Drivers of investment performance
- The month of September has traditionally been a weak month for sharemarket performance. September kept its reputation intact with nearly all major financial assets, fixed income and equities generating above-average losses last month.
- Following strong gains over the last year (29%), a 2.7% return in August, and after reaching historical highs, global sharemarkets fell heavily in September, down 3.7%.
- As the month unfolded, a growing list of concerns emerged. This included concerns over the slowing of the global economy, central banks moving toward tightening policy positions, uncertainty over the US debt ceiling and the prospect of higher taxes in America There was also ongoing global supply constraints and rising inflation pressures, the developing energy crisis in Europe and China, and the financial crisis surrounding Chinese property developer Evergrande.
- In their recent announcement, the US Federal Reserve (the Fed) indicated tapering, which is a reduction in the rate at which the Fed purchases securities in the market, would likely begin in November 2021. Furthermore, the Fed is anticipating stopping all purchases of securities by the middle of next year, bringing an end to their bond buying programme.
- In relation to interest rates, expectations for interest rate increases have been brought forward relative to previous Fed forecasts. An increase in the Fed Fund Rate is now anticipated for late 2022, compared to increases commencing in 2023 previously.
- Although sharemarkets initially welcomed the Fed’s announcement, market sentiment turned negative in the following days. Global equity markets increasingly saw the Fed’s statement leading to a likely tightening of policy conditions earlier than expected. Adding to the concerns over the direction of interest rates, Norway’s central bank became the first large-developed country’s central bank to raise interest rates in the post-Covid era. The Bank of England also indicated they could begin raising interest rates sooner than the market had expected.
- The US government was grappling with two issues late September – to avoid a shut-down of the government and possible default on its debt obligations. In effect, the US will run out of ways to pay its bills around October 18 if Congress fails to suspend or raise the US debt ceiling. By month’s end the US Government had avoided a partial shutdown of Government by extending the spending authority of Treasury to 3rd December.
- The focus is now on how to raise the debt ceiling. This is expected to occur before the deadline but may come at cost to President Biden via a reduction in the $3.5 trillion spending packages he has proposed. The Democrats can raise the debt ceiling through the budget reconciliation process, but they all need to agree to achieve this.
- Interestingly, the US debt ceiling has been increased 78 times since the 1960s. The current US debt ceiling stands at $28.4 trillion.
- Evergrande is a Chinese property development company that has failed to meet interest payments in recent weeks. With Evergrande being one of the largest property developers in China, fears of global contagion and a financial crisis grew. Comparisons to the 2008 financial crisis triggered by the collapse of Lehman Brothers were made.
- Although uncertainty remains, any contagion from Evergrande is expected to be contained. Already the company has been forced to sell assets to pay debt obligations and an orderly restructuring of the company is expected.
- Evergrande has highlighted the fragile state of the Chinese economy currently, as underlined by weaker than expected economic data during September. Therefore, Evergrande is likely to prompt a more urgent policy response from the Chinese Officials, which will be key to the country meeting their social objectives under the banner of ‘common prosperity’.
- News in relation to the Covid virus has improved in recent weeks. Global virus cases declined over September, after rising dramatically in July and August. Declining cases across Asia and the cresting of cases in the southern states of America helped reverse the global case numbers. Around 47% of the global population has now had at least one dose of the vaccine, 72% in the developed world and 56% in the developing world.
- Although global economic data was a mixed over September, it generally pointed to a weakening of economic activity over the last few months.
- This is partly due to the rise in Covid cases in recent months, which has hit the global service sector harder relative to the manufacturing sector. The weakness in the service sector also reflects a moderating of economic activity following the boost to economic activity from the opening of economies as the vaccines were rolled out.
- Capacity constraints and supply chain disruptions primarily account for the softness in the manufacturing sectors around the world.
- In contrast to the global trend, New Zealand continued to record better than expected economic data. The New Zealand economy grew 2.8% over the second quarter, well ahead of market and Reserve Bank of New Zealand’s expectations. The domestic economy was on a strong footing, with likely higher excess demand and underlying inflationary pressures than expected, heading into the current lockdown.
- Overall, the outlook for the global economy remains encouraging. The continuation of the global economic recovery is likely beyond the near-term interruptions, vaccines ultimately allowing a more sustained reopening and tight central bank policy positions are a long way off.
- Global sharemarkets fell 3.7% in September and have fallen about -5% from their historical highs reached in August. In addition to factors outlined above, a sharp rise interest weighed on sharemarkets. Particularly hard hit were the US mega technology companies, FAANGs (Facebook, Apple, Amazon, Netflix and Google (Alphabet)). Value stocks outperformed growth stocks in September, a reversal of the trend over the last six months.
- Emerging markets outperformed developed markets, falling 3.1% over the month. Despite economic growth concerns and developments surrounding Evergrande, the Chinese market rose 0.7% in September. Asian markets generally held up; manufacturing surveys improved reflecting the recent decline in virus cases.
- The New Zealand market eked out a 0.4% return, outperforming the rest of the world, and performance was solid across the board.
- Commodity prices rose 8.6% in September, adding to concerns over rising inflation pressures. The price of oil climbed 10.3% during the month and is 30% higher compared to six months ago. Rising gas prices due to shortages in Europe, along with higher coal prices due to shortages in China, helped boost the price of oil.
- Based on the Bloomberg Commodities Index, commodity prices have increased 42% over the last year. Iron ore bucked the trend, falling 23.4% in September as demand from China fell away.
- Conversely, local fixed income markets underperformed. Domestic interest rates moved higher following rising global interest rates and after the much-better-than-expected second quarter economic activity report.
- The New Zealand dollar fell over the month, primarily against the US and Australian dollars, down 2.1% and 0.9% respectively. This mainly reflects the US dollar strengthening given the global uncertainty and the Australian dollar was underpinned by rising commodity prices, eg oil, gas and coal.
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