Quarter in Review: September 2023
The September-23 quarter was a weak period for Australian equity markets, with the ASX300 Accumulation Index down 0.8% amidst surging bond yields prompting caution from investors. This included FY23 reporting season across August which signalled a largely resilient Australian economy but broad-based downgrades for future earnings given risks around labour cost inflation and increasing interest rates.
- Global Markets: Locally, small caps fared worse, with the Small Ordinaries index down 1.9%. US markets fared worse as a response to more severe upward moves in bond yields, with the S&P500 down 3.3% and the NASDAQ down 3.9%.
- Sector Performance: There was high variability between sectors during the quarter. The best performing sectors were Energy (+12.8%), Consumer Discretionary (+6.1%) and Financials (+2.7%). Energy stocks outperformed in line with the strength in oil prices, while Consumer Discretionary was helped by less bad than feared trading updates during reporting season. Financials were mostly led by the banks in response to strong employment outcomes implying a more benign credit cycle, as well as marginal restoration of industry rationality with CBA removing mortgage cashbacks. The worst performing sectors were Healthcare (-8.9%), Consumer Staples (-5.2%) and IT (-4.8%). Healthcare was dragged down by sector concentration in CSL and Resmed. Consumer Staples weakness was partly explained by a reversal in the crowding in “defensive” grocery stocks and increased El Nino fears on the agricultural exposures in the sector. IT stocks were impacted by their long duration sensitivity to rising bond yields.
- Rate and Yields: The quarter saw significant rises in bond yields as markets gravitated to a “higher for longer” stance as a response to better than feared economic activity and associative impacts on prices, notably energy. The AUS 10-Yr lifted 46bps to 449bps, reaching its strongest levels since October 2011 and most major bank economists are now pushing out rates cut to August 2024. The US 10-Yr lifted 73bps to 457bps, with the Federal Reserve reiterating their hawkish tone over their meetings this quarter. In terms of central bank actions, the RBA paused all 3 months during the quarter, with September accommodating the transition of RBA Governor to Michelle Bullock from Phil Lowe. In contrast, the FOMC hiked rates by another 26bps in their July meeting. The AUD fell further by 3.4% to 64c against the USD in response to the widening central bank rate differentials.
- Commodities: Commodity trends were broadly strong, notably seen in the surge of oil prices during the quarter, with Brent Crude up 27.3%. This was a function of lower supply with drawn global inventories and a material depletion in the US SPP, further exacerbated by controlled OPEC curtailments. Meanwhile, demand forces were lifted by a more resilient US economy. Iron Ore prices rose 7.1%, mainly due to solid crude steel production data in China.
- Corporate News: There was little corporate activity during the quarter in part due to seasonality given reporting blackout, as well as weak ECM markets. The start of the quarter saw the IPO of Redox, a diversified chemicals distributor, which thus far trades below its IPO price of $2.55ps. In August, packaging company Orora announced an acquisition for French luxury glassmaker SaverGlass at 7.7x adjusted Earnings Before Interest, Tax, Depreciation & Ammortisation.
Detailed Fund commentary is available to our subscribers via the form below.