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Financial market update - September 2019

Written and accurate as at: Oct 22, 2019 Current Stats & Facts

Australian Equities

Australian equities Australian shares managed to reclaim some ground in September which saw the S&P/ASX 200 Index post a modest 1.8% return before falling in the first week of October. Energy was the top-performing sector, returning 4.7% and clawing back some losses from the previous month. Oil price spiked in September, the result of major disruption to the oil market, which favoured energy producers like Santos (+7.2%) and Beach Energy (+3.3%). The financial services sector (+4.1%) saw broad growth over the month. Shares in IOOF (+26.0%) rose as the wealth manager completed its sale of Ord Minnett during the month and the Federal Court dismissed a case brought against it by APRA that accused executives of failing to act in its members’ interests. The materials sector (+3.1%) also saw significant gains for some members, led by Western Areas (+25.0%), which benefitted from a rise in the Nickel price after the Indonesian government announced a ban on exports of raw ore. Nufarm shares (+17.0%) shot higher following the announcement that it was selling its South American business to Japanese conglomerate Sumitomo. Large-cap shares rose 2.0% with solid gains from major banks and miners but were outshone by their small-cap peers, which returned 2.6%.

Global Equities

Global equities Global markets adjusted to renewed geopolitical risks, including the US-China trade dispute, growing tensions in the Middle East, the threat of impeachment, protests in Hong Kong, and the ongoing Brexit saga. A drone attack on a major Saudi Arabian oil facility, which wiped out 5.7 million barrels of production per day, or around five per cent of the world’s supply, wrought havoc on oil markets. Economic indicators point to a rise in the risk of a US recession and a possible turning point in equities, but so far markets appear satisfied with the low rate of US unemployment, and the bullish trend since the start of 2019 remains intact. Developed market shares outside Australia rose 1.8% in Australian dollar terms as investors tentatively reentered equities following selling in the previous month. In the US, energy shares (+3.6%) were boosted by the spike in oil prices. Marathon Petroleum (+23.5%) jumped higher, but this wasn’t enough to placate major shareholders disappointed with its recent underperformance. European shares had a positive month, with the STOXX Europe 600 Index rising 3.6%, led by financial services, auto, and energy sectors. In Asian markets, China’s CSI 300 Index was mostly flat at 0.5%, Hong Kong’s Hang Seng Index rose 1.9%, and Japan’s Nikkei 225 Index rose 5.9%.

Listed Property

September was a trying month for listed property as the S&P/ASX 200 A-REIT Index lost 2.7% as a temporary rise in yields undermined values, but the broad low-rate environment is likely a positive for property as investors continue their hunt for yield. Commercial managers Charter Hall Group (-7.9%) and Dexus (-7.5%) experienced the largest drops over the month, while retail and shopping centres also struggled. The improvement in house prices since June may now be flowing through to an improvement in housing finance.

However, from an activity perspective, what is important is the trajectory of dwelling construction and the associated flow-on to retail spending on household goods and furnishings. It is difficult to envisage a recovery in housing construction any time soon as supply issues and the projection of ongoing subdued wages growth. While credit to housing has improved, credit to developers and businesses appears to be affected by the royal commission. Globally, REITs had a positive month in September, rising 3.0% in developed markets. US REITs were positive in September, returning 1.5% in US dollar terms, with gains from shopping centres (+8.4%), regional malls (+5.6%) and hotels (+5.2%).

Fixed Interest

While equities were choppy, it was the bond market that revealed the full extent of investor indecisiveness. September began with a sharp sell-off in bonds as markets, which may have been partly due to high-than expected US inflation, along with evidence of robust consumer spending. The US 10-year Treasury yield jumped from 1.50% at the start of the month to 1.90% on 13 September, before falling back down to just over 1.50% in early October. The result was a capital loss on 10-year bonds of around 3% over a 10-day period, making the pace and magnitude of the sell-off among the most severe. Over the course of September, global bonds, measured by the Bloomberg Barclays Global Aggregate Index, fell 0.6% in Australian dollar hedged terms, while Australian bonds fell 0.5%. The 10-year minus 3-month portion of the yield curve has been inverted since May, raising concerns for some Fed members. While not the only indicator on the ‘recession dashboard’, at the very least it indicates that investors are nervous about future growth. It could also be a sign that Fed policy is too tight and that rates need to be reduced further. September also saw a spike in the overnight lending rate between US banks, which jumped to levels not seen since 2008, prompting cash injections from the Fed to support liquidity.

Source: Lonsec Research

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