September Market Commentary

September Market Commentary

All other things being equal, lower prices lead to higher future expected returns. That is clearly reflected below in the relative movements since our last update. As the price action was generally weaker across the board we have not made any adjustments to the respective active asset allocation stance between the asset classes since our August quarterly update.


As we have reached three quarters of the way through the current year, let us provide some numbers to illustrate the journey that markets have travelled over the year to date. We will then move on to the normal assessment of the macro conditions and outlook for the major geographic regions. Please note, while this is the September commentary the year to date figures quoted below include trading through the start of October, where in many cases there has pleasingly been some respite from recent volatility along with in some cases a significant bounce in the first fortnight of the new month.

The total return on the ASX200 index has been slightly negative at -0.3%, representing a price decline of 4.0% which has been offset by the dividend income – before franking credits are considered. To borrow a sporting analogy, this year has really been a game of two halves, with impressive price gains of nearly 10% recorded towards the end of April, only for the assault on the 6,000 threshold to fall just short. Then from late April to the end of September we have seen a significant price decline of 17.8% from peak to trough, though as mentioned the first weeks of October have added back more than 7% from low to high. The broad index has eked out this modest decline in spite of the large weights in Financials and Resources having declined by 2.8% and 9.3% respectively, helped by a positive return from Industrials which is up by 1.5% year to date in total return terms.

Overseas developed markets have generally fared similarly, with the S&P500 in the United States down by 1.5% and the UK’s FTSE100 index down by 1.3%. However in Europe the broad based Stoxx Europe 600 index is 6.9% higher – comprising a price return of 3.9% and income of 3.0%. Similarly Japan’s Nikkei 225 index is 4% higher with price gains of 2.5% and income of 1.5%. We have discussed the trajectory of the mainland Chinese indices in previous commentaries, and so we simply note here that it does appear that in recent weeks both the Shanghai and Shenzhen markets have stabilised. By contrast to the wild ride on the mainland, the Hong Kong-based Hang Seng index looks very similar to the experience of other developed markets with an overall return of -1.5%, being a price decline of -4.5% and income of 3.0%. All in all, it has certainly been a testing year so far for equity investors, and one that has served to remind that a value driven methodology can require significant periods of patience and disciplined portfolio management to realise the long-term benefits of the approach.


chart1In an unusual development, the main sources of unease and volatility have not been European in the most recent past. As such, we will limit our discussion on Europe to just a quick observation that the economic recovery continues as evidenced by the trajectory of GDP growth depicted here. Importantly we are also seeing that credit growth has been picking up in key areas and that other fundamental indicators such as commercial vehicle sales have continued to grow steadily.

We have also been getting consistent confirmation from Mario Draghi at the European Central Bank that the supportive monetary policy, including the European version of quantitative easing, will continue. Indeed, he has recently been quoted as saying that the initial deployment of QE is working better than the bank’s initial expectations. With a longer term view, there remains much work to be done to repair the labour market with Eurozone unemployment remaining above 10% and youth unemployment higher again at more than 20%. The recovery story is nonetheless encouraging and we believe supports our long-term forecast of attractive returns from the region.


The Chinese have been the cause for much consternation of late, primarily on the basis of their handling of a currency adjustment and the bursting of the bubble that had inflated in their mainland equity indices. The communication about the currency adjustments left a lot to be desired and certainly the markets were confused about any further actions that may or may not be forthcoming. This uncertainty leads to exaggerated volatility following what was a relatively modest adjustment to the rate at which the Renminbi exchanges with the US Dollar.


For some perspective on just how modest a move this currency adjustment was, it is represented by the small vertical decline in the blue line on the right hand side of this chart. The chart begins at the end of 2011 and plots the relative moves of the Chinese and Japanese currencies against the US Dollar and it shows that Japanese exporters to the United States have become about 35% more price competitive than their Chinese counterparts. Yet there have been little if any accusations of currency manipulation against the Japanese while this has unfolded.

The second major intervention that has brought skepticism as to the efficacy of the Chinese leadership was of course their response to a bubble in the equity indices. We will not go over the detail of the response except to highlight one of the primary causes of discontent was the perception that authorities had diminished their commitment to let the market play a ‘decisive’ role in the allocation of resources within the Chinese economy – a critical aspect of the reform program outlined in late 2013 at the Third Plenum of the 18th Party Congress.

Later this month the same leaders will meet again in Beijing for the Fifth Plenum which will present the policy and reform program for the next five year term from 2016 to 2020, the last period under the leadership of incumbents President Xi Jinping and Premier Le Keqiang. A re-commitment and continuation of the existing reforms, most particularly with respect to the governance of State Owned Enterprises, is widely expected. We keenly await the announcements, but in the meantime affirm that we do not foresee a so-called hard landing for the Chinese economy and take comfort from supportive valuations in our forecasts.


We may well be looking at another six months of ‘will they, or won’t they’ when it comes to the US Federal Reserve and their decision to answer the seemingly interminable question of whether or not to increase interest rates for the first time in 9 years. The widely anticipated lift-off stalled on the launch pad in September, with the accompanying commentary mentioning the volatility in global markets as a primary reason for the Fed’s reticence. There is no shortage of observers keen to point out that this was a mistake, and often it seems that these people have the loudest voices, but it is worth nothing that frequently these are the very same people that have been saying Fed policy has been misguided ever since rates were taken to zero. Whilst the nature of their criticism has fundamentally changed, they seem undeterred by the inaccuracy of their initial assessments and their critique continues unabashed. In the midst of the emergency monetary policy response which included interest rates at zero and the establishment of quantitative easing programs, the cries were that this policy would debase the currency and posed a risk of igniting runaway inflation.

The Wall Street Journal1 published an open letter to then Fed Chair Ben Bernanke on November 15, 2010 that was signed by 23 prominent institutional investors, economists and academics. In it they said: “We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.” Since that letter was published the US dollar has strengthened by more than 20% against its trading partners, the unemployment rate has fallen from 9.8% to 5.1% and inflation has just dipped below 0%. Approaching five years since the date of this letter, the facts clearly speak for themselves and perhaps we should leave monetary policy in the hands of the central bankers.

On that score, there is clearly some difference in opinion on the health of the recovery and those at the Fed with differing opinions and a vote on rates are becoming vocal about the reasons for their prudence. Among these are indeed the fears of a slowing global economy and the recent market volatility, but closer to home the September jobs number was weak and retail sales have been slowing significantly. Tellingly the retailer Wal-Mart has just updated the market and missed earnings expectations along with indicating they expect earnings to contract by 6% to 12% in fiscal year 2017. The US consumer which is integral to the economic recovery is perhaps not as strong as was previously thought and the cyclicality of earnings of which we often speak is maybe starting to become apparent. Our long term forecast for the US equity market remains well below that of other developed markets.


Everyone from the newly installed Prime Minister to our own central bankers have been responding in a similar fashion to the gloom that has characterised many comments on the Australian economy since the Q2 GDP result was published. That number came in at growth of 0.2% for the quarter and annual growth of 2.0%, which is at the bottom of trend growth recently. Philip Lowe is the current Deputy at the Reserve Bank of Australia and is expected to assume the leadership when Glenn Stevens steps down in about 12 months’ time. In a recent speech2 he pointed to the modest growth in real incomes over the last several years as a likely reason for the “soul searching about the future of the Australian economy” as well as asking a number of questions as to what comes after the resources boom, what will generate the future growth in living standards and where will the future jobs be found.


The answer lies in improving our productivity which is most commonly depicted using the green line showing economic output per hour worked. The orange line reflects the benefits to our national income of historically high commodities prices (our terms of trade) which now continues to trend lower. The blue line reflects living standards as it shows income on a per capita basis rather than per hour worked, and past gains have come about as a result of changes in demography that are unlikely to be repeated in the future, such as women joining the work force. Lowe went on to highlight five areas where fundamental aspects of our economy are supportive of productivity improvements.

Firstly, despite recent political ructions, by global standards we have a stable administration and well established regulatory system, as evidenced in one instance by the prudential oversight of our financial and banking system. Secondly, the population has high educational standards and a demonstrated capability to adjust to a changing world including the adoption of new technologies. Our mineral resource base remains one of the biggest and highest quality deposits in the world and our agricultural assets will become increasingly important in the future as Asian consumers adjust their consumption patterns. And finally, it is our location in the Asian region that means in addition to exporting goods we are well placed to be a provider of high-quality services in areas such as tourism, finance and education.

1. Open Letter to Ben Bernanke – Wall Street Journal. 15-Nov-10.
2. Philip Lowe, Fundamentals and Flexibility – Speech to CFA Institute. 13-Oct-15.

DISCLAIMER: The information in this commentary has been provided for publication by Implemented Portfolios (ABN 36 141 881 147. AFSL Number 345143). The information has not been verified by Implemented Portfolios or Adapt Wealth Management (ABN 33 711 661 027 Corporate Authorised Representative of Paragem Pty Ltd AFSL 297276) but is believed to have come from reliable sources as noted in the acknowledgements. No Liability is accepted by Implemented Portfolios, or Adapt Wealth Management Pty Ltd, its Directors, officers, employees or contractors for any inaccurate or incorrect information. The information is a broad commentary and there is no intention that a client should act on the information without seeking professional assistance from their own advisers (legal, tax, accounting, financial planning) for suitability in respect of their unique circumstances.

About Reuben Zelwer


Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.