Headlines in September were dominated by geopolitical events in Iraq and China, with the latter driving local market moves. Some worse than expected data from China have kept Hong Kong markets down, compounded by pro-democracy demonstrations towards month-end. Iron ore plunged to a five-year low during the month as waning demand in China coincided with a surge in supply. The US economy continued to improve despite the US Federal Reserve’s further tapering of its quantitative easing (QE) program. Over the month, the VIX (a measure of volatility in relation to equities) increased by 36.1% reflecting that markets are becoming increasingly anxious, particularly about the prospect of Fed rate rises.
The investment returns of the major markets for one and three months to 30 September 2014 are summarised below.
*Estimate at 8/10/2014
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays
Overseas equities as measured by the MSCI World ex-Australia Index fell 0.7% over the month when hedged into the Australian dollar (AUD). But on an unhedged basis, the sector was up by 4.3% because the Australian dollar depreciated against most major currencies. Across developed markets, the strongest performing country in local currency terms was Japan with the Nikkei up 4.9% in September. Problems continued in the Eurozone with its economic expansion continuing to stall and inflation slowed to the lowest rate in almost five years.
Australian equities as measured by the S&P/ASX300 index fell 5.4% in September, which was the biggest monthly loss since it dropped 7.3% in May 2012. Small cap stocks performed broadly in-line with large cap stocks. Property Trusts also performed poorly, while unlisted Australian property posted modest growth.
Australian bonds also performed poorly, following the lead of US Treasuries that started to price in the increasing likelihood of higher interest rates in the US. Long duration bonds and inflation linked securities underperformed for the month. The Australian dollar depreciated 6.4% against the US dollar. The USD was amongst the strongest performing currencies and posted a record-breaking eleven weeks of successive gains on expectations the Fed will raise interest rates well ahead of its counterparts in Japan and the Eurozone.