September 2021 Review – Inflation fears impact bond & equity markets

Updated: Feb 24

  • Share market values decline across the globe for the first month since January 2021.

  • Higher inflation fears were renewed as energy costs in Europe surge.

  • Bond yields rose in response to inflation and expectations of a tapering of monetary policy in the United States.

International Equities

Global equities declined by an average of 3.8% over September, with the United States leading the decline as the S&P 500 Index dropped 4.7%. Losses were also significant in Hong Kong, where the outlook for growth in China once again weighed on investor sentiment. The focus this month was the news that China’s second largest property development group, Evergrande, was at risk of defaulting on its debts, which was potentially triggered by new and more stringent borrowing regulations on property developers. As a result, expectations for Chinese economic growth, and housing construction in particular, once again softened. These China related factors combined with surging energy prices in Europe and rising bond yields to dent investor confidence across the globe. Also adding to general uncertainty was doubt over whether the U.S. government would pass a $550 billion infrastructure spending package, with the vote on legislation delayed due to concerns of insufficient support for the bill at a time when the U.S. government debt ceiling requires lifting.

Japan, however, moved against the general trend with the Nikkei Index rising by 4.9%. Japan was joined by markets such as Russia (up 5.8%) and the majority of the Middle East, where higher prices for energy had a positive impact. The oil price was 9.9% higher in $US terms over the month, with other energy commodities such as coal and natural gas rising even higher as supply shortages took hold in Europe in the lead up to winter.

Australian Equities

Australia, being a net energy exporter, had some stocks being strong beneficiaries of the higher energy prices, with the energy sector overall rallying 16.7%. Financials also enjoyed a strong month, as higher bond yields had a positive impact on expected earnings of banks and insurers. Most other sectors were negative, though, with the S&P ASX 200 Index falling 1.9% over September. Annually, the asset class remains firmly in positive territory by 30.6%. Resource stocks were largest contributors to the negative direction of the Australian market last month. Most notably, stocks such as BHP (down 11.6%) and Rio Tinto (down 10.6%) that have high iron ore exposures recorded sharp declines as a result of a drop in the price of iron ore. In $US terms, the spot iron ore price fell by 25% over the month, which was a substantial decline in response to indications of lower steel production in China and the prospect that lower levels of construction in the property sector could weaken demand further in the months ahead. Following the strong gains in August, the I.T sector dropped 3.9%. Healthcare was also one of the weaker performers with a 4.9% loss. The higher bond yields impacted on I.T. & Healthcaremore than others due to the high earnings growth profile of these sectors making them more sensitive to the impact of higher interest rates on the present value of future earnings.

Fixed Interest & Currencies

Bond yields returned to an upward trend last month. With signs that inflation may be a little more persistent than previously thought, expectations have firmed that the U.S. Federal Reserve will commence tapering its bond buying program this year, which could place upward pressure on yields. Over the month, the U.S. 10- year Treasury bond yield rose from 1.30% to 1.52%. The Australian equivalent yield finished the month 0.37% higher at 1.49%. The higher bond yields resulted in falling prices for bonds and negative returns for the broader fixed interest asset class. Returns from corporate credit linked investment were relatively flat over the month. Global default rates on corporate loan facilities continue to be relatively muted, which has created a stable return profile for these securities.

The Australian dollar continued its drift lower over September, with weaker iron prices and broader concerns over Chinese economic growth being the key contributors. Against the $US, the $A dropped from US 73.4 cents to 72.1 cents. Notwithstanding the lower iron ore prices, Australia’s trade surplus has continued to expand to new record highs, which provides some fundamental support for the $A at current levels.

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.

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