KEY POINTS
- The rally on global share markets continued over the September quarter, with the US and China particularly strong.
- Falling US bond yields added to the positive equity market momentum.
- The Australian share market lagged, with a pull-back from highs reached in August.
SHARE MARKETS RALLY DESPITE TARIFF PROGRAM CONFIRMATION
An easing in monetary policy by the United States Federal Reserve Bank appeared to lift investor sentiment across both bond and equity markets last quarter. Further detail on the U.S. tariff program failed to concern investors, despite tariff rates being introduced for many countries above the 10% “baseline”. The U.S. share market once again outperformed, with the S&P 500 Index gaining 8.1%. Information technology stocks outperformed, despite a brief lull in support during August. Nvidia’s 18.1% increase made a major contribution to the overall market gain, with the chip manufacturer now more than 50% ahead over the past year. Tesla’s share price continued to take a volatile path, increasing by 40.0% over the 3-months to September, ahead of releasing impressive production numbers for the third quarter. There was a resurgence in support for smaller companies in the U.S., with the Russell 2000 Index gaining 12.4% for the quarter.
Outside of the U.S., share market performance was mixed. Across Europe, sentiment was softer, with the German market declining 0.1% and the French market gaining 3.1%. The U.K. market (up 7.8%) performed relatively well, despite a 4.2% drop in the crude oil price. Asian markets also showed significant growth. Japan’s Nikkei Index gained 11.6% over the quarter, as the ongoing refocus on shareholder returns across corporate Japan has continued to attract buyers, whilst a weaker Yen also added support for Japanese exporters.
China’s equity market experienced a significant lift in support, with a 19.8% jump in the September quarter. China’s rally has defied the broader state of the local economy, which continues to appear subdued. Strong investor interest in the technology sector and artificial intelligence applications has been one contributor to the recent resurgence in Chinses equities. The majority of other emerging economy share markets were positive over the quarter, although negative returns in India (down 4.3%) offset gains elsewhere. The Indian market was negatively impacted by the news that the United States would be doubling the tariff applied to many imports from India to 50%. The tariff increase was made in response to India’s ongoing purchases of Russian crude oil.
With the reduction in interest rates in the United States, solid support for real assets was maintained, with global listed property returning 4.3% and listed infrastructure rising by 3.8%. Australian listed property slightly outperformed the global average, with a 4.8% increase. This gain came despite a 4.3% decline in the data centre focussed Goodman Group.
RESOURCE STOCKS LEAD THE AUSTRALIAN MARKET HIGHER
The Australian share market underperformed the global average, with the S&P ASX 200 Index rising by 4.7%. In an eventful earnings reporting season, healthcare major CSL Limited (down 16.3%) was sold down heavily, following a very negative reaction to the company’s annual results announcement. Similarly, Woolworths (down 12.3%) disappointed with its profits results and dragged the consumer staples sector lower. Energy (down 1.5%) also finished in negative territory, with a slightly weaker oil price and the withdrawal of a takeover offer for Santos (down 9.9%), creating a difficult quarter for the sector.
In contrast, resource stocks (up 19.8%) were the best supported across the Australian market last quarter. Iron ore prices strengthened, appreciating 11.5% over the quarter. BHP (up 18.4%), rallied despite concerns stemming from a state‑owned iron ore importer in China instructing their steel mills to temporarily halt purchases from BHP due to a pricing dispute. The ongoing rally in the gold price was another source of support for Australian resource stocks. Gold’s price rise was also a notable contributor to a rally in smaller companies, with the Small Ordinaries Index rising 15.3%.
The September quarter was also notable for a rotation away from the Commonwealth Bank, with the CBA’s 8.3% decline being matched by gains in both Westpac and National Australia Bank.
MONETARY POLICY EASED IN THE UNITED STATES AND AUSTRALIA
Both the Australian and United States central banks reduced cash interest rates by 0.25% last quarter. Cash rates are now 3.60% in Australia and between 4.0% and 4.25% in the U.S. Confirmation of the lower U.S. cash interest rates also led to a decline in longer term yields, with U.S. 10-year Treasury Bond yields dropping from 4.24% to 4.16%. This decline, however, was not matched in Australia, where stronger consumer spending and higher than expected monthly inflation results have reduced the probability of a further easing in interest rates this year. As a result, the Australian 10-year Government Bond yield increased from 4.16% to 4.31%.
With interest rates declining in the U.S., the downward momentum in the $US continued, enabling the $A to appreciate from US 65.6 cents to US 66.0 cents. The $A was also stronger against the Yen by 3.9% and also 0.7% higher relative to the Euro.
CONSIDERATIONS FOR INVESTORS
The September interest rate reduction in the United States has provided equity markets with another reason to rally. As appears to be pattern of late, good news is quickly reflected in share market prices and bad news is ignored or put aside to be considered at a later date. Today’s share market is being driven by a combination of very positive investor sentiment, strong market liquidity and a robust corporate sector that has provided just enough evidence of earnings growth to justify current valuations. In the short-term, there appears little that may dent these 3 drivers of market performance and the rally may therefore continue for some time.
However, whilst the reaction to the Federal Reserve’s rate cut was overwhelmingly positive, a share market with less sanguine sentiment may well have reacted very differently. In essence, the Federal Reserve’s decision was driven by the evidence of a material weakening in labour market growth. Softer conditions in labour markets are generally considered to be evidence of a later stage downturn in the economic cycle, which should have negative implications for company earnings. Unlike Australia, it is more difficult to argue that success in lowering inflation was the primary motivation behind the Federal Reserve’s monetary policy easing. Core or underlying inflation in the U.S. is still approximately 1% above the central bank’s 2% target. With the impact of the tariff program still to be determined, the central bank may be very hesitant in engineering a softer policy on the basis that inflation objectives have been met.
The share market’s willingness to discount risks in the current cycle was again demonstrated in September by the lack of reaction to the shutdown of government services triggered by the absence of agreement between Congress and the President to authorise government spending for the new fiscal year. Whilst relatively common, and unlikely to have any lasting impact, there is an environment of heightened policy uncertainty in the U.S. . The fact that the U.S. share market trades at an all-time record high at a time when much of the government’s expenditure has been frozen highlights the dominance of positive sentiment on today’s share market.
However, the U.S. is not the only share market characterised investor exuberance. China’s rally in recent monthshas come despite any long awaited domestic economic recovery or government stimulus program. Whilst the cheaper valuations that were available in the Chinese market may provide a firm basis for this rally, the recent uplift in market valuations comes at a time when there remains uncertainty over the magnitude and impact of U.S. tariffs applying to Chinese exports – and the new world trade order more broadly.
As discussed above, there are many reasons to question both the basis for, and the sustainability of, the current share market rally. However, the generally strong position of companies, the potential for significant positive transformation to be delivered by artificial intelligence, and the very strong health of the financial sector are all factors that can’t be ignored and may continue to drive share markets higher. As such, whilst a cautious approach to equity market exposure should be maintained, the lack of any financial dysfunction in markets, or apparent near-term catalyst to dent sentiment, suggests the majority of longer-term target allocations to equity markets should be maintained in the current environment.
Important Information
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR, MSCI World ex Australia NR Hdg AUD, FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged), MSCI China (Composite) in CN, Deutsche Borse DAX 30 Performance TR in EU. Hang Seng TR in HKD, MSCI United Kingdom TR in GBP, Nikkei 225 in JPY, S&P 500 TR in USD
This Market Update contains information that is general in nature. It does not constitute financial or investment advice. Any information, material or commentary is intended to provide general information only and does not take into account personal circumstances. Zone Financial Pty Ltd makes no representation as to the accuracy or completeness of the information. Before acting on any information contained in this document, each person should consider its appropriateness having regard to their own or their clients’ individual objectives, financial situation and needs. You should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision or recommendation.
