International share markets had negative returns in September for the first time since the sell-off in February and March. In local currency terms international markets declined 2.9%, but a fall in the Australian dollar caused an overall decline of 0.3% for Australian investors in unhedged terms. US tech companies were notably weaker, but so too were energy stocks due to oil price weakness. Chinese markets underperformed but remain significantly higher than a few months ago. The Australian share market was 3.7% weaker, with Healthcare the only sector to post a positive return for the month. Bond markets benefited from the move away from risk assets with the Australian bond market returning a solid 1.1%.
A meaningful pullback in global share markets occurred in early September mostly due to falls in US tech firms after months of strong performance. This was perhaps more a reflection of investors locking in profits over the past 6 months rather than any issues with the underlying fundamentals of the companies. The US share market (S&P 500 Index) dropped by 6.9% over the course of four days, while the major US tech companies (e.g. Facebook, Apple, Netflix) dropped by roughly double this amount over the same time period. The NYSE FANG+ index (the index used for US tech companies) fell 13.6% over the month, but over the longer term these tech companies have significantly outperformed the wider US stock market, as shown in the chart below.
Other than the equity market pullback, notable developments on the policy front as well as the upcoming US presidential election attracted plenty of attention.
Firstly, following news in August that the US Federal Reserve will be adopting an arguably more flexible approach to inflation targeting going forward, the latest data showed that a number of committee members believed that the key short term interest rate will stay near zero until 2023. Such an expectation by key decision makers reinforces that the historically low interest rate environment we are in will likely remain for years to come.
The UK central bank on the other hand seems to be carefully considering the adoption of negative interest rates (as opposed to the current near-zero rates) as it fights persistently low inflation. Unemployment in the UK rose above 4% for the first time since 2018 and is expected to continue to rise as the spread of Covid-19 continues.
In the US, with the passing of the first of three presidential debates, interest in the election continues to rise. In the meantime, investors are still waiting for the current government process to allow a further stimulus package through, but so far the political negotiations have not reached an agreement on the size of the stimulus. Agreement is essential to provide relief to those unemployed or temporarily laid-off due to the lockdowns. Share markets are likely to receive a boost should a deal be agreed before the election, but even without such a package the US economy continues to show signs of improvement. For example, consumer sentiment improved again in September (although it is still well below its February high) and the manufacturing sector has continued to expand after the sharp contraction caused by the various shutdowns earlier in the year.
Although share market performance in September was disappointing, international share markets have overall delivered a very strong return since the onset of the crisis. In fact, international share markets are slightly positive for the year to date in 2020. The Australian share market hasn’t reacted with nearly the same level of strength and is still behind year to date despite a solid 16% gain since the end of March. Moving forward, we believe that news relating to a possible vaccine, the US election and Brexit negotiations have the potential to cause significant volatility in the coming months. In such an environment, we believe that maintaining a well-diversified portfolio remains essential.
1 Bloomberg Finance L.P
2 Bloomberg Finance L.P, EISS Super
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