Investment market review - Quarter-ended 30 September 2019
28 Nov 2019
The S&P/ASX 300 Accumulation Index underperformed global markets in the September quarter, rising 2.6%.
Most sectors had positive returns with the exception of mining (down 5.5%) and Telecommunications (down 5%). This was driven in part by the poor performance of Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP), as both companies were heavily impacted by the falling iron ore price. This was due to increased iron ore production and supply coming from Brazil and declines in steel production in China. Low demand for base metals, due to US and China trade tensions, disadvantaged South32 (ASX: S32), a Western Australian mining and metals company. In contrast, stronger gold prices supported companies like Newcrest (ASX: NCM), one of the world’s largest gold mining companies.
Listed property trusts
The Australian real estate investment trust (A-REIT) sector produced a return of only 1.1% during the September quarter.
Real estate investment companies, Goodman (ASX: GMG) and Dexus (ASX: DXS) were primarily responsible for the relatively weak performance during the quarter. While earnings for both companies during the 2018/19 financial year were slightly above expectations, the outlook for both of them meant analysts have lowered their expectations for the 2019/20 and 2020/21 financial years. This contributed to their weakening share prices. In the case of Goodman, some index-driven selling may have also contributed to share price weakness. That is, Goodman was removed from the FTSE EPRA NAREIT Global Index (an index designed to represent overall performance in income-producing listed real estate worldwide) due to its business model shifting away from rental income to be more development based. This created pressure on investment managers, who follow the index, to sell Goodman shares.
Global markets had a strong quarter with the MSCI World Index in Australian dollar terms recording a gain of 4.6% during the quarter.
Globally, most share markets rose during the quarter led by positive returns during July and September which offset weak performance in August. The global rally was led by bond proxy sectors, that tend to offer predictable returns - such as utilities, real estate and consumer staples, because they benefited from two rate cuts by the US Federal Reserve and a further cut by the European Central Bank.
The Australian dollar weakened during the quarter which supported unhedged global equity returns. Key drivers included falling interest rates (making holding the Australian dollar less attractive) and a decline in iron ore prices due to increased iron ore supply.
Australian and global bond yields fell further during the quarter with the AusBond Composite rising 2%.
In Australia, weak economic growth continued. Poor consumer and business confidence, as measured by Westpac and NAB surveys respectively, points to further weak economic growth ahead. While inflation rose slightly by 0.6% during the June 2019 quarter (reported in July), on an annual basis it was only 1.6%. This remained below the Reserve Bank of Australia’s (RBA) target range of 2-3%. In addition, the unemployment rate of 5.2% in September remained above the RBA target of 4.5%. Taken together, these factors contributed to the RBA rate cut decisions in June, July and October. Concerns over rising trade tensions between the US and China, as well as weaker global growth fears, contributed to falling yields globally which also impacts Australian bond yields.
The RBA’s outlook for the economy continues to be driven by concerns over slowing economic growth and their view that rate cuts can continue to support lower unemployment without increasing inflation. RBA rate cuts have different impacts across the economy. Some groups and areas benefit while others are disadvantaged. Borrowers benefit because lower interest rates, provided they are passed on by the banks, reduce mortgage repayments and improve borrower spending. Savers are disadvantaged because they receive less interest income. This affects retirees and people with large amounts of cash held in bank accounts or conservative investment portfolios.