• It was another strong month for the ASX, with the larger company focused ASX200 adding 1.3% in price terms for September and the Small Ordinaries an impressive 2.0%. Once again, the importance of mining and banking to the Australian economy was highlighted, with financials adding 4.1%, as both ASIC and APRA’s litigation against the sector was thrown out. As the calls for climate action increase, the economy continues to benefit, with the energy sector up 4.7% and materials adding 3.1% buoyed by gold and iron ore production. The defensive healthcare (-2.5%) and property trust sectors (-2.7%) were hardest hit. The S&P 500 delivered a solid return as another round of earnings season is set to begin, with the benchmark index up 1.7%. The positive return came amid increasing concern about the trade war, however, consumer numbers remain strong and markets were buoyed by the continued support of the Federal Reserve. The result took the year to date return to 19%, the best since 1997.

 

  • Central banks around the world responded to weakening global growth in September. The ECB moved their cash rate further into negative territory to -0.5%. Despite the protestation of the White House they also recommenced their QE policy, buying $20bn of assets per month in an attempt to stimulate the banking sector to lend again. The US Fed finally capitulated to pressure from President Trump, cutting rates by a further 0.25%. They were also forced to step into the overnight lending market, to the tune of $128bn, as inter-bank lending froze and interest rates spiked in a rehash of 2007. In Asia, the PBOC responded by cutting the bank reserve ratio by banks by 0.5%.

 

  • The increasingly combative Australian regulator’s took another hit, with APRA losing its case against IOOF. The judge indicating that APRA’s case was systemically weak and failed to prove that the reimbursement of customers from the super funds ‘reserves’ was inappropriate. This followed ASIC’s case against Westpac in relation to responsible lending laws being thrown out in August. September also saw the ATO ramp up pressure on SMSF trustees. They sent letters to 18,000 trustees holding more than 90% of their fund in a single assets (read direct property) with threats of fines and disqualification.

 

  • In a predictable and after the fact announcement, the OECD downgraded the outlook for the growth in the Australian economy to 1.7%. This coming just a few weeks after the weak June quarter result of just 1.4%. The OECD called for more taxation reform, including an increase in the GST and company tax cuts in an effort to stimulate investment. They noted the impact that trade uncertainty is having on investment decisions. Global growth in 2020 was reduced to 3.0% and 2.9% in 2019 as the US-China trade war, high savings rates and low business investment continue to bite. Whilst growth is slower than trend most economies remain in reasonable shape, with inflation in the US and Australia at 1.7% and 1.6%, and unemployment of just 3.7% and 5.3% respectively.

 

  • Australia achieved its first current account surplus in 44 years, bouncing back from a deficit of $2.9bn in July to $5.8bn in August as commodity prices remained well supported. This comes at a time when growth in the Chinese economy, which is our most important trading partner (chart below) continued to slow. Industrial output growth was 4.4% down from 4.8%, and exports fell 4.3% driven by a 16% reduction in exports to the US.

 

  • If the attacks in the Strait of Hormuz weren’t enough, Iran has reportedly increased geopolitical risk in the Middle East by facilitating an attack on Saudi Arabia’s key oil projects. Interestingly, this comes at a time when the Saudi’s were planning the IPO of this massive state owned business. The immediate reaction has been a spike in oil prices around the world, yet reports suggest at least half of production has already been reinstated. As history has shown, the cure for higher oil prices is higher oil prices as this would present a huge drag on an already weakening global economy

 

  • In a sign that the incredible flow of capital into private markets may be hitting its ceiling, the IPO of We Work was put on hold during the month. Some are suggesting public markets simply weren’t willing to pay the lofty valuation of a company that lost (yes, lost) USD$1.4bn in the first 6 months of 2019 alone. More importantly, they suggest that this may be a turning point after years of capital flooding into private equity, venture capital and other unlisted assets has increased competition in the sector. We aren’t sure how $1.4bn of money can be lost in 6 months, but here is an explanation of how We Work ‘makes’ money. Interestingly, public markets valued the company at just $15bn only a few months after the company raised venture capital on a valuation of $47bn!

 

  • There is growing pressure for industry funds and advisers alike to reduce expectations for investors after several years of stronger than targeted returns. The typical balanced fund targets a return of CPI + 4.0% with the average of around 7-8% over the last 12 months. But as it stands and as highlighted by the likes of Schroders, such targets are getting more difficult to achieve. The traditional Government bond allocations which should make up 40-50% of portfolios are now offering negative returns and sharemarkets remained challenged. Recent returns have been delivered by taking more risk but the likes of ex Lazard CEO Rob Prugue are concerned about the focus on return ‘scorecards’ rather than security of members retirement funds.

 

  • In one of the more enlightening fund manager presentations we have attended, David Harding of Winton fame, visited Melbourne to discuss the difficult conditions for his trend following fund. After delivering  during the GFC the fund has been a stalwart in Australian portfolios but returns since have been positive but weak. Harding discussed the problem of crowding in his trend following approach, which reduces the potential returns on each investment decision stated his ‘hope’ for 2020 was higher returns. He also discussed the difficulty many scientists and engineers have in investment markets, believing it is a science and not a combination of both art and science.