SEPTEMBER 2021: Finance Update
18 October 2021
Although we have seen some weakness over the last month, we are still supportive of risk assets (Australian and International shares and listed property securities) despite some of the risks outlined below. Bonds, including Government and corporate bonds, offer limited relative value in the current environment. However, we continue to see asset valuations rise notably in Australian equities and will continue to monitor valuations looking for opportunities to take profits where applicable. We also believe that ensuring that portfolios are diversified in their exposures will become more important in the coming 12 months.
September saw an evaporation of the gains made in global markets over the last three months, with developed and emerging markets receding by 3.1% and 2.8% in Australian Dollar terms, respectively. However, this represents a mild correction given the strong gains in 2021. Over the one-year period, Global small caps led comparative markets, returning 38.7% compared with 27.8% for global large caps and 17.3% and for emerging markets in Australian dollar terms.
There were three key factors driving this share market weakness:
- First, we had high inflation readings in America and Europe, partly due to the shortage of computer chips and ships – delaying deliveries and increasing congestion. These factors contributed to annual inflation figures of 3% in Europe and 5% in the United States. Consequently, we saw an increase in bond yields and some share market weakness.
- Second, signs from the US Federal Reserve that they will reduce the amount of Government bond purchasing in the next couple of months. Markets are watching to see what direction all central banks will take on their asset purchases programs and whether they will seek to taper the programs and if so to what extent.
- Third, was the potential collapse of Evergrande, one of China’s biggest property developers, as the Chinese government sought to stem excessive borrowing leaving the heavily indebted company with over $400B in debt. The main concern is that the collapse may have a flow on effect on the Chinese property market, which has grown at an incredible rate, and ultimately impact the Chinese economy.
Overall, the global economy is making a solid recovery. Those countries with better access to vaccines have seen their economies open up with more travel and higher levels of employment, particularly in travel and hospitality. Some countries in Asia are struggling to control the virus with flow on effects to their economies.
The Australian share market finished lower in September, ending an impressive 11 month run of gains, with the S&P/ASX 200 losing 1.9% for the month. The Energy sector benefitted from rising coal and oil prices, with the sector up 16.7% for the month. The Utilities sector also finished higher with a 2.5% gain. Materials (-9.3%), Health Care (-4.9%) and Information Technology (-3.9%) were the biggest drags on the Index. For the quarter, the S&P/ASX 200 gained 1.7%, with Energy the standout sector (+9.2%), whilst falling iron prices weighed on Materials (-9.9%).
Falling iron ore prices, which have been impacted by Chinese production cuts across the steel manufacturing industry, have weighed on local mining heavy weights which account for roughly a fifth of the Index. Iron ore prices have also been adversely impacted by the financial woes of Evergrande, and should Evergrande fail, the impact is expected to be felt across other Chinese property developers, which will likely contribute to a further reduction in demand for iron ore. This saw weakness in BHP, Rio Tinto and Fortescue as examples.
Economically, Australia has had a significant setback with lockdowns in NSW and VIC, with high impact on economic activity - with fall in GDP expected for September quarter. However, business and consumer surveys seem to be stabilising and a very good response to vaccination programs is seeing some opening up in the eastern states. This will help drive the Australian economy in recovery mode.
September saw a sharp reversal in the performance in Fixed Income markets, with the trend of decreasing yields that had defined the prior months coming to a screeching halt. Increasing inflationary expectations, and growing fears that the current high levels of inflation may not be transitory, have driven yields upwards with the yield of 10 year Australian Government Bonds having risen by more than 30bps from the end of August to the end of September.
Credit spreads also widened over the course of September, which, combined with the changes to the risk-free rate, resulted in a month of poor performance in Fixed Income markets.
Internationally, the story is very similar, as continued supply issues drive fears of protracted inflationary pressure, resulting in rising yields.
REIT’s (listed property securities)
The S&P/ASX 200 A-REIT Accumulation Index returned -2.18% in September, mainly fuelled by a couple of days of selling towards the month end. Global real estate equities sold off during September, with the index closing 5.41% lower.
Nationally, the housing market continued to increase in value, despite somewhat slowing quarterly increases, with the CoreLogic 5 city aggregate recording a 1.45% increase for September. The recent house price rise, 12 months to August, equates to the largest rate of annual appreciation since mid-1989 (as reported by CoreLogic).