Market update - September 2017

Global equity markets rallied over the month of September, despite ongoing geopolitical tensions between North Korea and the US. Equity market volatility as measured by the US Volatility Index (VIX) fell by 10.2% over the month which was surprising given that market volatility as an indicator of uncertainty in the markets tends to rise with geopolitical tensions.

Over the month, several major central banks increased their bias towards monetary policy tightening, with the Bank of Canada announcing an unexpected interest rate hike. The Bank of England signaled that it may need to raise interest rate sooner than the market expected and the US Federal Reserve (Fed) announced that their balance sheet reduction plans would commence in October 2017. These synchronised moves by central banks, combined with a modest upside surprise in US inflation, led to a rally in global yields.

In Australia the latest GDP came in at slightly below expectations, which indicated the economy grew by 0.8% for the June 2017 quarter, bringing the year-on-year growth to 1.8%. Towards the end of the month, the Australian Dollar depreciated sharply due to an increasing divergence in monetary policy outlook for Australia relative to other global developed economies and a fall in iron ore prices of nearly 20% over the month.

The investment returns of the major markets for one month, one quarter (or financial year to date) and one year to 30 September 2017 are summarised below.

Market Performance - 30 September 2017 Month Quarter 1 Year
Australian Equities 0.0% 0.8% 9.0%
Australian Property (Unlisted)* 1.9% 2.8% 12.3%
Australian Property (Listed) 0.6% 1.9% -2.0%
Global Listed Property (Heged into AUD) 0.0% 1.3% 2.9%
Overseas Equities (Hedged into AUD) 2.5% 4.4% 20.3%
Overseas Equities (Unhedged into AUD) 3.5% 2.7% 16.0%
Emerging Markets (Unhedged into AUD) 0.7% 5.6% 19.9%
Australian Bonds -0.3% -0.1% -0.7%
Overseas Bonds (Hedged into AUD) -0.4% 0.9% 0.5%
Cash 0.1% 0.4% 1.8%
Australian Dollar vs. US Dollar -1.1% 2.3% 2.5%

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

US equity prices were largely suppressed early in the month, as investors were concerned about the potential impact the recent consecutive hurricanes might have on the US economy and the US Federal Reserve’s interest rate normalisation plans. Relatively benign comments from various Fed members in relation to future monetary policy settings and ongoing geopolitical tensions with North Korea also added to concerns.  However, equity prices and US Dollar weakness largely reversed in the second half of the month on the news of the upside inflation surprise and less severe forecasts for the economic impact of the hurricanes.

The Fed also released their balance sheet normalisation plans, by allowing an incrementally increasing amount of Treasuries and mortgage-backed securities to roll-off without being reinvested, starting from October 2017. Towards the end of the month, US President Trump provided more details on the long-awaited tax cut initiative, with plans to reduce the US corporate tax rate from 35% to 20% and boost international competitiveness of domestic firms.

The MSCI World Index ex-Australia (hedged into AUD) rose 2.5% over the month. The Australian dollar depreciated against most developed market currencies in September, which resulted in a return for unhedged overseas equities of 3.5% (in AUD). In developed markets, Germany (6.2%) and France (4.9%) outperformed the broader market, while the UK (-0.8%) and Hong Kong (-0.5%) underperformed. The MSCI Emerging Markets Index (0.7%) underperformed unhedged developed markets.

The Australian share market as measured by the S&P/ASX300 Accumulation Index was broadly unchanged over the month. Small Cap (1.3%) stocks outperformed the broader market, while Large Cap (-0.2%) stocks underperformed. Health Care (2.3%), Energy (1.1%) and Financials (1.1%) outperformed, while Telecommunication Services (-4.5%) and Utilities (-3.6%) were the worst performing sectors.
The Australian and global bonds delivered negative re turns over the month.