The Australian equity market (as measured by the S&P/ASX 200) underwent a chaotic and volatile three months and whilst providing some relief in July and August (off the back of a better-than-expected reporting season), reality set back in as the month of September gave most of the gains back, slumping (6.2%); the index ended the quarter up slightly (0.4%).
For the quarter, the Energy sector (+5.9%) continued to lead the way as supply constraints and production cuts forced oil and gas prices higher. Healthcare (+3.3%) and Information Technology (+2.9%) provided solid returns whilst the biggest laggards for the quarter were the so-called bond-proxy sectors, Utilities (-12.5%) and Real Estate (-6.2%).
All styles of equity investing were hurt during September. The ‘Growth’ style outperformed for the quarter, however ‘Value’ remains ahead year to date. In saying that, both styles have posted negative returns for the last 12 months.
Across the market spectrum, mid and small sized companies outperformed their larger counterparts in the quarter helped by a strong rally in July.
Negative quarterly performance across regions varied as hawkish central banks continued to implement aggressive tightening policies. The Federal Reserve, European Central Bank and Bank of England all raised interest rates in the quarter as September lived up to its historical standing of the worst month of the year.
The S&P 500 lost (-9.3%) for the month, (-5.0%) for the quarter, whilst the tech heavy Nasdaq lost (-10.4%) in September and (-3.9%) for the quarter. In Australian Dollar (AUD) terms, there were quarterly gains respectively of (+1.6%) and (+2.8%) with currency movements once again proving to be a strong contributor for unhedged strategies, as the AUD continued its freefall during the quarter.
In AUD terms, the broader global equity market (MSCI World NR AUD) provided a small gain of (0.3%) indicating the level of pressure US markets are currently facing; Eurozone equities (STOXX Europe 600 NR), experienced further declines (-4.1%) as the Russia/Ukraine conflict continued and concerns mounted over gas costs/shortages and recession; UK equities (FTSE 100 TR) fell (-4.4%), experiencing a tumultuous third quarter as the new leadership’s fiscal package was poorly received by markets and sent sterling to an all-time low versus the US dollar. Emerging markets (MSCI EM Index), unfortunately did not buck the trend this quarter against a backdrop of slowing global growth, heightened inflationary pressures and rising interest rates, falling (-5.4%). Asian markets (MSCI AC Asia Ex Japan) fared worse, falling (-7.8%) as investors continued to sell riskier assets with Chinese equities particularly hard hit as the government ramped up covid restrictions yet again; Latin America (MSCI EM Latin America Growth NR) however performed exceptionally well, surging (+11.0%), assisted by strong commodity prices and improving growth and inflation profiles.
The Australian listed property sector (S&P/ASX 200 A-REIT), after starting the quarter off with a bang, fell in August and September to end the quarter down (-6.7%). The continuing ascent of ‘real’ bond yields and heightened risk of recession being the major pain points for the sector. Despite a myriad of uncertainties, over 90% of AREITs provided some form of guidance for FY 2023.
Global listed property (unhedged) returned (-4.4%) for the quarter, outperforming the domestic market. The speed and level of increases in real interest rates over the quarter continued to impact REIT sentiment globally (especially in the US) while the sector continued to be weighed down by issues surrounding the China property sector and the European residential for-rent sector.
Global listed infrastructure (FTSE Global Core Infra 50/50 index unhedged) continued to provide some form of respite although not immune to selling pressure, returning a drop of (-2.5%), with further increases in real yields continuing to pressure the sector along with concerns regarding the economic outlook.
Global bond markets continued to sell off in the September quarter as major central banks went on the inflation offensive raising rates throughout the quarter. The 150bps in hikes from the Federal Reserve (US Central Bank), 150bps from the RBA (Reserve Bank of Australia), 125bps from the ECB (European Central Bank) and 100bps from the BoE (Bank of England) laid the foundations for sharp rises in bond yields across the board.
As inflation reached decade high peaks globally, central banks feverishly tried to control its acceleration, by scaling up the level of rate increases resulting in yields reaching levels not seen this century and pushing indices further into negative territory. Volatility settled slightly as the quarter came to a close and yields did stagnate, albeit slightly.
Yields on 10-year treasuries, both domestically and globally continued their volatile ride throughout the quarter. The 10-year Australian Treasury yield rose from 3.63% to 3.89%. The 10-year US Treasury yield rose from 3.02% to 3.79% by quarter end. Markets are now factoring in higher rates for longer.
Australian bonds (Bloomberg AusBond Govn 0+Yr) returned (-0.7%) whilst global bonds (BBgBarc Global Aggregate TR Hedged) returned (-3.9%). Credit markets sold off once again (spreads widened) with the sector impacted by the risk off environment and rising rates which may undermine further economic growth prospects. Spreads across most high yield jurisdictions widened causing negative returns across corporates, however, European investment grade and high yield, as well as emerging market credit, did fare much better on a relative basis although returns did remain negative.
Most currencies weakened versus the US dollar, lead by Emerging market currencies, as investors fled to the safety of the US dollar on rising global recession fears and the large and widening interest rate differentials between the US and other countries.
The September quarter saw markets take a roller-coaster ride caused by more events than a quarter should ever see, with investors balancing stubbornly high inflation with rising recession risks; all whilst waiting for any signs (data) that central banks might be done with their policy tightening. Every time investors had an inkling that a central bank pivot might be on the cards, central banks took it upon themselves to smack investors down with a continuation of outsized rate increases and/or more hawkish rhetoric regarding their laser focus on maintaining their inflation fighting objective.
Food and energy price inflation continued to hurt the European post-covid recovery effort as the impact of the Russia/Ukraine war continued to take its toll; whilst European government officials did their best to maintain a brave face as residential, commercial, and industrial energy prices soared to record highs. Officials scrambled to store as much energy as they could (at any cost) leading into the European winter, whilst Putin turned off the taps following moves by the Europeans and their allies to cap the price of Russian gas. This was followed by an attack on those same Russian pipelines that resulted in liquefied natural gas (LNG) spilling into the sea, setting off a blame-game chain reaction. Not to be outdone, UK Prime Minister Liz Truss decided to shake things up economically with a rather differentiated, ill-timed, and poorly communicated policy agenda which forced the Bank of England to intervene and stabilise UK government bonds and the currency, as both came under attack.
Asian and emerging markets continued to be driven by two main issues: China’s languishing economic growth due to their continuation with covid-zero policies; and significant US dollar strength causing added inflationary pressures for importers, particularly commodity importers. The Chinese economy faced increasing headwinds, already reeling from a property crash; with a continuation of covid-zero policies significantly hampering economic growth, rising unemployment, falling industrial production and not enough government stimulus to right the ship. We did see signs in the quarter of stimulus from both the government and the central bank, though relatively minor at this stage given the significance of the issues at hand, whilst we also saw a significant relaxation of covid policies in Hong Kong and Macau.
Geopolitically, tensions between China and the USA soared again regarding Taiwan’s sovereignty as the 3rd most powerful US government official flew into Taiwan as a show of both support and strength, not helping already heightened tensions regarding technology security and global semi-conductor supply. Chinese and Indian buying of Russian oil and gas also put these countries in the crosshairs of the allies, with both countries taking advantage of significantly reduced prices and constrained global supply whilst touting the need for their own energy security.
The US economy moved into bi-polar territory in the quarter with current data remaining relatively strong, whilst leading indicators turned more and more negative; putting the central bank between a rock and hard place. This meant an increasing risk of too many rate rises which may lead to a more painful recession, compared to a soft-landing scenario. The central bank made clear in the quarter that whilst inflation remained high, they would need to continue hiking rates with added emphasis and rhetoric around higher rates “for longer”. This took the wind out of any hope investors had regarding a pause and/or a pivot back to policy loosening. However, investors continued to try and read the tea leaves which put them front and centre of the central bank’s ire multiple times during the quarter.
The US labour market remained strong and whilst headline inflation started to abate given falling commodity and food prices, core inflation widened much to the distress of the central bank and President Biden’s administration. The Biden administration’s election policy promises didn’t help the inflation dynamic, with fiscal expansion making the central bank’s job even harder. The rapid pace of rate increases versus the rest of the world saw the US dollar surge, putting pressure on US exports which impacts US company revenues and earnings, particularly multi-national companies. More to come on this front in the period ahead.
Closer to home, we were once again reminded of our lucky country status, which still holds given the abundance of natural resources under our feet and our physical proximity (or lack thereof) to the rest of the world. This has meant that we’re approximately 6-8 months behind other parts of the world from an economic perspective but assisted by a commodities floor and a natural benefit in the falling Aussie dollar which makes our exports that much more competitive. Mixed data was also a feature of the Australian economy in the quarter, with rising business confidence, weak consumer confidence and retail sales which increased at a slower pace but remained very healthy versus pre-covid levels.
Like the USA, our labour market remained strong, with household and corporate balance sheets in excellent shape. However, labour shortages started to hit home and property market weakness from the peak has begun; but has yet to feel the full brunt of the 2.50% of rate increases we’ve seen in a short period of time. Inflation continued to push higher in the quarter forcing the central bank’s hand on outsized rate hikes, whilst the new Albanese government pushed ahead with their Jobs Summit and climate agenda.
Given the above, the outlook remains mixed with risks to the downside in the very short term, but with increasing risks to the upside over the medium term. Not all downturns or recessions are created equal and it’s worth noting that a recession and the Global Financial Crisis (GFC) are not the same thing. We need to see the end of the rate hiking cycle and/or inflation settling at a faster pace in order to gain greater comfort. What is providing comfort is that the world is mostly going into this period from a position of strength – i.e. household and corporate balance sheets appear to be in good shape, with two years of significant asset price growth and tight labour markets – which provides a buffer or floor leading into this weaker period.
We remain watchful of evolving developments, particularly regarding sudden or large changes to the trends in data (i.e. the rate of change) and remain comforted that portfolios have a strong quality streak running through them which should provide both a buffer in the short-term and position of strength over the medium term as higher quality companies generally take advantage of their strengths in periods of weakness. We also remain ready to adjust portfolios as the probabilities of paths change.
The Australian equity market (as measured by the S&P/ASX 200) started the year off much like the previous finished, although most of the steam had been taken out of the rally with January producing a solid +1.20% return. February was much more muted with the uncertainty of an imminent reporting season hanging over the market however with better-than-expected results, coupled with softer-than-expected domestic inflation data, March provided some highlights as Australian shares hit new record highs. The quarter ended on a high with March producing +3.27% closing the quarter off with an attractive +5.53%.
2023 made for another very interesting year in investment markets as macro / regime driven events resulted in extreme shifts in investor sentiment on an almost monthly basis. Investors chose to shoot first and ask questions later in what can best be described as a year of maximum noise.
The Australian equity market (as measured by the S&P/ASX 200) started the September quarter with a flurry but ended up in the red as the global “higher-for-longer” narrative (interest rates) coupled with the ever-increasing cost of living concerns caused consumer confidence to wane.