Market Data October 2023
In October, investor concerns about inflation, rising interest rates, and the potential for a global recession drove down returns across most major asset classes.
Global equities declined by 2.7% in local currencies, with US equities falling2.1% and underperforming compared to Japan and Europe, which saw decreases ranging from 2.6% to 3.8%. The IT sector struggled, with companies like Nvidia(-6.3%) and Tesla (-19.7%) experiencing significant drops due to rate hikes and valuation concerns. Tesla also faced issues with its earnings and future projections.
Australian equities saw a 3.8% decrease, with healthcare and IT sectors among the hardest hit. CSL and Xero were notable decliners. Conversely, materials sector stocks such as Rio Tinto and BHP outperformed, and gold miners like Evolution Mining rose, with persistent inflation and the fear of continued rate hikes by the RBA contributing to a bleak outlook.
Bond yields in Australia rose, with the 10-year yield momentarily reaching 5%,.High-quality corporate bonds and high-yield bonds both declined due to heightened recession risks and financing concerns.
Gold stood out, gaining 7.3% in USD, as investors sought safe-haven assets. However, other commodities like oil dropped by 11%, and the S&P; GSCI Commodity Index decreased by 5.4%.
Overall, October ended with a more cautious investor sentiment, shaped by macroeconomic worries and market reactions to the possibility of a less aggressive rate hike approach by the US Federal Reserve.
Market Returns - 1 Month to 31 October 2023 (in AUD)
The ASX 200 fell 3.8% in October, as rising bond yields weighed heavily on equity valuations. Indeed, the tension between rising interest rates and equities has caused equity markets to trade near one- year lows in October. The increase in bond yields has been driven by stronger than expected economic growth supported by solid demand for employment and surging migration levels. At this stage the higher interest rate environment has yet to materially dampen either inflation or retail spending in Australia. A relatively buoyant economic backdrop should be supportive to a more resilient and stable outlook for corporate earnings.
For October higher bond yields had a deleterious impact on the Technology, Healthcare and Real Estate sectors. While, heightened geo-political tensions in the Middle East supported the energy and gold sectors.
At a portfolio level there source and telecommunication sectors exhibited the greatest resilience. Specially, Northern Star, Spark NZ, and RIO were notable strong performers. Whereas CSL, Cleanaway Waste Management, and Woolworths weighed on performance.
In October Blackmore Capital travelled to the UK to attend investor meetings in: Industrial logistics, commodities & energy transition, and healthcare. Key summary points were:
- There is a multi-decade tailwind for energy transition investment. Significant government programs to support 2050 net zero targets with total green infrastructure spending expected to be in the vicinity of ~$60 trillion, or ~$2-$3trn per annum.
- The key challenges to execute the green transition are in, permitting/regulatory delays, cost inflation due to lack of skilled labour, raw material constraints, supply chain bottlenecks & higher cost of capital.
- Decarbonization at scale requires technological breakthrough for carbon emitting industries: commercial transportation, heavy energy intensive industries, shipping & aviation. The decarbonization of commercial buildings is a further challenge.
- China well ahead in the green transition in terms of electrification investment in grid and EV rollout. China has greater urgency in achieving energy security.
- Structural tailwinds for commodities. Resource sector beneficiaries of a longer period of fossil fuel demand and the metal intensification of required in green infrastructure transition.
- Higher cost of capital weighing on Private Equity. Returns of >15% achieved over the last ten years now look ambitiously high in a world where the cost of capital has now normalized.
- Long-term tailwind for logistic/data warehousing driven by growing urban populations, limited land supply, growth in digitalization, and supply-chain optimization.
- For Private Hospitals fundamentals remain attractive in the UK. Public health system (NHS) unable to effectively address record elective surgery waiting lists (7.8m waitlist vs 4.5m pre pandemic). Double digit growth in Private Health Insurance and Self-Pay. UK Ramsay volumes have recovered above pre-pandemic levels and cost pressures moderated.
We have clearly passed the period of ultra- low interest rates and global economies are adjusting to a new era of higher borrowing costs. The impact of this is most noticeable in corporates with higher debt levels. We expect that while we may be close to the peak of the interest rate cycle, borrowing costs could well remain stubbornly high in the foreseeable future.
Local and global bond markets continued to sell-down across October. The Australian 10-year continued to sell-off, being 4.49% at the end of September to then 4.93% at the end of October. There were also some wild swings intra-month as conflicting data from the US whipsawed yields. The AusBond Composite (BACMO) Index fell -1.82% for the month, and the Bloomberg Global Aggregate (LEGATRUU) Index finished -1.20% lower. Safety in floating rate exposure was the case for the AusBond Credit FRN (BAFRNO) Index, which returned +0.37%, however this is down from the typical mid-forties monthly return, indicating slight credit weakness locally also.
October was a weaker month for AT1s as trading margins gave back the gains of September. Spreads on the BondAdviser All A$ AT1 Index rose by 40bps over the month to 263bps. The Index produced a total return for October of -0.43%. The BondAdviser All A$ Tier 2 Index also saw some spread widening, however it was far more moderate and the Index finished the month with a -0.03% return. All of these negative factors in public markets contributed in either detracting from or muting the Prime Australian Defensive Income Portfolio's return in October, which was +5 basis points. Again, when contextualised against the global fixed income market, this is a good result. The Bloomberg Bank Bill Index rose by 33bps over the same period.
October was like a broken record playing the same song for the Prime Australian Defensive Income Portfolio. The portfolio's slightly positive return was driven by constructive income-related contributions across the portfolio being offset by duration-heavy exposures. The Metrics Direct Income Fund and the MA Priority Income Fund were once again the greatest contributors with +10bps and +8bps for October (HPRs of +0.80% and +0.69%, respectively). Countering this positivity were again the PIMCO Global Bond Fund and the Yarra Australian Bond Fund with respective -16 and -14 basis point detractions (-1.36% and -1.85% HPRs). The remainder of the portfolio's holdings all produced weighted contributions of between +1 and +5bps. The best performing asset on a HPR basis was CBAPM with +1.15% for the month.
The portfolio's developed market equity funds were the main detractors for another month in a row. The MFS Concentrated Global Equity Trust (-1.83%), Platinum International Fund (-1.94%), and iShares S&P; 500 ETF (-1.69%) all struggled as quality growth stocks underperformed. The Nanuk New World Fund (-4.72%) significantly lagged with its overweight position in structurally challenged sectors like consumer discretionary and its underweight to energy.
On the flipside, the Aoris International Fund (+1.11%) was a standout, showcasing the benefits of its quality value approach in the current environment. The Munro Global Growth Fund (+0.18%) also outperformed through its barbell approach of growth and inflation beneficiaries.
In emerging markets, optimism around China's reopening supported the Shanghai Composite but wasn't enough to offset the broader EM exposure of the Trinetra Emerging Markets Growth Trust (-2.79%). The fund's overweight position in India proved detrimental as that market fell -3.7%.
The portfolio's allocation to global small caps via the Langdon Global Smaller Companies Fund (-5.15%) was another drag on performance. Small caps remained out of favour as recession concerns disproportionately impacted that part of the market.
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