Quarter in Review: September 2022
After a weak June quarter, the September quarter saw the ASX300 Accumulation Index returning 0.5%, with July delivering buoyant returns before hawkish rates fears erased its gains in the month of September. The key drivers of the market were:
- Sector Performance: While the general market was modestly up for the quarter, sector performance was varied. The best performing sectors during the quarter were Energy (7.2%), Healthcare (3.3%) and Materials (3.1%). Conversely the worst performing sectors were seen in Utilities (-12.2%), Real Estate (-6.4%) and Industrials (-4.1%).
- Rates and Yields: Inflation is remaining persistent despite further rate rises by central banks globally. The quarter started and ended in contrasting conclusions of the markets’ view on rates. During the beginning conversations stemmed around the potential of a Federal Reserve pivot from its hawkish regime – pricing in a reversal of rates hikes from March 2023 onwards. The key catalyst came from a dovish interpretation of the July FOMC meeting. However, sentiment quickly turned following the annual Jackson Hole Symposium where Federal Reserve Chairman Jerome Powell issued clear intention to prioritise price stability above a potential recession outcome. In all, the US 10-Yr rose 82bps to 383bps in the quarter. Meanwhile, the AUS 10-Yr rose by 23bps to 389bps during the quarter as the RBA delivered three consecutive 50bps hikes to end the quarter with the cash rate at 235bps.
- Economic News: China continued its battle with Covid imposing further lockdowns in many cities resulting in another sluggish quarter of economic growth. Days after the funeral of Queen Elizabeth II, the new Truss Government shocked global markets with a GBP45bn stimulus package which was in direct conflict with the BOE’s goal of fighting inflation by raising rates to reduce demand. The pound fell and gilts rose and the BOE had to buy gilts to calm markets before the government wound back its policy.
- Commodities: Despite the Energy and Materials sectors outperforming during the quarter, commodity prices were soft. Iron Ore (-19.9%) deteriorated on the back of continued China lockdowns stifling activity in the steel-intensive sectors, as well as cratering sales in the Chinese property market. Brent Crude (-23.4%) also suffered from increasing fears of global recession risks – a consequential reaction to the hawkish regimes enacted by key central banks and the massive terms of trade shock in Europe.
- Global Markets: Peer global indices fared worse than the Australian market with the MSCI down 6% for the quarter dragged down by Emerging Markets down 11.5% on the back of the surging USD.
- Reporting Season: Companies reported better than expected results with margins holding up as companies were able to largely pass on cost pressures onto selling prices – a lever easier to pull, and an attributable cause of the higher inflationary environment. In FY22 sales growth for the ASX200 was up 12% and eps growth was up 23% largely driven by resources up 38% vs industrials ex financials up 6%. However, with the future macroeconomic landscape fraught with uncertainty, investors were focused on the forward outlook which saw EPS downgrades come through for FY23.
- Corporate News: As markets fell and interest rates rose, we saw three takeover bids fall over or be restructured. KKR withdrew from taking over Ramsay Healthcare after being denied due diligence and, Atlas Arteria (who were in takeover discussions with IFM Investors) bought a 66.7% interest in Chicago Skyway and used a non-renounceable rights issue (on their inflated share price) totalling $3.1bn to pay for it. Dye and Durham’s bid for Link was withdrawn and instead have made a non-binding offer to buy Link’s corporate markets division. Meanwhile in financials, ANZ acquired Suncorp Bank for A$4.9bn at 1.3x book subject to ACCC approval and Pendal and Perpetual entered into a scheme of arrangement to merge the two businesses.
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