After strong gains in July and August, share markets fell in September as investors grew concerned about the withdrawal of support by central banks, higher inflation and concerns about the Chinese property market. International share markets fell 3.0% (unhedged in Australian dollars) during the month, whilst the Australian share market was down by 1.9%. Despite these share market falls in September, returns over the past year remain very strong. Fears of higher than expected inflation meant bond markets also had a negative return in September, with the Australian market falling by 1.5%.
Asset class performance as of 30 September 20211
|Asset class||1 month
(S&P/ASX 200 Accumulation Index)
(MSCI World ex-Australia - unhedged in $A)
(FTSE EPRA/NAREIT Developed Rental Index unhedged in $A)
(Bloomberg AusBond Composite Index)
(Bloomberg AusBond Bank Bill Index)
Please note, where past performance information is provided this should not be considered an indication of future performance.
The strong performance from share markets over the past year was finally halted in September. The debate over the US debt ceiling and higher than expected inflation data in the US was the main cause for concern. The US Congress has until 18 October to increase the debt ceiling before having to default on payments, which could potentially cause share market volatility. These debates have occurred before and have always resulted in agreement, but they often go right down to the last day.
US inflation has also remained at an elevated level in recent months (see chart below). Most economists believe this higher inflation will be transitory, but it has been stubbornly high recently and may last longer than previously expected. This has resulted in negative returns in both share and bond markets during September. Inflation has picked up around the globe as economies are re-opening and retail spending picks up, but it is expected that this activity will fall back to ‘normal’ levels by the end of the year as people get used to living with the Covid-19 virus. Recent talk from the US Central Bank to reduce their monetary support for the economy has also had a negative impact on bond markets.
Aside from US markets, the other main concern recently has been the news that Chinese real estate developer Evergrande Group may collapse because of high debt levels. Chinese shares have underperformed in recent months due to a number of new regulations. This has led to concerns about the flow on effects of a default by such a large corporate to the real estate sector as well as the wider economy. The potential range of outcomes is wide, but we believe the Chinese government will look for an orderly recapitalisation of Evergrande and avoid a significant fall in share markets in China and across the globe. However, there may still be further volatility in the near term.
Although markets were disappointing in September, overall market performance for the quarter and the past twelve months has been very good. The month of September is often susceptible to share market volatility, so long-term investors should avoid selling based purely on short term fluctuations.
The continued increase in vaccination rates has meant the Australian economy will soon re-open, which should see a surge in retail spending and other activities such as travel and eating out at restaurants. All of this increased activity will be good for the Australian economy and share markets. We remain confident that returns for investors across diversified investment options will continue to be solid over the next year despite periods of volatility as we have seen in September.
1 Bloomberg Finance L.P.
2 Bloomberg Finance L.P., EISS Super, US Bureau of Labor Statistics
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