Cash

The Reserve Bank of Australia (RBA) left the cash rate unchanged at 5.75% during the month. The UBS Bank Bill index returned 0.5% for the month.

Australian Bonds

The UBSA Composite Bond Index (All Maturities) returned 0.2%, marginally underperforming the UBSA Bank Bill Index (+0.5%), as yields rose across all maturities in anticipation of positive economic data released during the month.

This data helped push yields higher, moderating prices. The data included unemployment that fell to a new 30 year low, as employment growth rose significantly above estimates registering the best monthly performance in 18 months. First quarter GDP surprised on the upside, with year-on-year growth at 3.1%. Private sector credit and housing credit registered significant gains, rising 14.1% and 13.0% respectively for the year to date.

The 3-Year and 10-Year bond yields ended the month at 5.8% (+8bps) and 5.8% (+4bps) respectively.

International Bonds

June was a month of two halves for international fixed interest markets. The first part of the month was dominated by inflation fears with US 10-Year bond yields rising (+25bps), pushing bond markets into the red, before yields fell back following more cautious statement from the Federal Reserve. The bond market finished flat. The Lehman Global Aggregate Index (hedged, A$) returned 0.0%.

In the US the Federal Reserve reconfirmed its focus on both inflation and growth. The Federal Reserve's late June announcement stressed the need to manage growth, as it had begun to moderate from the highs of the first quarter when it hit 5.6% (annualised). Previously US growth was robust enough for the Fed to focus solely on managing inflation through rate rises. US 3-Year and 10-Year bond yields ended the month at 5.1% (+12bp) and 5.1% (+9bp) respectively. Yields were higher for corporate bonds representing the greater risk of default in a high interest rate environment.

In Europe, inflation pressures gathered pace. The International Monetary Fund (IMF) cautioned the European Central Bank (ECB) about raising interest rates. The IMF noted that "the conditions for continued and thus more substantial tightening do not seem in place". European 3-Year and 10-Year bond yields ended the month at 3.7% (+16bp) and 4.1% (+9bp) respectively.

In Japan, despite signals from a Bank of Japan (BoJ) board member that the Bank intended to keep borrowing costs at near zero for "some time", the market continued to anticipate a rate rise in July/August. Japanese 3-Year and 10-Year bond yields ended the month at 1.0% (+2bp) and 1.9% (+7bp) respectively.

Australian Listed Property Securities

The S&P/ASX 300 Property Accumulation Index (+6.2%) delivering its highest monthly return since inception of the index. Property trusts outperformed as inflation fears dominated most of the month. Property trusts are viewed by investors as an inflation hedge, offer a high headline yield and are more defensive than other sectors.

The best performing sectors were Industrial (+6.8%) and Diversified (+5.5%). The worst performing sectors were Diversified Property (+3.6%) and Retail (+4.5%). The best performing stock was Macquarie Goodman (+8.4%) as investors continued to price the stock on anticipated deal flows in Europe and Asia.

International Listed Property Securities

Global listed property securities outperformed the broader share markets, clawing back their May losses. In what was a very strong month for property, investors rotated into the more defensive sectors amid market volatility. The UBS Global Investors hedged Index delivered (+4.5%) for the month.

The best performing markets were Australia (+6.2%), North America (+5.4%) and Continental Europe (+3.8%). The worst performing markets were the Singapore (-3.1%) and Japan (-2.2%).

The office sector is finally having its day in the sun, with strong returns across the globe. Retail trusts still generated positive performance but have found more recent conditions challenging with a rising interest rate environment and continued high petrol prices dampening consumer spending.

Australian Shares

The S&P/ASX 300 Accumulation Index (+2.0%) performed solidly, with most performance coming in the last two days of the month (+2.6%).

The best performing sectors were Property Trusts (+6.2%), Utilities (+3.8%), and Financials (+3.5%). The worst performing sectors were Telecommunication Services (-2.1%) and Consumer Discretionary (-0.6%). Materials (+0.5%) and Energy (+2.1%), the primary drivers of the market this year (+50.3% and +34.7%) fell back as commodity prices weakened and British Petroleum suggested that spare oil capacity would double by 2010.

The best performing stocks generally had the lowest beta and highest duration. Low beta stocks are those stocks with the lowest correlation to the movement of the market, such as Macquarie Communications Infrastructure Group (+13.6%). High duration stocks, like Cochlear Limited (+11.0%), are those stocks in the market that are less impacted by interest rate adjustments.

Merger and acquisition activity continue to underpin the market return. Tabcorp (-0.1%) bid for UNiTAB (+1.1%). Macquarie Bank (+7.8%) purchased Stagecoach UK ($482 million) and bid for control of PCCW ($7 billion) and SAA Marine ($2 billion) the largest port operator in the US. In private equity, Macquarie Capital Alliance (-4.9%) purchased ASI Holdings ($482), and veteran US buyout firm KKR took control of Bramble's (+3.2%) waste management division.

June also witnessed a significant number of profit warnings in response to both higher input prices and slower consumer spending.

International Shares

The MSCI World Ex Australia Index (net div) in $A unhedged (+1.4%) significantly outperformed the hedged return (+0.6%) as the Australian dollar fell against the US dollar (-1.4%), Euro (-1.0%) and the UK pound (-0.3%).

The best performing sectors were Consumer Staples (+1.9%), Energy (+1.5%) and Utilities (+1.3%). The worst performing sectors were Information Technology (-1.2%) and Consumer Discretionary (-0.4%). Material stocks fell 0.3% in June and 2.9% in the June quarter having rising 34.4% in the past 12 months.

US (S&P 500: +0.0%) stocks underperformed as inflationary themes played out. President George Bush's Council of Economic Advisers, was upbeat about the economic growth prospects despite the cautionary tone from the Federal Reserve. Consumer spending remained resilient rising by the largest amount in 10 months. Corporate profitability was strong with investment banks Lehman Brother (profit: +47%) and Bear Stearns (profit: +81%) reporting record profits as M&A activity reached record highs.

Europe (MSCI Europe: +0.8%) registered solid performance. The best performing markets were the UK (FTSE: +1.9%) and France (CAC: +0.7%). European business confidence reached a 5 year high as German retail sales increased and unemployment declined. European M&A remains robust with Dexia, Belgium's third largest bank, buying Denizbank (Turkey), Ferrovial winning control of BAA, and Goldman Sachs buying AB Ports that is the UK's second largest port operator. The upcoming float of part of the Russian oil firm OAO Rosneft ($14 billion), on the UK and Russian exchanges is likely to attract some of the excess liquidity in the market. The float will be the largest this year.

Japan (Nikkei 225: +0.2%) delivered more moderate performance as investors expected the BoJ to move to increase rates. The Japanese economy continued to show strength with first quarter GDP growing at 3.1% (annualised) fuelled by corporate spending, which increased at the fastest rate since 1990. International investors remain optimistic about the strength of the Japanese market with foreign ownership of Japanese shares reaching its third straight annual record in June.

A key challenge for global markets is the tighter monetary backdrop. The risk to equities markets will be if policymakers raise interest rates to the point where they slow economic growth and impact significantly on company profits.

Global Emerging Markets

The MSCI EM in $A (with div reinvested) returned 1.2%. The best performing regions were Eastern Europe and Emerging Asia. The flight away from emerging markets during the quarter (-8.2%) saw the exit of some global share managers with a small exposure to the sector providing good buying opportunities for dedicated emerging market managers.

Global emerging markets continue to be underpinned by strong fundamentals. These nations in Asia, Europe and Latin America are structurally more sound than they were. This makes them less prone to shocks that can have a ripple effect. It is no surprise that we have seen high returns from global emerging markets in the last 12 months as these economies have been re-rated by investors.