Surging global bond yields pushed equity markets deeper into negative territory last month.
Property& infrastructure were sold down more heavily than equities generally.
The $A continued to depreciate, which neutralised some of the losses for Australian investors with global assets.
International Equities
Rising bond yields and central bank monetary policy tightening continued to be the dominant themes on equity markets last month. Central banks followed through on their August statements, with both the European and U.S. authorities lifting cash rates by another 0.75%.
This combined with slightly higher than expected monthly inflation numbers in the U.S., and an unexpected expansionary fiscal policy program announced in the U.K., pushed bond yields and general inflationary expectations sharply higher.
The response on equity markets was significant as the probability of recession in Europe and the U.S. moved another notch higher. The U.S. market led the global equityasset class lower, with the S&P500 Index falling 9.2% to lock in its third consecutive quarterly decline. Losses on European markets were more moderate, with the French and German markets down by between 6% and 7%.
The apparent sabotage of the Nord Stream 3 gas pipeline added another element of uncertainty to the outlook for European energy supplies and prices for the period ahead.
Following a positive month in August, emerging markets were sold down heavily in September, withthe MSCI Emerging Market Index falling 9.4% (in local currency terms). Further weakness in Chinese equity valuations contributed to this decline, however losses were recorded across all regions.
A 12.1% drop in the oil price sent Middle Eastern markets lower, which remains one of the few regions still in positive territory on an annual basis.
As was the case in August, property trusts were sold down more heavily than the broader equity market. This reflects an expectation that higher interest rates will drive down the capital values of property, whilst the earnings outlook for property trust structures is negatively impacted by higher borrowing costs and potentially lower demand from tenants.
After showing strong resiliency against similar factors, the infrastructure asset class also recorded larges losses last month, falling by an average 10.6%. However, as cashflows are generally more defensive than those of property, infrastructure is expected to be less volatile and has outperformed property by more than 18% over the past year.
Australian Equities
Australian equities experienced a marginally better month than the global average, with the S&P ASX 200 Index falling 6.2%.
Resources and energy were once again the best performing sectors, benefiting from a lower exchange rate and relative stability in the iron ore price.
The more defensive sectors, such as healthcare and consumer staples, also outperformed - but still finished well into negative territory.
Consistent with the global trend, listed property and utilities were sold down heavily, with yields from these sectors becoming less attractive on a relative basis as bond yields increased. Another area of significant weakness was smaller “growth” orientated stocks.
This was reflected in a 10.6% decline in the Information Technology sector and an 11.2% drop in smaller companies more broadly. In annual terms, Information Technology stocks have now fallen 39%, with smaller companies 23% lower.
Fixed Interest & Currencies
Cash interest rates continued to increase across the globe as central banks took further steps to manage ongoing inflationary pressures. Australia became somewhat of an outlier in opting for a smaller 0.25% lift in the cash rate following the Reserve Bank Board meeting in early October.
Earlier indications that the RBA was considering a more moderate rate increase program may explain relative movements in bond yields, with the Australian yield curve not shifting upwards as much as overseas yields last month. The Australian 10-year government bond yield finished September 0.30% higher at 3.90%. The equivalent U.S. 10-year Treasury yield jumped a more significant 0.68% to finish at 3.83% - thereby effectively closing the gap between longer term U.S. and Australian yields.
The narrowing of interest rate differentials is likely to explain some of the decline in the Australian currency last month. Against the $US, the $A dropped U.S. 4.0 cents to be U.S. 65.0 cents. The $A was also weaker against most other majorcurrencies, falling 3.7% against the Euro. Over the past 6 months, the $A has depreciated against the $US by 13.1% and fallen by 1.3% against the Euro.
Important Information
The following indexes are used to report asset classperformance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays GlobalAggregate ($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 Pty Ltd (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 thourgh a financial adviser. Past Performance is not a reliable indicator of future performance.