Market Overview
September was a generally strong month for most asset classes. Gold, emerging market equities, and international growth equities (think the Magnificent 7 and AI/tech adjacent companies) continued to perform.
Australia was a modest outlier, compared to international peers, with the local equity market taking something of a breather after an unusually strong August. Credit spreads tightened, to near record lows, indicating bond markets saw very little chance of default risk across much of the corporate debt market.
Private credit, on the other hand, is under pressure with ASIC/regulator concerns over misrepresentation of terms. Hedged investments, compared to unhedged international exposures, performed fractionally better over month driven by a modestly stronger AUD.
Global shares
China’s various sharemarkets have been performing well over the last 6 months, rebounding from multi-year lows. It wasn’t all that long ago that China was seen as “uninvestable” due to heavy government and regulatory interference, and viewed through a lens of poor social and corporate governance concerns. That’s changed, in part due to a shift towards a “business friendly” stance from authorities, and due to the rise of China’s tech champions, from Alibaba to Tencent to Baidu to Xiaomi and DeepSeek (China’s rival to OpenAI).
There’s almost been some modest efforts to combat China’s “excess capacity”. The enormous manufacturing apparatus that has allowed China to compete so effectively in photovoltaics, solar modules, electric vehicles and the like has harmed domestic producers as much as it has international competitors, and thus the authorities trying to clamp down on the production and export of goods below cost has been viewed as very good for restoring profitability and reducing the impacts of deflation.
China’s rise has helped lift the overall emerging market region, given the sizeable benchmark weighting (typically China is between 20-30% of most EM oriented benchmarks or ETFs).
Australian shares
Energy stocks sold off over September, with the high profile takeover of Santos by ADNOC falling over. Delays, requirements to take on rehabilitation liabilities, impacts of leaks and potential costs, all took a toll culminating in ADNOC walking away from the deal. That pressured most oil and gas equities; not helping was the near continual efforts of OPEC+ to return barrels to an already well supplied market.
Towards the end of the month, a major copper/gold mine outage at the Grasberg mine in Indonesia helped companies like BHP and RIO (who run some of the biggest copper mines in the world) to outperform over the month, within materials.
Also strong were the consumer discretionary names, which continued a strong rally that began with the August results season (where consumer demand outlooks were fairly robust) and carried over into September. Staples, on the other hand, continues to struggle, with Woolworths continuing to sell-off post tabling a “weaker than expected” start to the new financial years’ trading in the iconic Australian food arm. That update was from August, but the negative share price momentum continued.
Investment Outlook
The rise of “passive” and systematic investment strategies means there’s no marginal buyer for companies/stocks that deliver bad news, and instead we see momentum oriented quantitative strategies appearing to exacerbate the trend, by shorting or selling companies with weaker price or earnings momentum. The net result of this seems to be that companies with strong earnings certainty (no question marks over the outlook) continue to perform much better than their fundamentals (sales, cashflows and earnings growth) might suggest, and companies with uncertainty about the earnings (some question marks over their outlook) selling off much more than we’d expect.
Said more simply, bad news is being punished by a margin much greater than you’d anticipate just based on the earnings and dividends alone, and good news is being rewarded by a much larger amount than you’d reasonably expect based on the earnings and dividends alone.
Returning to markets more broadly, equities are presently very strong. The share price performances of many markets, and the failure of weaker economic data (like the loss of momentum in jobs data) to translate into more systemic macroeconomic weakness, is luring new buyers and fresh money into the asset class.
Whilst that’s a good thing, in that it explains recent, strong, market performance, it is something of a concern, in that one of our most regular empirical findings is that there’s a future, negative, correlation between how large the asset allocation to equities is, and the subsequent return from equities over time. In other words, the above graph suggests equities are potentially overbought, and that the expected future return, given the high starting point, is much lower today than at any point in time over the past 5 years.
We are mindful of this in our asset allocation positioning and are ensuring the portfolios remain well diversified across asset, sub asset, region and markets. Spreading the capital far and wide and remaining biased towards quality investments (e.g. investment grade debt, as opposed to sub-investment grade, or high yield debt).
Australian cash rate.
At time of writing, the RBA had just handed down their decision to leave the domestic cash rate unchanged, noting that inflation was looking just a touch higher than they’d anticipated, and given that consumer spending, and corporate credit growth remain robust, they are holding fire on further cuts at this time.
Overleaf, we show the market forecast for where rates are likely to wind up over the next 18 months or so. What you’ll notice is that the aqua coloured dots in the future level out at ~3%, indicating that the markets (and us) are really only expecting another cut or two, and that will be it for the current easing cycle.
Important information
This document has been prepared by Aequitas Investment Partners Pty Ltd ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of AIP FS Pty Ltd ABN 49 680 982 478 (Australian Financial Services Licensee no. 700016), and is for distribution within Australia to wholesale clients only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement.
EWK Investment Committee
