Market & Economic Quarterly Update – September 2020

Below is a summary of market movements this quarter and major changes to some of the key asset classes:

Australian equities

The Australian equity market (as measured by the S&P/ASX 200) continued to slowly recover in July and August (off the back of a better than feared reporting season). The market traded sideways and struggled to gain much momentum. However as September drew to a close, heightening volatility, mainly due to lack of US fiscal stimulus and second wave virus concerns, caused the market to fall away significantly, resulting in the quarter finishing down (-0.44%). 

Quarterly returns, both losses and gains, were evenly spread across all sectors with cyclical sectors again being impacted the most (Energy -14%, Financials -6%). Information technology continued its northward trajectory (+13%), whilst Consumer Discretionary was up (+8.7%).

With the large cap sector potentially running out of steam, the more volatile, yet greater potential small and mid-cap sectors continue to outperform posting (+5.7%) and (+5.4%) respectively for the quarter. 

International equities

All major developed and emerging markets outperformed the Australian market finishing the quarter strongly in AUD terms, albeit not helped by a rise in the Aussie dollar. In the US, second waves of COVID-19 across the country and increasing uncertainty surrounding the upcoming election did not stop the local indices gaining further ground; the S&P 500 returning (+4.5%).

Emerging Markets (as measured by the MSCI EM index) returned a robust (+5.2%) aided by optimism towards a COVID-19 vaccine and improving economic conditions. Europe (as measured by the STOXX Europe 600 index) was fairly flat over the quarter returning a mild (+0.5%) whilst Asia, excluding Japan (as measured by the MSCI AC Asia Ex Japan index) recorded a strong return of (+6.3%) which was aided by double digit returns across Taiwan, India and Korea. Information Technology and Consumer Discretionary lead the way.

Property & Infrastructure

The Australian listed property sector showed some resilience returning (+7.0%) however the sector will remain structurally challenged (divergence in performance across sub-sectors even more pronounced) due to the pandemic and slowing economy. Global listed property (+0.6%) and global listed infrastructure (+1.0%) performed fairly flat on a currency hedged basis, but a rise in the Aussie dollar saw unhedged returns fall into negative territory, (-2.4%) and (-1.8%) respectively.

Bonds and Cash

The RBA and central banks globally continued their significant stimulus programs to support bond markets. Bond returns were again muted in the September quarter. Australian bonds (Bloomberg AusBond Govn 0+Yr) were up (+0.95%) whilst global bonds (BBgBarc Global Aggregate TR Hedged) were also slightly positive (+0.68%). Corporate bonds outperformed government bonds as spreads continue to tighten albeit at lesser levels than the June quarter. Riskier bond assets were broadly buoyant with monetary policy helping anchor yields at low levels thus forcing investors out the risk spectrum to chase yield. Cash yields remained anchored low with the RBA leaving the official rate (+0.25%) untouched throughout the quarter. 

The September quarter was mixed all around with markets, economics, and politics all ebbing and flowing throughout the quarter.

Markets broadly finished up for the quarter, but it was an unusual ride through as virus concerns rose as did political risks, particularly in the US. Second wave virus fears were proven correct as Europe saw a large rise in new daily infections as many Europeans travelled for the summer holidays, possibly buoyed by European political leaders vowing no second lockdown. New daily US infections also rose as the US economy began to re-open as businesses and households tried their best to get back to some level of normal. This resulted in some increases in restrictions within Europe and the US, and even parts of Asia.

Pleasingly, the increase in new daily infections didn’t coincide with an increased daily death rate. The reasons: better testing, contact tracing, hospital and healthcare preparedness, and increased use of widely available treatments. However, the increases in some restrictions meant concerns regarding the pace of the economic recovery ahead. Closer to home, Victoria went into stage 4 lockdown again, with increased restrictions regarding curfews and distance from home, whilst states kept their borders closed longer than previously expected.

Prior to the second wave fears, economic data both locally and globally had begun to improve. Employment data, particularly in the US, saw strong improvements whilst local employment data came in much better than previously expected. The Australian economy contracted in the June quarter, but came in much better than previously expected and much better than most other developed nations. Manufacturing data also improved globally as demand for goods and services increased, whilst US housing data continued to show strength. Oil prices also rose, confirming the increase in economic activity and improving economic outlook.

The Australian economy eagerly awaited the Federal Budget which was to be handed down in the first week of October, whilst income support packages in JobKeeper and JobSeeker saw their first tapering at the end of the quarter which concerned some parts of the market and economy particularly the household and consumer discretionary spending.

Outside of virus concerns, political concerns were the next biggest driver of markets in the quarter. The run into the US election heated up as we saw the first of the televised debates between President Trump and Joe Biden, which ended in a hard to watch stalemate. News broke that US President Trump had contracted the virus which saw markets react negatively. Markets recovered some of those loses at the end of the quarter as it became apparent that a range of drug treatments had seen the President recover much quicker than expected. However, markets fell again soon after as the President announced that he was calling off all fiscal stimulus negotiations between both parties as they increasingly failed to agree to a fresh round of much needed measures.

We also saw rising Brexit risks as the UK and the EU wrangled over trade agreements, with the UK threatening to re-write the Brexit agreement, all whilst PM Boris Johnson came under pressure for his handling of the virus. Closer to home, PM Scott Morrison and Treasurer Josh Frydenberg became more vocal in calling for state borders to be opened and for restrictions to be relaxed so that the economy can begin to recover.

Looking forward

The outlook remains mixed in light of the virus second wave, pending US election, phase 3 vaccine trial results which are expected in the quarter, all whilst governments contend with balancing the economic recovery with potentially increased restrictions on households and businesses. Positively, governments and central banks remain committed in doing whatever it takes to patch any holes and get the economic recovery going. That stimulus will continue to support asset prices in the short to medium term, but we will not be surprised by increased volatility in the quarter ahead.