Events in the September quarter did nothing to change our constructive view on global equities. First, company earnings were very strong and widely distributed. Second, the global economy remains in ‘rude health’ generating strong growth in a synchronised manner. Finally, there are no signs of over-heating so any withdrawal of monetary ‘medicine’ can be done gradually. Should this gradual reduction remain in place and interest rates only rise slowly, markets will be comforted knowing that the tightening is because of a strong economy and not because inflation is getting out of hand. However, given the length of this bull market we remain on high alert for signals that the party may be coming to an end. Some of the things that would cause us to turn more cautious are a rapid increase in wages translating into a jump in inflation, a material further contraction in equity risk premiums and
the old market-top calling card of euphoria reigning supreme amongst investors. Until we see some of these signals (and/or others on our watchlist) we remain positive on global equities.
Following is a recap of market movements in September
Global share markets (or equities) made solid gains in September with the MSCI All Country World Index returning 1.9% over the month (in local currency). Investors seemed to shrug off the ongoing geopolitical tensions between the US and North Korea and instead focused on the possibility of significant corporate tax cuts in the U.S. in the months ahead.
U.S. equities had yet another positive month with the S&P500 rising 1.9% during September. This marked the 6th positive month in a row and brought the year to date returns up to a very healthy 12.5%.
The prospect of the Republicans actually managing to pass a major piece of market-friendly legislation lit a fire under equities. The tax reform proposes to reduce the corporate tax rate from 35% to 20% which would be an immediate boost to corporate USA’s bottom line. There are deep divides within Congress with regard to fiscal policy, meaning passing this legislation is far from a done deal. We will have to wait and see whether or not markets have gotten a little ahead of themselves on this one.
Also in the U.S., the Federal Reserve (Fed) said that it plans to stay the course with further tightening of monetary policy. Its base case is one more hike this year and three more in 2018. As expected it also announced that it will start reducing its behemoth balance sheet in October. The Fed is at pains not to spook the market, as it does not want a repeat of the “taper tantrum” in 2013, whereby equity and bond markets sold off aggressively. Therefore, it is being very transparent with its future plans.
European equity markets had a stellar month with the Bloomberg European 500 Index rising 3.7%. Economic data remained robust in September and generally beat expectations. Of particular note was a manufacturing sector activity survey which strengthened the most since early 2013.
The European Central Bank maintained its settings at its September meeting but many in the market believe it will reveal future changes to its asset purchasing programme at its next meeting in late October.
Emerging equity markets as a whole managed to scrape through with yet another month of positive returns with the MSCI Emerging Markets Index rising 0.3% over the month (in local currency). This brought its strong run to 21.3% year to date. Russia led the way with higher oil prices helping its local share market. Whereas Turkey and Greece – each dealing with its own set of challenges – were underperformers.
In China, equities were subdued with the Shanghai Stock Exchange Composite Index easing 0.4% over the month. Providing a headwind was a ratings downgrade from Standard & Poors due to concern over high debt levels and moves taken by the Government to cap rising house prices.
In Australia, the ASX200 Accumulation Index was essentially flat in September. The two Aussie heavy-weight sectors were in a tug-of-war during the month as the banks were generally firmer but mining stocks were weaker. Miners with iron ore operations underperformed, as concerns over mandated cuts in steel production in China over the winter months in order to curb pollution weighted on the price of iron ore.
Back home and the NZ50 Gross Index posted its first negative month of the year - albeit a minor fall of -0.2%. In last month’s newsletter, we wondered how much longer the local market could continue its relentless drive higher, particularly with the election in September. We welcome the market taking a breather given the strong run it has had.
It is worth noting that the drop would have been noticeably larger were it not for the continued share market leadership of A2 Milk (ATM) and Xero (XRO) which were up 15.9% and 17.7% respectively. Also of note is that more than one-third of the local market’s performance in the September quarter was attributable to the share price rises of these two companies. If you throw in Fisher & Paykel Healthcare it is almost half! ATM is now the NZ Stock Exchange’s 5th largest company by market capitalisation whilst XRO is 8th.
