Market Update – October 2013
Factional brinkmanship in the US around debt ceiling negotiations, culminating in the fortnight-long US Government shutdown, introduced some volatility to global markets in October, however most remained resilient. Confidence in a solution to the debt ceiling issue, strong 3rd quarter company earnings and a Fed pledge to continue its stimulus program in the short term saw the S&P500 finish October up +4.5%.
The ASX finished not far behind, up +4% for the month. It’s now up +7.4% for the last quarter, the second best performing index globally over the period …
… first is Italy (+11% in October/ 17.4% last quarter) leading a general surge in European equities (Euro Stoxx +6% in October) on the back of positive economic data and growing optimism in the European growth story. Germany ended October +5.1% and the UK +4.2%.
Asian shares were mixed, with both the Japanese and the Chinese markets falling while Hong Kong’s Hang Seng Index returned +1.5%.
Bond markets were mixed in October with Australian bonds having a small negative return and global bonds up 1.04%, buoyed by the Fed’s decision not to cut their bond purchasing program.
Data released over the month show business conditions and hiring intentions remained weak, and consumer confidence falling 2.1%. Notwithstanding, strong import-export data and stable iron ore prices were taken as encouraging for the resources sector and improved housing data also helped bolster the Australian index. All sectors ended the month higher, with Financials (+5.9%), Healthcare (+4.5%) and Telcos (+4.3%) the strongest, while Energy (+0.2%) was the weakest.
At a company level, earnings reports and updates were mixed. Year-end results from Bank of Queensland and ANZ were well received as were quarterly updates from JB Hi-Fi, and BHP Billiton.
A downbeat update from respiratory manufacturer ResMed detracted from relative portfolio returns with the stock tumbling on the release of softer than expected first quarter revenues precipitated by secession of market share and, more materially, from the fallout in the US competitive bidding process. We regard ResMed as one of the strongest performers in the market and believe the stock will continue on its outperformance trajectory.
Cash rate unchanged … again
The Reserve Bank of Australia (RBA) left official cash rates on hold at 2.50%, in October and again in November, both widely expected. The RBA Board continues to monitor effects of past easing decisions and while business confidence has risen sharply we remain cautious as to the extent this will translate to materially stronger aggregate demand. Private consumption and investment continues to remain anaemic despite improving global economic growth prospects. With mining investment set to slow and the non-mining sector of the economy remaining sluggish we expect growth to remain sub trend.
With tapering and debt ceiling negotiations in the US off the immediate agenda, we expect global markets to remain well-supported near term within an environment largely devoid of macro risks. While bouts of political posturing in the US will certainly continue to herald market uncertainty, the real threat comes from the fact the Fed’s QE program is not working. US policymakers are aware of this and will likely constrain their expansion of liquidity early next year.
Domestically, while stronger building approvals data may indicate that dwelling construction is starting to respond to rising house prices, for Australian to hit trend economic growth in 2014 other non-mining sectors need to respond to accommodative RBA policy.
Although continued political issues in the US and a slowing domestic economy will conceivably see increased volatility, we believe equity markets can continue to rise based on a rebound in earnings and a more conducive economic environment.
Our investment philosophy – which places fundamentals above the behavioural impacts emanating out from the global backdrop – sees companies with earnings growth rewarded in the long run. Our Australian equity portfolios continue to support names such as 21st Century Fox which offer certainty without being particularly sensitive to macro affairs.
- Download BTIM’s October 2013 Fund Manager Commentaries for a more detailed analysis of:
- domestic and global market performance in October 2013
- how BTIM funds performed, and
- our portfolio managers’ outlooks for the period ahead.
- Download this market update in PDF format