Gary Gleeson
(Melbourne Financial Management)
- In a month of weak equity markets, fixed interest was the best performing sector.
- All equities linked returns were negative, with the Australian market returning -3.7% for the month. This weakness follows five consecutive months of gains on global equity markets.
- A decline in the A$/US$ exchange rate limited the declined in unhedged equity returns to just 0.3%.
- Thermal and coking coal were higher in September, but most other hard commodities eased over the course of the month, including Iron Ore .
- During September, investor sentiment was impacted by a rising second wave of COVID infections in the Northern Hemisphere, despite a gradually improving experience in Australia.
International Equities
September returns were uniformly weak, with only Japan delivering a mildly positive month. The resignation process of Japan’s longest serving Prime Minister (Shinzo Abe, for health reasons) was finalised by the election of his successor Yoshihide Suga. Limited change in policy is expected from this transition. Hong Kong remains overshadowed by China’s moves to ensure that Party control of the territory is undisputed. China’s geopolitical ambitions may also be concerning investors with mainland markets also weak despite what appear to be strengthening economic conditions in the country. In the US, markets are likely focused on the economic implications of the continuing inability of the US Congress and Senate to agree on economic stimulus measures. US domiciled global stocks have dominated market returns this year, but domestic concerns may be taking over as the driver of market returns in the short term. In Europe, climbing COVID-19 infection rates weighed on sentiment, with the lack of progress on UK – European trade negotiations contributing to weakness in the Pound as well as the UK’s equity market.
Across the globe, government action has sustained economies and financial markets. Central Banks continue to provide support and many governments are starting to implement a second round of fiscal support. However, the looming US elections and the phasing out of some government emergency support measures provide potential for market volatility in the December quarter.
Australian Equities
The Australian market fell 3.7% in September. Only the Healthcare sector delivered a positive return in the month. The market was heavily influenced by moves in the US, with little domestic news to diminish the influence of a negative overseas market. Despite a significant (6.8%) decline in September, Information Technology easily retains the position of strongest returning sector for the quarter. Companies benefiting from a move on-line and access to global markets remain a sweet spot for investors. Despite signs that the Australian housing market is holding up relatively well and the announcement in September that consumer lending regulations would be lightened, banks continue to lack support from investors, with financial stocks dropping 6.1% last month.
Energy related companies did poorly as oil prices remain low due to lower demand and increased supply. Oil prices in US$ fell almost 8% in September. However, analysts’ forecast earnings revisions turned positive following the August reporting season, with the overall market result no worse than expected. This provides some reason to hope for better returns from the sector in the coming months.
The RBA, the US Fed and other central banks have reiterated their commitment to low interest rates and support for bank lending and funding several times in the past few months. Most recently, both central banks have highlighted that their economies need additional fiscal stimulus to maximise the chances of recovery as we learn to live with COVID – at least until a vaccine is confirmed. These views have possibly influenced additional fiscal initiatives put in place by governments. Bond markets saw a brief rise in interest rates in August which has largely retraced in September leaving fixed interest returns positive for the month. Australian 10 Year bond yields fell from 0.98% to 0.84% prior to the budget announcement in October. There was some speculation that the RBA may cut target rates slightly in the short term, but this did not eventuate. However, indications from Reserve Bank officials that additional monetary policy measures would be considered in the future did contribute to the decline in interest rates across the yield curve.
The A$ fell 3.3% in September against the US$, finishing the month at US 71.1 cents after the US$ reversed some of its recent weakness. Against the Euro, the A$ was down 1.9%. The A$’s fall in September extends the pattern of the A$ being weaker in periods of decline in share markets.
Outlook and Portfolio Positioning
The December quarter is shaping up as a potentially difficult one for financial markets, as the strong momentum in share prices that had been in place since the late March recovery ended in September. Uncertainty over the US election, rising COVID-19 infections and the removal of some of the emergency economic support measures all add an element of additional risk and uncertainty to the months ahead. Notwithstanding this heightened uncertainty, some recent positive global economic data and the ongoing commitment to exceedingly low interest rates could continue to provide the basis of support for share markets.
Within the equity market rally that has dominated share markets for much of the past 6 months, there has been considerable disparity between movements in prices across sectors and styles. As a result, valuations are not uniformly expensive despite the broader rally. Therefore, should the uncertainty in the months ahead trigger a broad correction on equity markets, opportunities to buy selected under priced assets may emerge. Infrastructure, listed property and traditional “value” sectors (e.g. banks) are all currently trading well below the relative valuation peaks reached by “growth” sectors such as healthcare and information technology.
Opportunities within the cash and fixed interest asset classes are increasingly difficult to identify. Falling bond yields and rising prices for corporate debt securities continue to reduce prospective returns. Domestically, returns from many cash styled investments have effectively hit zero on a post fee basis as the flood of liquidity on money markets has pushed interbank lending and bank bill yields to the bottom of the Reserve Bank cash rate corridor range. This reality will encourage more investors to move out of defensive assets, although caution should be applied to building more equity risk in portfolios at a time of extended valuations and unusually high macro-economic uncertainty. The role of Alternative investments, which theoretically should have limited equity market risk exposure, may need to take on increased importance in portfolios if overall returns are to be maintained above inflation.
Yours faithfully,
Gary Gleeson
BBus(Ec&Fin), MAppFin, CFP®, SSATM
Principal | MFM Group
Important Information
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged)
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