Last week markets were down again, reflecting the trends that took root in September - long-term yields pushing higher with markets on the back foot.  Most major asset classes were in negative territory for September, which had overtones of 2022, as concerns over rising interest rates, the slowing pace of disinflation, high oil prices and a potential global recession weighed on investor sentiment.

For much of the quarter fears of a recession seemed to be receding although confidence has weakened again in the last few weeks. The main preoccupation for markets, however, has been the sense that inflation, especially in food and energy prices, might remain elevated amidst increasingly hawkish rhetoric from central banks around the world.

That means that returns for the quarter were also subdued after a buoyant July and a weaker August. Australian equities ended slightly down for the quarter, with the ASX 300 returning -0.8%, having lost almost 3% in September. Losses were broad-based across large, mid, and small caps. Healthcare was the worst-performing sector, down 6.4%, while Energy bucked the downward trend, gaining 2.2% on the back of higher oil prices. Most of this happened in September and energy stocks were up 12%, having been down earlier in the quarter reflecting volatility in global energy markets. Soft iron ore prices meant the local miners were a drag on the index, but it was healthcare stocks that had the biggest impact, especially ResMed and CSL. Their Q2 earnings were mixed but actually not that bad and many managers have been surprised at the reaction of markets, and in fact, many stocks that reported good earnings were also down.

We have heard an intriguing narrative that so many global managers have rotated into the large pharma companies that have so-called GLP-1 obesity drugs in the market that they might have been simultaneously rotating out of other healthcare stocks, especially those like ResMed that are supposed to benefit from the link between obesity and conditions like sleep apnea and diabetes. Certainly, Eli Lilly and Novo Nordisk, the GLP-1 front runners, were one of the main positive contributors to global markets, up 15% last quarter, 60% over the last year and some 350% over the last 5 years.  

Global equities still declined, by 4% in AUD terms in September, with the S&P 500 down -3.3% in local currency terms while European and Japanese were down by more than 5% (including the effects of weaker currencies). The UK FTSE 100 was the stand-out performer and remained in positive territory (at least in local currency terms) as exporters were seen to benefit from the weak British Pound.

The Australian dollar also depreciated against most major currencies but especially the US dollar which provided a cushion for unhedged global asset returns. That meant that, for Australian unhedged investors, global developed markets only experienced losses of less than 0.5% in AUD terms. Emerging markets also proved resilient and were flat for the quarter. Solid performance from parts of Asia (including China) offset weakness in Latin America with currency again having an impact.

Australian bonds were only slightly negative for the quarter and down a few percent overseas where long-term rate rises have been a little more pronounced. Government bonds here and overseas were down almost 2% in September.  Perversely, high-yield bonds were flat and outperformed higher-quality corporate credit (-1.97%), as the latter tends to pay larger fixed coupons so is more driven by government bond yields, whereas lower-quality companies tend to be more exposed to floating rates.

Listed real assets including property and infrastructure posted negative returns, weighed down by rising bond yields. Australian REITs returned -3.04% (having fallen 8% in September) and global infrastructure and REITs were both down by around 7% for the quarter. While the cash flows of both asset classes are seen to offer some protection against the effects of long-term inflation, they can also be very sensitive to bond rates in the short-term as the market adjusts the rate at which those cash flows should be discounted in real terms.

Commodities, on the other hand, are often expected to have more immediate inflation hedging properties and were true to form in the last few months, with the S&P GSCI commodity index returning +12.81% in USD terms, and importantly for Australians, Iron ore prices matched that return.  Gold has held up in Australian Dollar terms but is down about 5% in USD terms, probably because it often moves inversely to real bond yields.