Market Update - September 2020

Most listed equities markets experienced negative returns over September, giving back a portion of their strong gains made in August.  Evidence of a ‘second wave’ of the pandemic across several countries, particularly in the Eurozone, have resulted in authorities reinstating social distancing measures in many places, further stunting global economic recovery. This development and the emergency government support that began to roll off in several countries, in conjunction with limited signs of a timely and efficacious vaccine, continued to fuel uncertainty for investors globally.

In Australia border restrictions began to ease as a number of states saw a continued absence of cases.  However, strict social restriction measures in Melbourne remained, dampening the national economic recovery.  Low levels of activity within the housing market were sustained as confidence among investors remained weak, although changes to lending regulations were announced later in the month which will support the property market.  Positively, ABS figures showed that 111,000 jobs were created in August, pulling the headline unemployment rate down from 7.5% to 6.8%.

In the US, the market-leading cohort of ‘growth’ stocks which have been beneficiaries of the social distancing measures and lockdowns, came under pressure, giving up some of their strong gains since the beginning of the pandemic.  More broadly, rising COVID-19 case numbers, the relationship with China and uncertainty around election outcomes continued to drag on confidence within the US market.  On a positive note, the unemployment rate fell to 8.4%, beating market expectations of 9.7%; marking the fourth consecutive decline after the April high of 14.7%.  Other economic indicators such as the Manufacturing Purchasing Managers Index (PMI) and the Services PMI remained strong and echoed continued economic expansion during September. To support the recovery, the Federal Reserve left its funds rate target range unchanged at 0-0.25% with no changes expected until 2023.

In Europe, a resurgence of COVID-19 cases became apparent, with Spain, Italy and France being hit the hardest, further impacting the economic growth of the region.  Eurozone inflation posted its first decline since May 2016, dropping 0.2% over one year, while unemployment increased to 8.1%, hitting some of its highest levels since mid-2018.  Similarly, the UK also began to experience a second wave, leading to the reintroduction of certain lockdown measures.  Moreover, fiscal stimulus is beginning to fade with the current furlough scheme ending in October.  This is likely to lead to a substantial rise in unemployment.  To soften the possible negative effect of this, the Bank of England maintained its bank rate at 0.1%.

The investment returns of the major markets for one month, one quarter (or financial year to date), and one year to 30 September 2020 are summarised below.

Market Performance - 30 September 2020

Month

Quarter

FYTD

1YR

Australian Equities

-3.6%

-0.1%

-0.1%

-10.0%

Overseas Equities (Hedged into AUD)

-2.9%

6.6%

6.6%

7.0%

Overseas Equities (Unhedged into AUD)

-0.3%

3.9%

3.9%

4.9%

Emerging Markets (Unhedged into AUD)

1.6%

5.4%

5.4%

4.4%

Australian Property (Unlisted)

0.5%

0.9%

0.9%

-3.1%

Australian Property (Listed)

-1.1%

7.4%

7.4%

-15.8%

Global Listed Property (Hedged into AUD)

-2.5%

0.9%

0.9%

-20.8%

Australian Bonds

1.1%

1.0%

1.0%

3.2%

Overseas Bonds (Hedged into AUD)

0.4%

0.7%

0.7%

3.5%

Cash

0.0%

0.0%

0.0%

0.6%

Australian Dollar vs. US Dollar

-3.1%

4.1%

4.1%

6.3%

Source – JANA, FactSet

The Australian equities market (S&P/ASX 300 Index) fell 3.6% in September, with most sectors producing negative returns.  Energy (-10.7%) was again a primary detractor along with Consumer Staples (-6.6%).  Healthcare (+0.8%) was the strongest performing sector as investors rotated into areas of perceived safety during the period of volatility.  Small Caps (-2.8%) and Mid Caps (-3.0%) both outperformed large caps (-3.6%).  Australian listed property or REITs (-1.1%) outperformed the broad equity market and also outperformed Global REITs (-2.9%).

The MSCI World Index ex-Australia (hedged into AUD) dropped 2.9% over the month, with the S&P 500 in the U.S.  declining by 3.8%.  In developed markets, Denmark (3.3%) and Sweden (3.0%) outperformed the broader market, while Israel (-7.9%) and Austria (-7.0%) underperformed.  The MSCI Emerging Markets Index (unhedged) rose by 1.6%, outperforming unhedged developed markets (-0.3%).

Australian and overseas bonds posted positive returns for the month. The Australian Dollar depreciated significantly against several major currencies, including the US Dollar and the Japanese Yen, falling 3.1% and 3.6% respectively.