Market Update - October 2023
24 October 2023
Your Market Update - October Summary
Main Market Themes
• Longer term global bond yields, and particularly US 10 year Treasuries, have moved to near a 16 year high. This has been attributed to the US Federal Reserve committing to a “higher for longer” interest rate regime, even though inflation appears to be slowing. This has unsettled markets and has been exacerbated by a strengthening US$ and higher oil prices.
• Australia looks to be in better shape and there is a lower need to issue Australian bonds as we have a budget surplus, low unemployment and higher tax inflows from increasing iron ore and gas royalties. Consequently, there is less impetus for further interest rate increases locally.
• China has been experiencing mixed growth with some stimulus measures being deployed. Consumer spending and confidence is yet to recover, particularly while there continues to be concerns around the Chinese property sector with some developers missing interest payments.
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When markets are volatile or the direction uncertain, investors can be tempted to sit out of the market.
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By being out of the market, investors risk missing out on market rallies which tend to follow market downturns.
Market Developments during September 2023
Australian Equities
The ASX 200 finished September down 2.8%, reflecting the losses seen globally. However, Australian equities did manage to outperform some global markets.
Energy was the lone bright spot in the market, returning 1.6%, riding the tailwinds of rising global oil prices.
In terms of the laggards, the Real Estate sector was hit hard with an 8.6% drop, reflecting the “higher-for-longer” rhetoric regarding interest rates, and the potential impact on property values.
Given the potential impact of interest rates on high-growth tech stocks, IT was another sector seemingly hampered by the hawkish sentiment in September, suffering losses of 7.9%. This mirrored the sell-off in US tech giants such as Apple, Nvidia, and Amazon.
Global Equities
Global equities had a negative month, with September typically being the worst performing month historically for stocks. Emerging markets outperformed developed market counterparts returning -2.3% (MSCI Emerging Markets Index (AUD)) versus a -4.0% return according to the MSCI World Ex-Australia Index (AUD).
Continued negative economic data in September saw another rise in bond yields and a decrease in equity markets, with inflation falling more slowly than expected, primarily due to rising energy costs. US equities stumbled amid an interest rate hold and the prolonged possibility of a government shutdown, recording one of its worst months for the year with the S&P500 Index declining -4.8% (in local currency terms) during the month.
The UK was one of the few positive performers for the month, with the FTSE 100 Index returning a gain of 2.4% (in local currency terms). This was driven by a decrease in domestic core inflation and surprising GDP data above expectations. The Bank of England also kept interest rates on hold.
Fixed Interest
In his final meeting as RBA Governor, Phillip Lowe kept the cash rate on hold at 4.10% for the third month running. This month’s meeting signifies Lowe’s final monetary policy decision hand down, with his seven-year term not being renewed. During his term, Lowe and the RBA board cut rates to an historic 0.1 percent, and subsequently hiked rates 12 times in a bid to control inflation. Lowe’s successor, Michele Bullock, took over the role on September 17.
The month saw a sharp repricing of bond markets with yields rising to cycle highs. Australian 2- and 10- Year Bond yields rose 25bps and 46bps respectively, and the Bloomberg AusBond Composite 0+ Yr Index returned -1.53%. Despite inflation rates falling and economic data showing a slowing economy, bond markets appear to be repricing due to concerns central banks are expected to maintain higher interest rates for a prolonged period.
The story was similar in the US, with the Federal Reserve holding the target cash rate steady at 5.25%-5.50% citing easing inflation pressures and concerns of slowing economic growth. Despite rate hike respite, bond markets experienced a poor month, correlating positively with equity markets. US 2- and 10- Year Treasury yields rose 18bps and 46bps respectively, and the Bloomberg Barclays Global Aggregate Index (AUD) returned -2.58% over the course of the month.
REIT’s (listed property securities)
The S&P/ASX 200 A-REIT Accumulation index finished September lower after consecutive positive months in July and August, with the index finishing the month -8.6%. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also fell, returning –5.3% for the month. Australian infrastructure finished lower through September, with the S&P/ASX Infrastructure Index TR returning -1.6% for the month.
The Australian residential property market experienced an increase by +0.9% Month on Month (as represented by CoreLogic’s five capital city aggregate). Adelaide was the biggest riser (+1.7%), followed by Brisbane and Perth (both +1.3%). All five capital cities performed positively for the fifth consecutive month with Melbourne (+0.4%) being the worst performing city. Over the one-year period, Perth was the largest gainer (+8.8%).