September Quarter 2020 Review - Rally in equities narrows

Updated: Feb 4, 2021

Australian Listed Property was the strongest performer (up 7.4%) for the quarter, following better than expected rent collections for many landlords as highlighted in the August results reporting season.

Hedged Global Equities also performed well (up 6.4%), driven by the US market where the large technology names dominated returns early in the quarter. Few non-US markets have been as strong over the past twelve months - highlighting the disproportionate impact of the FANG (Facebook, Apple, Amazon, Netflix, Google). Unhedged Global Equities returned less (up 3.8%) due to appreciation in the $A.

With a weak domestic equity market in the month of September, Australian Equities finished the quarter slightly in negative territory, as was the case with global infrastructure.

The quarter was marked by a second wave of COVID infections in the Northern Hemisphere and a gradually improving experience in Australia.

International Equities

Despite weak September monthly returns, global markets were relatively strong over the quarter. Performance was dominated by the US and China, with stimulus in China assisting in July and strong technology stock performances dominating in the US. Hong Kong didn’t follow the Chinese market higher and remains overshadowed by China’s moves to ensure that Party control of the territory is undisputed. The performance of other markets has generally reflected their relative performance in containing the pandemic.

Germany and Japan have performed relatively well, while Britain remains subject to shutdowns, unclear economic policy, and ongoing uncertainty over post Brexit trade arrangements with Europe. The exceptional post March equity rally moderated in September, but the forces driving global markets higher are unchanged – increased money supply from central banks, resulting low interest rates, fiscal stimulus by governments and strong growth outlooks for technology companies and those operating strong online businesses.

Across the globe, government action has sustained economies and financial markets. Central Banks continue to provide support and many governments are starting to implement a second round of fiscal support. However, the looming US elections and the phasing out of some government emergency support measures provide potential for market volatility in the December quarter.

Australian Equities

The Australian market fell 0.4% in the quarter - with September’s weakness offsetting a small positive in July and a relatively good performance in August during company reporting season. Despite a significant 6.8% decline in September, Information Technology remained the strongest returning sector for the quarter. Companies benefiting from a move on-line and access to global markets remain a sweet spot for investors.

Energy related companies did poorly as oil prices remain low due to lower demand and plentiful supply. Surprisingly, some areas of the Consumer Discretionary sector have done well due to government support payments boosting disposable incomes, creating both a rise in household sector savings and increased expenditure on selected items. As noted above, Property Trusts had a strong return through the quarter, while other “defensive sectors”, particularly utilities, failed to generate the same support. Encouragingly though, overall analysts’ earnings revisions turned positive in September, following the August reporting season, with broader earnings results no worse than expected.

Fixed Interest & Currencies

The RBA, the US Fed and other central banks have reiterated their commitment to low interest rates and support for bank lending and funding several times in the past few months. Most recently, both banks have highlighted that their economies need additional fiscal stimulus to maximize the chances of recovery as we learn to live with COVID – at least until a vaccine is confirmed. These views have possibly influenced additional fiscal initiatives put in place by governments.

Bond markets saw a brief rise in interest rates in August, which was largely retraced in September. With bond yields stable and prices for corporate debt securities increasing, fixed interest returns were mildly positive for the quarter. At the end of September, Australian 10-year bond yields stood at 0.84%, with the U.S. equivalent at 0.69%. There was some speculation that the RBA may cut target rates slightly in the short term, but this is yet to eventuate.

The A$ rose3.6% in the September quarter against the US$, finishing at US 71.1 cents. Continued strength in the iron ore price has supported the A$, as has some recent weakness in the US$ more broadly. Against the Euro, the A$ fell over the quarter by 0.9%.

Outlook and Portfolio Positioning

The December quarter is shaping up as a potentially difficult one for financial markets, as the strong momentum in share prices that had been in place since the late March recovery ended in September. Uncertainty over the US election, rising COVID-19 infections and the removal of some of the emergency economic support measures all add an element of additional risk and uncertainty to the months ahead. Notwithstanding this heightened uncertainty, some recent positive global economic data and the ongoing commitment to exceedingly low interest rates could continue to provide the basis of support for share markets.

Within the equity market rally that has dominated share markets for much of the past 6 months, there has been considerable disparity between movements in prices across sectors and styles. As a result, valuations are not uniformly expensive despite the broader rally. Therefore, should the uncertainty in the months ahead trigger a broad correction on equity markets, opportunities to buy selected underpriced assets may emerge. Infrastructure, listed property and traditional “value” sectors (e.g. banks) are all currently trading well below the relative valuation peaks reached by “growth” sectors such as healthcare and information technology.

Opportunities within the cash and fixed interest asset classes are increasingly difficult to identify. Falling bond yields and rising prices for corporate debt securities continue to reduce prospective returns. Domestically, returns from many cash styled investments have effectively hit zero on a post fee basis as the flood of liquidity on money markets has pushed interbank lending and bank bill yields to the bottom of the Reserve Bank cash rate corridor range. This reality will encourage more investors to move out of defensive assets, although caution should be applied to building more equity risk in portfolios at a time of extended valuations and unusually high macro-economic uncertainty. The role of Alternative investments, which theoretically should have limited equity market risk exposure, may need to take on increased importance in portfolios if overall returns are to be maintained above inflation.

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