Global equity markets recovered strongly in October from the negative returns of the previous month.
Volatility was high on bond markets, particularly in Australia where underlying inflation exceeded expectations.
The $A rallied over the month, reducing the equity gains for unhedged investors.
International Equities
Following the 3.8% decline in September, global equities bounced back strongly in October, with the United States being the dominant contributor to this increase. The US S&P 500 Index rose 7.0% after falling by 4.7% the previous month. Production and employment data was positive and provided investors with confidence that the global economic cycle was still favourable, despite the inflationary pressures evident. Confirmation that the US central bank would start to wind back its bond purchase program in mid-December did little to dent this confidence. Equity markets were also positive in Europe, where there was some stabilisation in the energy demand-supply balance following the supply shortages and price hikes of September. Japan was one of the few developed markets to post a negative equity market return, with some uncertainty over the new Prime Minister’s prospects at the general election held at end of the month. The ruling Liberal Democratic Party did retain power, which may improve market confidence in November and beyond.
Gains on emerging markets were less significant than on developed markets last month, with the Chinese market posting a flat result. Chinese equities are still being impacted by a general downward shift in growth expectations for the Chinese economy. This follows a spate of new regulation aimed at reducing excessive gearing and monopoly power of businesses, as well as improving wealth distribution across the population. There were, however, some significant gains on other emerging markets, with the Middle East region particularly strong in response to ongoing increases in the price of oil. In $US terms, oil rose another 11.2% last month and is now well over double the price prevailing one year ago.
Australian Equities
Australia underperformed the global average last month, with the S&P ASX 200 Index falling 0.1%. Further weakness in the iron ore price weighed on the resource sector, which finished the month 1.2% lower. Energy stocks also detracted with a 2.7% loss, as weaker natural gas prices offset the impact of the gain in oil prices.
Outside of the resource and energy sectors there were some positive movements on the Australian equity market last month. The Information Technology sector responded to a pickup in appetite for growth orientated stocks, which was consistent with the direction of global markets as well. Financial stocks also had a positive month, with higher bond yields continuing to benefit the sector. Healthcare stocks also performed well, with stocks such as Ramsay Healthcare (up 3.0%) set to benefit from the removal of lockdowns and normalisation of elective surgery volumes.
Fixed Interest & Currencies
It was an active month on bond markets, particularly in Australia, where the September quarter inflation results triggered a sharp increase in bond yields. The Consumer Price Index (CPI) rose by 0.8% in the 3 months to September, which was the same increase as recorded in the June quarter. In annual terms, Australia’s inflation rate fell from 3.8% to 3.0%. A reduction from the 3.8% annual rate recorded in June was widely anticipated given the extent to which the lower “base effect” from the previous year’s June quarter fall inflated the June 2021 annual result. The fact that the September result continued to show relatively high inflation suggests some of the increase in the rate of price growth recorded recently may be more than temporary.This result impacted the market’s future inflation expectations and also prompted speculation that the Reserve Bank (RBA) would abandon its 0.10% target for the April 2024 bond yield. At its Board Meeting in early November, the RBA did remove this target. The net result was that bond yields at the shorter end of the yield curve rose sharply, creating losses for fixed interest investors. The 3-year Australian government bond finished the month at a yield of 1.17%, after opening at 0.25%. The 10-year yield rose 0.60% to 2.09%. Australian longer term yields are now well above those in the United States, with the U.S. 10-year yield increase last month being a modest 0.03% to 1.55%.
The Australian dollar rallied strongly over October, despite the weaker iron ore price. The upward shift in the bond yield curve attracted foreign investor support, with the $A jumping from US 72.1 cents to US 75.5 cents. The stronger Australian dollar dampened share price gains to those global investors who held unhedged currency exposures, as foreign currencies declined in value in $A terms.
Important Information
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 YrIndex, Barclays Global Aggregate ($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).
General Advice Disclaimer
This document has been prepared by Sage Advisers (AFSL 238039). 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.