- Global equity markets inch cautiously ahead in September, somewhat heartened by the fact that the United States Federal Reserve baulked at raising interest rates at its key meeting. That said, growing fear of Fed tightening saw equity market “bond proxies”, such as listed property underperform. Commodity prices, by contrast, lifted – helped by a rebound in oil prices on speculation that OPEC might agree to production cuts (which it eventually did). Emerging markets fared a little better than developed markets.
- Australian equities marginally outperformed global equities on a currency hedged basis, helped by strength in the material sector especially – which in turn reflected optimism around commodity prices and the mining sector. Local equity outperformance was stronger in $A terms due to strength in the AUD/USD. The local bond market weakened slightly, as reduced RBA rate cut expectations saw local bond yields rise modestly.
- Listed property remains the best performing asset class over the past 12 months, while commodities remain the worst.
- Although the Fed did not raise interest rates in September, continued generally solid US economic data has markets concerned that US rates will rise by the December meeting. At the same time, US earnings growth expectations continue to ease, while equity market outright price-to-earnings valuations remain high. Concerns over European banks were another source of concern late in the month and into early October.
- What’s more, another new development in recent days has been the decision by the United Kingdom to press on with its formal exit from the European Union, with Prime Minister Theresa May seemingly prepared to risk some market access limitations in a bid to retain greater controls over immigration. This is yet a new unhelpful source of uncertainty for already troubled European markets in particular.
- Closer to home, expectations of another local interest rate cut has eased of late in the face of generally upbeat economic data. Our base case view is that the Reserve Bank of Australia will not cut interest rates in November unless the upcoming September quarter consumer price index result is much lower than generally expected. We now see local rates on hold for the foreseeable future.
- Our decision to move back to neutral with regard to listed property last month was supported by the asset classes’ subsequent weakness in September. Due to the growing prospect of a resumption of Fed tightening and our view of no further rate cuts anytime soon in Australia, we are now adopting an underweight view with regard to bonds (versus cash) and an underweight with regard to listed property.
- That said, due to weak earnings and high valuations, we remain underweight growth assets (including commodities) in general relative to defensive assets. The prospect of further weakness in the $A also leads to our continued overweight of international equities versus local equities on an unhedged basis
Originally published by BetaShares