Market Data September 2023
Concerns over rising interest rates, slowing pace of disinflation, high oil prices and a potential global recession weighed on investor sentiment negatively, with most major asset classes following recording negative returns in September. Despite a receding investor consensus over fears of a recession for much of the quarter, inflation, especially food and energy prices, might remain elevated amidst increasingly hawkish rhetoric from central banks around the world, eroding growing market confidence.
The quarter witnessed modest returns following a lively July and a softer August. Australian equities reported as light downturn, with the ASX 300 yielding -0.8%, and witnessing nearly a 3%dip in September. The losses were widespread across various cap sizes, with Healthcare plunging by 6.4% and energy, contrarily, ascending by 2.2% due to the spike in oil prices. The latter half of the quarter, especially September, saw a 12% uptick in energy stocks, despite an earlier slump, mirroring the volatility in global energy markets.
Global equities declined by 4% in AUD terms, with the S&P; 500 dipping by -3.3% in local currency terms and European and Japanese markets descending by over 5%. In contrast, the UK FTSE100 managed to stay in the green, benefiting from a frail British Pound. The Australian dollar depreciated notably against the US dollar, cushioning the impact on unhedged global asset returns, leading to less than 0.5% losses in AUD terms for Australian unhedged investors in global developed markets.
Australian bonds faced a marginal negative shift for the quarter and witnessed a more significant decline overseas due to more pronounced long-term rate rises. Meanwhile, listed real assets, including property and infrastructure, posted negative returns, burdened by escalating bond yields. Conversely, commodities demonstrated their typical inflation hedging properties, with the S&P; GSCI commodity index returning +12.81% in USD terms.
Market Returns - 1 Month to 31 September 2023 (in AUD)
The ASX 200 fell 2.8% in September as rising bond yields weighed heavily on global stock market valuations. At both an Index and company level, equity markets have now started to respond negatively to the pressure of higher interest rates. A renewed ‘hawkish’ stance by the US Federal Reserve has unsettled investors concerned that interest rates could remain ‘higher for longer’ due to renewed inflation fears.
The Goldilocks economic scenario has dimmed with the possibility of another Federal Reserve rate hike this year and less rate cuts planned for 2024. Undoubtedly, higher bond yields, and evidence of slower economic growth are a challenging backdrop for investors.
Whilst the ASX 200 12-month forward Price Earnings Ratio (PER) is trading at ~15.5 times, a modest premium to its long-term average of ~14.3 times, a quickening pace of negative earnings revision Incomens by analysts has further potential to dampen market sentiment.
Combined with the ASX 200 dividend yield now below the 10-year government bond yield for the first time since 2011, equity investors are rightfully weary.
At the sector level, Energy, Insurance and Materials were the strongest performers in September, whilst Healthcare, Real Estate and Technology underperformed.
At a portfolio level, this translated into the energy and materials sectors exhibiting greater resilience. Specifically, BHP, Santos, and Treasury Wines were notable strong-performing stocks. WhereasCSL, Goodman Group, and Northern Star weighed on performance.
Undoubtedly it is a challenging period for investors, as equity markets undergo a meaningful downward valuation adjustment. A longer period of higher interest rates will continue to be a headwind for those parts of the market leveraged to bond yields and a higher cost of debt. This includes growth companies without the benefit of solid cashflows, REITs, infrastructure stocks, and highly leveraged industrial companies. We believe that is prudent to be positioned in companies that exhibit ‘earnings resilience’ and suitably conservative balance sheets.
As such we have further adjusted our portfolios to reflect these attributes. Furthermore, an area of concern has been the underperformance of healthcare in the portfolio. Whilst we readily acknowledge the recovery from COVID has been slower than anticipated our investment thesis remains that the structural industry dynamics, namely: population growth, chronic disease, and demographics provide pivotal support. Moreover, healthcare remains one of the few sectors positioned in the ASX 200 to deliver double-digit earnings growth over the next twelve months.
Overall, we expect that higher bond yields and slower earnings growth will continue to be a headwind for equity markets.
Australian Government Bonds were in lockstep with the US in September as duration fears again drove selling in treasuries. Both the US and Australian 10-year rose by 46bps over the month while the 2-year climbed 18 and 29 basis points, respectively. These larger moves at the longer end of the curve were the driver of weakness in induration-heavy bond portfolios. The AusBond Composite (BACM0) Index fell -1.53% for the month, and the Bloomberg Global Aggregate (LEGATRUU) Index dropped -2.92 %. Safety in floating rate exposure was again highlighted by the stability of the AusBond Credit FRN (BAFRN0) Index, which returned +0.46%.
September was a strong month for AT1s as both trading margins squeezed tighter and a large portion of the index paid distributions. This played a role in uplifting the Prime Australian Defensive Portfolio’s return to 12 basis points, a solid result considering the drastic weakness in global fixed income. The Bloomberg Bank Bill Index rose by 34bps. Spread compression was less pronounced in Tier 2 and BondAdviser’s Big Four T2 Index (BAB4T20DNTR), which remains around its long-term median of 165-170bps – we expect continued tightening here.
The hot streak continued for Metrics DirectIncome Fund, which again was the greatest contributor with +9bps for September(HPR of +0.75%). Closely in tow was the MA Priority Income Fund (+8bps, +0.69%)and the three AT1 holdings (CBAPM, WBCPJ and MQGPF) which cumulatively added 14bps to the total result. The AT1 distributions contributed +11bps (franking excluded) with the price impact across the AT1 holdings adding a total of 3 basis points to the portfolio’s performance. MQGPF was the standout with a 2.35% holding period return broken into +0.72% from capital appreciation and 1.63% from the distribution. While all other holdings produced a flat or slightly positive result, the two laggards caused significant damage. Duration exposure was the factor driving this underperformance with the two detractors being the PIMCOGlobal Bond Fund and the Yarra Australian Bond Fund. The two funds had weighted returns of -13bps and -15bps due to HPRs of -1.21% and -1.56%, respectively.
Within the month of September, the main detractors of the portfolio were the global equity funds with quality and growth biases, which struggled as investors rotated to more value-oriented stocks.
The MFS Concentrated Global Equity Trust(-5.28%) and Hyperion Global Growth Companies Fund (-5.45%) were among the bottom contributors.
The Platinum International Fund (-2.62%)held up relatively better compared to peers, showcasing Platinum's contrarian value approach. Their underweights to the US market and positions in cheaper parts of the market like Japan proved beneficial as the US underperformed.
The IShares S&P; 500 ETF (-4.36%) was also a drag on performance due to the index's weighting toward mega-cap tech stocks like Apple, Microsoft, Amazon and Tesla which led the market down. -Looking at the attribution, the portfolio's underperformance stemmed mostly from stock selection as managers struggled to navigate the style rotation. However, the portfolio's allocation to cash and underweight to the underperforming US market provided some offset.
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