• The market continues to climb amid increasing uncertainty and a seemingly never-ending flow of bad news on the geopolitical front. In fact, the S&P 500 once again hit an all-time high during October. Yet if you speak with any investor, professional or individual, there is a feeling that things have never been worse. Whether it is the proliferation of social media and the availability of information, or just the end of a bull market, it’s always prudent to ask, what if you are wrong? In this vein, we were interested to read the thoughts of Montaka during the month:“We believe investors are underestimating the potential for more optimistic scenarios. Consider how equities would perform in an environment of easy monetary settings, a stabilised global economy, an acceptable Brexit deal and relief from US trade measures while President Trump seeks re-election. Such a scenario, while far from certainty, is far less improbable than most currently believe, in our view. The point is that investors need to remain invested”.

 

  • Sharemarkets around the world were generally mixed, with the US performing well on the back of continued strength in the consumer sector. The Japanese market benefitted from a weaker currency, sending the index up over 5%, whilst the ASX essentially treaded water, falling -0.4% in price terms. The major detractor was the banking sector (-2.8%), as the impacts of the financial advice scandal and more aggressive regulation continue to impact profits. On the positive side, the healthcare sector (+7.8%) benefitted from earnings upgrades from RMD and a reiteration of 7-10% growth by CSL.

 

  • Some of the biggest news in what was a very active month, was the announcement that Chinese GDP growth had fallen to 6%; the slowest rate in 27 years. Growth across the board appears to be slowing, with investment in the agriculture, manufacturing and industrial sectors slowing but infrastructure spending ramping up as the Communist Party’s 70th anniversary nears. The rate is well below the 6.6% of 2018, but the economy remains healthy was retail sales climbing 7.8% in September and industrial output up 5.8%. As highlighted, the Australian economy is increasingly reliant on strong Chinese growth, so signs the US-China Trade War may be coming to an end should be seen as a positive.

 

  • There were increasing signs that the technology driven market bubble may be coming to an end. With a short report targeting logistics software specialist Wisetech Global seeing billions of market capitalisation lost. The We Work debacle was highlighted in all of its glory with renowned venture capital investor Soft Bank global recapitalizing the company after it’s failed IPO. The capital injection, which saw the failed CEO walk away with over $1bn, valued the company at just $8bn, just a few weeks after the company attempted to sell shares in its IPO at a value of $47bn.

 

  • Inflation remains non-existent in the US, at just 1.7%, with costs kept under control from sustained low interest rates and a lack of wage pressure due to more flexible employment. Unemployment continued its march lower, hitting just 5% during the month, with the participation rate still strong at 63.2%. The results were similar in Australia, with unemployment falling to 5.2% in September, what’s even more impressive is the participation rate reaching multi-decade highs of 66.1%. That being said, the rationalization occurring in the major banks and traditional business sectors will likely see increasing redundancies in the years to come.

 

  • It was another eventful month in geopolitics with the announcement that the US and China would re-engage in talks to end their trade war. The announcement suggested the Chinese would begin buying $50bn in US farm products and allow financial services companies more access to their market, in return tariffs scheduled for 15 October were put on hold. This came at an opportune time as US factory activity had contracted for the second straight month in September, hitting a 10 year low and increasing concerns about the economy. Once again, the ‘Trump Collar’ was in force, with the President supporting weaker stock markets through good news. On the other side of the Atlantic, PM Boris Johnson managed to negotiate a new deal with the EU and seems closer than anyone could have predicted to deliver Brexit in an orderly manner. His Halloween target has been pushed back by Parliament, yet this is a positive sign for Brexiteer’s and anyone seeking some certainty. The UK is now set for a pre-Christmas election as Johnson seeks another mandate from the people. It’s worth keeping in mind the UK economy represents just 3% of the world.

 

  • The Federal Government made the questionable decision to announce an inquiry into why the major, and junior, banks didn’t pass on the recent RBA rate cuts in full. The ACCC has been asked to examine the reasons behind this, yet to most market participants it is incredibly clear. The banking sector is seeing costs increase from every angle, including staffing, funding via overseas markets and the costs of increasingly complex regulation. This is all having an impact on their net interest margins (NIMs) which represent the difference between their cost of capital and the interest rate they charge. Sustained low interest rates are dangerous for pension funds and banks alike, as the low returns on offer push them towards insolvency, or the ability to profitably fund their own operations. By holding onto a small portion of these rate cuts, the banks are attempting to protect their capital position and profitability.

 

  • The likelihood of further short-term rate cuts has effectively disappeared, with inflation printing at 1.7% for the 12 months to September. Whilst still below the 2-3% RBA target, it is substantially higher than most developed economies around the world. Looking to the US, economic activity improved to an annualised rate of 1.9% in the third quarter, below the 2% of June, but still one of the fastest in the G7. The better than anticipated result was due to the resilient consumer, which is benefitted from wage growth and full employment, as consumption increased 2.9%. Businesses continue to hold off on investment in the face of the trade war, which declined 1.5%, far better than the 6.3% in the previous quarter.

 

  • Is this the end? As mentioned previously the long awaited listing of shared office provider We Work was pulled and saw its valuation fall nearly 80% overnight. The share prices of Uber and Grubhub fell heavily as investors tired of lofty valuations and hoping for growth. Closer to home, Wisetech Global was called out by short sellers from Asia, the Latitude Finance IPO was pulled for a second time, as was Property Guru. In Tasmania, the Hobart Airport was sold to a syndicate lead by Queensland Investment Corporation (QIC) at a multiple of 26 times earnings. This compares to the ASX which trades closer to 13 times. There is an increasingly feeling that a lack of growth and easy access to capital is seeing valuations move out of control potentially capping long term returns at lower levels.