The September quarter was a choppy one for Australian shares driven largely by global macro events.
Australian shares started the quarter positively as investors gained confidence that the US economy was continuing to improve, and the slowing of Chinese growth may not be as sharp as feared. Whilst August was relatively flat the end of the quarter saw a sharp 5.37% sell-off in shares as the optimism towards global growth seen at the start of the quarter melted away. There were several negative influences, including weakening indicators of Chinese industrial production and infrastructure, worsening European growth outlook, troubles in the Middle East and the spread of the Ebola outbreak.
The weakening global outlook weighed heavily on commodity stocks. This decline was in part softened by a corresponding decline in the Australian dollar from US$0.94 to US$0.87, helping many sectors of the economy which had suffered over the past few years.
The macro events dominating market movements over the quarter tended to overshadow a relatively solid corporate reporting season.
Expectations for FY 2015 earnings growth declined a fraction following the reporting season, with the overall market earnings expected to grow 4.6% by end of financial year. Dividend payments were on average increased by corporates reflecting the general investor demand for higher income generation.
The Australian equity market is trading on valuations around its long term average.
The forward price earnings multiple is 13.6 times which is 4% below its long term average.
The forecast dividend yield on the market is 4.8% before franking credits which remains attractive compared to the official cash rate of 2.5%.
The third quarter offered no shortage of dramatic headlines with tensions between Russia and Ukraine, the conflicts in the Middle East and fears of Ebola taking centre stage. The prospect of Scottish independence also garnered attention given the potential domino effect a ‘yes’ vote might have had across Europe. Yet despite all of these concerns, global equity markets performed reasonably well in July and August before dropping in September.
The US appears to be reasserting its traditional role as the leader of the global business cycle. Whilst most emerging market economies are now past their cyclical growth peaks, the US economy is achieving self-sustaining growth with boom employment and consumer spending improving. As a result, the US Federal Reserve is winding down its asset purchase program and is providing some indication that it may start increasing rates sometime next year.
Japan is in an entirely different phase of adjustment. The Abe administration has made it a priority to eradicate deflation and is employing both monetary and fiscal tools aggressively. So far the results have been promising with core inflation having risen above zero and has remained there for almost a year.
Signs are also emerging that there could be a third quarter rebound from the consumption tax hike induced contraction in the second quarter.
The Eurozone economy is arguably the most problematic region with regard to economic growth woes. Growth in the second quarter disappointed in most European countries, with more recent economic indicators noticeably weak in France and Italy and mixed for Germany.
It was a mixed quarter for emerging markets with optimism for reform in India and Indonesia following market-friendly election outcomes offset by concerns over a Chinese slowdown and continued unrest in Ukraine before a ceasefire was agreed in September.
In China, recent data seems to suggest that the policy supported rebound in the second quarter appears to have lost momentum in the third quarter and central policymakers have dampened expectations of significant policy easing being provided.
The third quarter was characterised by the growing disparity between the economic and monetary policy outlook between the US and Eurozone, heightened geopolitical worries and a correction in the global high-yield corporate bond market.
Economic data and Central Bank policy remains a crucial driver of markets, with the two key events being the European Central Bank announcing additional stimulus measures at their September meeting and the Federal Reserve set to complete its Quantitative Easing (QE) tapering in October. Improving economic data in the US and cash rate forecast helped bond yields rise.
Geopolitical concerns about risks surrounding events in the Middle East and eastern Europe were again present during the quarter.
Domestically, Australian bond yields rose, currency depreciated and the yield curve steepened during September, led by US treasuries due to positive data from the US. The Reserve Bank of Australia (RBA) left monetary policy unchanged over the quarter at 2.5%. Australian economic data was also positive.
The RBA left the cash rate on hold at 2.5%.
In general, economic data was positive with job generation, lower unemployment rate and better than expected building approvals. Credit growth on the other hand was broadly in line with expectations. Market expectations remain for an extended period of cash rate stability, however any prospect of further easing that had been previously priced in was removed.
Although property fundamentals did not deteriorate during the quarter the property securities market displayed renewed signs of volatility with equity market investors demonstrating their concern in relation to global economic factors.
The weight of capital chasing investment grade assets continues to drive direct property values however many property sectors continue to illustrate moderate leasing demand due to soft economic conditions.