Quarterly Performance – Q3 2019Money Matters: 28/10/2019
There was no shortage of headlines throughout September as the now all too familiar geopolitical, rate expectation, trade-war narratives were accompanied by some more idiosyncratic and unheard-of events that in turn flowed through into markets. Widespread discussion of the rotation into value stocks and stalling of many so-called momentum trades reverberated through markets in the early stages of the month. Ultimately however these issues subsided, and equities gradually climbed during the rest of the month. Safe-haven assets such as bonds and gold took a hit, despite the looming pessimism that persists around the world as investors reassessed the capacity for Central Banks to lower interest rates.
Australian and international equities rose by +1.9% and 2.0% respectively in September, while emerging markets were up +1.8%. A-REITs tumbled -2.7% throughout the month, while in local currency terms G-REITs and infrastructure posted +2.6% and +1.9%, respectively. The reassessment of rate expectations left domestic fixed interest down -0.5% for the month, ever so slightly underperformed by international fixed interest at -0.6%. Cash returned +0.1% for the month, the continued result of interest rates at historic lows. Gold gave back some the gains made last month, returning -2.8% in local currency terms.
RBA Governor Lowe was once again among the more vocal central bankers in admitting the limited scope of monetary policy and the need for fiscal stimulus. Conversation of more unconventional measures also surfaced throughout the month with several suggestions that the RBA may need to employ measures similar to the Quantitative Easing (buying Government Bonds with newly created money) undertaken by other Centrals banks since the GFC. ECB President Draghi was also notably vocal on the calls for fiscal cooperation, essentially admitting monetary policy can only get you so far.
The US China trade war continued to weigh on global markets as the world’s two largest economies sparred over everything from tariffs to technology to access to domestic capital markets. The combined confidence of US consumers, business and investors fell to 2009 lows according to State Street, and bellwether economies such as South Korea and Taiwan showed signs of lacklustre trade data. The attention on trade was somewhat diverted following news that President Trump had an impeachment inquiry initiated against him.
Oil markets experienced the single largest disruption to supply in history following a series of drone attacks that targeted facilities in Saudi Arabia’s second largest oil field. Oil surged as much as +19% on news that an estimated 5% of global supply had been wiped off markets, all before production was restored much quicker than expected and it gave back almost all the gains.
The prorogation of the British Parliament that put a squeeze on crafting a Brexit negotiation was deemed unlawful by the UK Supreme Court and brought parliament members back almost three weeks earlier than expected. The pound rose on the news and UK Equities ended the month up +2.8%, although the likelihood of Boris Johnson delivering on his exit from the EU by October 31st is becoming increasingly more unclear.
There were also signs of stress in institutional funding markets in the US as banks seemingly scrambled to increase their Dollar reserves. A range of issues contributed including a relative lack of deposits in the US financial system with investors having been forced to search for higher-yielding alternatives. Another element playing into this is that companies began to draw down cash balances as quarterly tax bills became due. This cocktail of issues boiled down to a lack of funding in the overnight money market and left many wondering whether this was reminiscent of events in the build-up to the GFC. Ultimately the Federal Reserve injected liquidity into the overnight market in response but it took several attempts and remains uncertain how this will be addressed in future.
All in all, markets remained remarkably sanguine in light of the headwinds that the global economy appears to be facing and a multitude of left field events. This suggests a range bound environment where volatility within asset classes could be as influential as absolute moves up or down. This would make some kind of sense following a long period where markets have been polarised between value and growth and degrees interest rate sensitivity.