Global share markets sold off during the September quarter, following a period of strong increase. Rising bond yields were the major catalyst for weaker share markets, and the more interest rate-sensitive sectors of infrastructure and property were sold off heavily over the quarter due to continued underperformance.
International Equities
The re-emergence of inflation concerns, and the ongoing strength of the United States economy, led to a recalibration of interest rate expectations last quarter. Market consensus has swung towards a view that existing elevated cash interest rates will need to be maintained for some time, with central banks having minimal scope to cut interest rates in 2024.
A key part of the rationale for this shift in consensus is the ongoing strength evident in the U.S. economy. In addition, there was also increasing concern last quarter over the inflationary impact of rising oil prices. Buoyant demand and ongoing supply constraints saw the global oil price jump 28.5%.
Global developed markets were generally lower by between 4% and 5%, although the United Kingdom was an exception, posting a 2.6% increase. The higher oil price and some weakness in the value of the Pound assisted the U.K. market last quarter.
The United States (down 3.4%), where the bond yield increase was most significant, led the global market lower over the quarter.A reversal of some recent strength in the Information Technology sector (which dropped 5.7%) also weighed more heavily on the U.S., given its dominance in the sector mix there.
Emerging markets performed better than developed markets and the MSCI Emerging Markets Index was actually positive 0.1% in $A terms over the quarter. The ongoing lack of any significant economic policy stimulus continued to weigh on the Chinese share market. Policy initiatives announced to date have been of a smaller scale than expected.
Several measures announced by Chinese authorities have been targeted at supporting the ailing property sector, with reduced stamp duties and lower mortgage rates and down payment ratios being put in place recently. Losses on the Chinese market over the quarter (down 2.9%) were offset by gains in India (up 4.0%), with oil exporting nations also positive, boosted by the stronger crude oil price.
Higher bond yields detracted from the appeal of property and infrastructure investments, which were sold down heavily. Global infrastructure stocks dropped by 6.5%, with global listed property 5.2% lower. The Australian REIT sector fared slightly better (down 3.0%), with the largest constituent, Goodman Group (up 6.9%), enjoying a positive response from its strong earnings result.
Australian Equities
The Australian market outperformed the global average over the September quarter, with the S&P ASX 200 Index falling by just 0.8%. In annual terms, returns remain positive at 13.5%. Energy stood out as the strongest sector, rising by 11.2%, largely due to higher crude oil prices. The consumer discretionary sector also performed well.
During the profit reporting season, several consumer discretionary stocks performed better than expected, with earnings holding up despite weaker consumer spending growth overall. Consistent with the pattern overseas, “growth” sectors such as Information Technology and Healthcare, lagged the market average.
Resource stocks were amongst the better performers last quarter. In addition to higher oil prices, iron ore prices also strengthened slightly over the quarter.The iron ore price remains 21.9% above the level of one year earlier, despite the weakness in the Chinese economy and construction sector.
Fixed Interest & Currencies
There was minimal change in cash interest rates last quarter. The Australian RBA left monetary policy unchanged, with the cash interest rate set at 4.10%.
The United States Federal Reserve made one 0.25% increase in the cash target early in the quarter to bring the rate to a 5.25% to 5.50% range. However, despite the stability at the front end of the yield curve, there was significant increase in longer term bond yields.
In the United States, the 10-year Treasury bond yield jumped from 3.81% to 4.59%. In Australia, the increase in yields were more modest, but still significant, with the 10-year yield rising from 4.03% to 4.48%. These yield increases created capital losses in fixed interest asset classes.
Stronger economic data, and increased inflationary pressures from oil prices, have been two contributors to the higher bond yields. In addition, there has been increased focus on the size of the United States government debt position and the ongoing need to issue more bonds - with the bond supply addition potentially causing further bond price weakness (pushing yields higher).
With the sharp increase in U.S. bond yields, the rally in the value of the $US continued over the quarter. This strength in the $US saw a corresponding fall in the $A, which dropped from U.S. 66.3 cents to U.S. 64.6 cents. The $A did, however, appreciate slightly against the Japanese Yen (up 0.4%) and the Euro (up 0.1%).
Important Information
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($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), CSI China Securities 300 TR in CN, Deutsche Borse DAX 30 Performance TR in EU. Hang Seng TR in HK, MSCI United Kingdom TR, Nikkei 225 in JP,S&P 500 TR in US.
General Advice Disclaimer
This document has been prepared by Sage Financial Advice. Sage Financial Advice is a Corporate Authorized Representative of N/A (AFSL N/A). Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Should the reader wish to avail of using the above investment philosophy they should only do so firstly seeking personal financial advice through a financial planner. Past performance is not a reliable indicator of future performance.
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