Equity markets rebounded over September, closing out a mixed and volatile third quarter with Hedged Overseas Developed Shares increasing by 2.3%.
Investors looked past global trade friction, softer global manufacturing activities and macro uncertainties, with additional monetary stimulus helping to alleviate investor concerns.
Investors generally displayed a risk-on sentiment over the month, favouring small caps, high beta and low volatility stocks. The European Central Bank (ECB) cut its overnight rate to -0.5% and revived its quantitative easing program. The Federal Reserve (Fed) also cut its rate by 25bps, while the People’s Bank of China (PBoC) cut its reserve ratios.
Further easing in emerging markets, including Brazil and Russia, boosted emerging markets performance by 1.8% over September, recovering slightly from August. Value stocks outperformed growth stocks during the month, while momentum factors weakened. Within sectors, Energy (+4.5%) recovered from a negative return in August and Utilities (+3.5%) also performed strongly over September.
Geopolitical risks remained significant, with the UK Supreme Court ruling that Prime Minister Boris Johnson’s suspension of Parliament was illegal, and persisting uncertainty around Brexit continues to threaten a recession in the UK.
US House of Representatives Speaker Nancy Pelosi announced an impeachment inquiry against President Trump, while mixed signals on the US-China trade negotiations, ongoing protests in Hong Kong, and attacks on Saudi Arabia’s oil facilities largely contributed to macroeconomic uncertainty. The US Dollar gained against the Yuan and the Euro, but weakened against the British Pound, driven by the lower probability of a no-deal Brexit. Emerging market currencies strengthened on the back of easing monetary policies, and emerging market debt rebounded, partly due to reversing capital flows.
The US Treasury yield curve steepened in September, driven by the expectation of a less dovish stance by the Fed. Meanwhile, bond markets underperformed as sovereign bond yields rose from August lows, despite further cuts in interest rates. The risk-on sentiment from investors and easing financial environment saw high yield bonds improve. However, there are increasing concerns surrounding the effectiveness of quantitative easing.
The Australian equity market picked up from August, with the S&P/ASX300 improving its performance by 1.9%, marginally underperforming its hedged international counterpart by 0.4%. Domestic small caps increased by 2.6% as investors recovered slightly from economic fears displayed over August. Energy (+4.5%) and Financials (+4.2%) were the best performing sectors, while the weakest performing sectors were Communication Services (-2.9%) and Real Estate (-2.3%).
- The Reserve Bank of Australia (RBA) decided to lower the cash rate by 25 basis points in its early October meeting to 0.75% per annum (pa). RBA Governor, Philip Lowe, noted that the outlook for the global economy remains reasonable, however risks are tilted to the downside due to trade disputes and a slowdown in international trade, as businesses scale back future spending plans as a result of increased uncertainty. Interest rates around the world are quite low and further monetary easing is expected, as central banks respond to the subdued inflationary environment.
- The Australian economy grew 1.4% over the year to June quarter, which was weaker than expected. Employment growth has continued strongly, despite the unemployment rate recently remaining steady at 5.3% over recent months. Inflation pressures remain subdued and this is likely to continue for some time. The RBA estimates underlying inflation to be just under 2.0% over 2020 and to move slightly above 2.0% over 2021. There are tentative signs that house prices are now stabilising in Sydney and Melbourne, with credit conditions also stabilising. The recent decision to lower the cash rate is aimed at filling the spare capacity within the economy, assisting in supporting employment and income growth and to provide more stable progress towards the inflation target. The Board has noted that is reasonable to expect an extended period of low interest rates in order to reach full employment and achieve the inflation target in Australia.
- Australian seasonally adjusted employment increased by 34,700 in August, above expectations for a 15,000 rise while July figures were revised to an increase of 36,400. The unemployment rate increased to 5.3% for August, above expectations for 5.2%. The participation rate increased to 66.2%, above expectations for 66.0%. Part time jobs increased by 50,200 and full time jobs decreased by 15,500.
- Australian building approvals decreased 1.1% month-on-month to be down 21.5% for the year to August, compared to previous levels of -9.7% and -28.2% (revised) for respective periods ending July.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 47.8 in September, below consensus for 50.0, and below the 49.1 recorded in August. Of the 18 manufacturing industries, Miscellaneous Manufacturing, Food, Beverage and Tobacco Products and Chemical Products were the top contributors, while Apparel, Leather and Allied Products, Printing & Related Support Activities and Wood Products were the largest detractors over the month. The ISM Non-Manufacturing Index recorded 52.6 in September, below consensus for 55.0 and below the 56.4 for August. Of the 18 nonmanufacturing industries, the top performers in September were Utilities, Retail Trade and Construction. Educational Services, Other Services, Real Estate, Rental and Leasing and Wholesale Trade were the four industries which reported a decrease over the month.
- US Non-Farm Payrolls increased by 136,000 in September, below the previous 168,000 increase (revised) for August. The unemployment rate decreased to 3.5% over September.
- US gross domestic product (GDP) third estimate for Q2 2019 is 2.0% quarter on quarter (QoQ) annualised, in line with expectations.
- The Caixin Manufacturing PMI in China recorded 51.4 in September, above expectations for 50.2. The indicator signalled an improvement in the overall health of the sector for the second month in a row.
- A preliminary estimate of the European Core Consumer Price Index (CPI) recorded 1.0% over the year to September, in line with expectations for 1.0%.
- The Eurozone composite PMI decreased to 50.1 in September, below expectations for 50.4 and below 51.9 recorded for August.
- The final estimate recorded for Q2 2019 Eurozone seasonally adjusted GDP was 1.2% for year-on-year (YoY) and 0.2% QoQ.
The Australian equity market underperformed its hedged overseas counterpart index over the month, as the S&P/ASX 300 Index increased 1.9%. The ASX Small was the strongest relative performer, increasing 2.6%, while the S&P/ASX Mid 50 was the weakest, increasing 0.9% over the month.
The best performing sectors were Energy (+4.5%) and Financials (+4.2%), while the weakest performing sectors were Communication Services (-2.9%) and Real Estate (-2.3%). The largest positive stock contributors to the index return were NAB, ANZ and Westpac, with absolute returns of 9.1%, 7.2% and 5.6% respectively. In contrast, the most significant detractors were CSL, Telstra and Newcrest Mining with absolute returns of -2.9%, -5.4% and -6.0%, respectively.
The broad MSCI World ex Australia (NR) Index increased 2.3% in hedged terms and 2.0% in unhedged terms over the month, as the Australian dollar (AUD) appreciated against most major currencies. The strongest performing sectors were Financials (+5.3%) and Energy (+4.5%), while Healthcare (-0.2%) and Communication Services (0.1%) were the worst performers.
In AUD terms, both the Global Small Cap and Emerging Market sectors was up 2.0% and 1.8% respectively over September.
Over September, the NASDAQ increased 0.5%, the S&P 500 Composite Index increased 1.9% and the Dow Jones Industrial Average also increased 2.1%, all in USD terms. In local currency terms, major European equity markets also experienced positive returns as the FTSE 100 (UK) increased 3.0%, the CAC 40 (France) increased by 3.7% and the DAX 30 (Germany) increased by 4.1%. Positive returns were experienced in Asia also, as the Japanese TOPIX (6.0%), the Hang Seng (1.9%), the Chinese SSE Composite (0.7%) and the Indian S&P BSE 500 (4.0%) increased over September.
The Real Assets sector experienced mixed returns. The FTSE Global Core Infrastructure index increased by 1.9% and the Global Real Estate Investment Trusts (REITs) increased 2.7% over the month (both in AUD hedged terms). The Domestic REITs decreased -2.7% over September, while Australian Direct Property (NAV) returned 0.2% on a one-month lagged basis.
Global bond markets were broadly negative over September as yields increased across most major regions. The Barclays Capital Global Aggregate Bond Index (Hedged) decreased -0.6% over the month and the FTSE World Government Bond (ex-Australia) Index (Hedged) also decreased -0.7%. Ten-year bond yields increased in the US (+16bps to 1.67%), Japan (+6bps to -0.22%) and Germany (+17bps to -0.57%), and remained flat in the UK (0.40%). Two-year bond yields experienced mixed movements over the month with US (+13bps to 1.66%) and German (+17bps to -0.74%) bond yields increasing, whilst UK (-3bps to 0.37%) and Japanese bond yields (-2bps to -0.32%) decreased.
Returns for existing domestic bond holders were negative over September, with 10-year yields (+12bps to 1.01%), five-year yields (+9bps to 0.78%) and two-year yields (+1bp to 0.73%) all increasing. Of the Bloomberg Ausbond indices, the Inflation Index and Bank Bill Index produced the highest return, increasing 0.1% over the month.
The AUD Trade Weighted Index increased to 59.2 over September, up 0.5% from the previous month. The AUD appreciated against the major currencies Euro (+1.5%), Japanese Yen (+1.8%) and the US dollar (+0.1%) but fell against Pound Sterling (-0.4%).
Iron Ore increased 7.5% over September, finishing the month at $93.0 per metric tonne. The S&P GSCI Commodity Total Return Index increased 1.6% over the month. Gold prices finished the month at US$1,473.85 per ounce, decreasing -3.6% over the period, while the oil price increased +0.7% to $60.89 per barrel over September.
Source: Mercer IS