Australian equities suffered over the September quarter with the S&P/ASX 300 Accumulation Index falling -6.47%. Investor worries over a slowdown in China and the relatively fragile state of the Australian economy continued to weigh on share prices. Major Australian banks added to the selling pressure via ongoing equity raisings required to meet higher capital requirements demanded by regulators.
Australian economic data was mixed. Readings of GDP growth, consumer and business confidence were all weak, while strength in housing continued. The Reserve Bank of Australia (RBA) held cash rates steady at 2.0% over the quarter, but pressure is building for a further cut. Earnings for the equity market as a whole declined by approximately 4% over the financial year, led lower by mining companies earnings falling by 35%. The S&P/ASX 300 Accumulation Index is trading on a forward multiple of 15.0 times - close to its long term average - suggesting the Australian market is around fair value.
Global equities declined during a volatile quarter amid fears of a slowdown in Chinese economic growth and its potential impact on the rest of the world. In Australian dollar terms the MSCI AC World ex Australia Index returned -0.74% for the quarter. The Australian dollar depreciated over the quarter, so hedged returns were worse with the MSCI World ex Australia Index returning -7.36% for the quarter.
China was a focus point over the quarter. The Shanghai Composite continued its selloff falling a further 27.9% and GDP growth rates slowing to around 6.5%.
In the US, a sell-off came despite continued strong macroeconomic data. European and UK equities also delivered negative returns. In Europe, economic growth remains patchy despite stimulus from the European Central. Amid global growth concerns, declining energy and metals prices weighed on the resources sectors. In Japan, share prices slid sharply amid weaker-than-expected economic data releases and the negative sentiment that hurt most world markets. Emerging markets delivered negative returns, due to concerns over the health of the Chinese economy, commodity price weakness and Brazil’s credit rating downgrade. The MSCI Emerging Markets Index returned -10.14% in Australian dollar terms.
The Australian property securities market generated a return of 1.13% during the quarter ending 30 September 2015.The uncertainty regarding the direction of US interest rates is supporting defensive asset classes like property, however the tailwinds recently enjoyed by the Australian residential sector are moderating due to uncertainty associated with demand from Chinese investors and an increase in residential interest rates in Australia.
Australian bonds returned 2.20% over the quarter as measured by the Bloomberg AusBond Composite Bond Index. International bonds returned 1.87% as measured by the Barclays Capital Global Aggregate Bond Index ($A hedged) during the quarter. Bond yields rose mid-September driven by expectations the US Fed would increase rates. Following the Fed keeping the interest rate on hold and postponing any monetary policy decision due to the current global uncertainty, global and australian bond yields retracted.
The RBA left rates on hold in the third quarter at 2.0%. The decision was supported by the below long-term trend rate in economic growth. However, outside of the mining sector, conditions have been very gradually improving including the labour market. However the RBA sees downside risks to world growth due to the continuing moderation in economic growth in Asian economies which could affect the local economy and confidence. Market expectations persist for further rate easing.