined to push the Australian Dollar 5.2% lower against the US Dollar to US73.08 cents, after hitting an intra-month low of US72.35 cents. This was the lowest level in the local currency since April 2009. The trade-weighted index also fell 3.8%.
The Reserve Bank of Australia has been consistently calling for a lower Australian currency and it appears that this somewhat cushioned the impact on local resource stocks (with the S&P/ASX Resources Index down 2.0%); while the overall Australian equity market rallied 4.3% in July and outperformed most of its international peers.
Within the Ausbil Portfolios, our key thematic approach has been to favour international earnings streams, housing related sectors and high yielding sectors with earnings growth. In this period of sustained Australian currency weakness, we continue to target a series of Australian companies that will benefit significantly from underlying global growth and the strong US dollar. We are also maintaining a cautious approach to resource and energy stocks as commodity prices remain subdued.