Share markets around the world rebounded very strongly in October as investors started to regain confidence that European leaders would find a workable solution to the European sovereign debt issues. As has been the theme of late, markets rally when new initiatives to resolve the European debt issue are proclaimed, only to sell off-later when the details are heavily scrutinised and questioned by investors.

On the Australian share market, the ASX300 Accumulation Index posted one of its highest months ever in October, up 7.2%. Other factors contributing to this return came from the Financial sector – which was very strong in the run up to the banks’ reporting season. Materials and Energy were also strong, reflecting a rebound from weakness in the prior quarter and a significant rally in the oil price in the case of Energy. As you would expect in rally like this, the more defensive parts of the market trailed, with Telecoms, Consumer Staples, Healthcare and Utilities all underperforming.

The gains on the Australian share market were relatively modest compared to global share markets though, with the US S&P500 up nearly 11% - its best month since December 1991, London’s FTSE100 up over 8% and Euro Stoxx 50 up 9.4%. Asian markets, as shown by the MSCI APEX 50, were up 11.8%, however Tokyo lagged.

From an economics perspective the data releases in October were positive for the US. The minutes of the September FOMC meeting indicated that most Fed officials do not anticipate recession but believe the recovery may be more vulnerable to shocks. Data out of China was mixed, with 3Q11 GDP up 9.1% over the year, slightly below both expectations (9.3%) and the run rate of 2Q11 (9.5% over the year). Continued growth in domestic demand compensated for weaker exports.

In the Fixed Income market, performance in October continued to be driven by the situation unfolding in Europe. Market participants closely followed the results leading into and following the meeting of EU leaders on 23 October. The market gyrated from risk-on to risk-off upon the release of various market rumours, but on a whole, risk assets recovered from the sell-off experienced in both August and September.

However on the domestic front, Australian bond yields paused their rally and sold off in October. The three-year bond yield rose from 3.62% to 3.88%; the ten-year yield from 4.22% to 4.51%, and the 3-10s yield curve steepened to 63 basis points.

The Reserve Bank of Australia (RBA) left the cash rate unchanged at 4.75% at its October meeting. In its statement the RBA noted the Board had been concerned about a further pick-up in inflation, however more recently questioned whether a period of weaker than expected conditions would contain inflationary pressures.

Fund manager commentary

Read BTIM’s complete fund manager commentary for October 2011.