September In Review: Bond Yields Up, Equities Down

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The ASX200 outperformed most overseas indices for the second consecutive month though lost -2.8% in September as 10-year bond yields climbed.

-The ASX200 lost -2.8% (total return) in September
-Health Care and Real Estate lagged, Energy the best
-Value outperformed Growth across the globe
-Bond yields jumped and Brent crude oil rose

By Mark Woodruff

The ASX200 lost -2.8% (net of dividends) in September, contributing to a loss of -0.8% over the last three months, the first negative quarter since June 2022.

The local index outperformed the MSCI Developed Markets Index and the S&P500 in the US over September, which lost -3.7% and -4.8% respectively in local currency terms.

Emerging markets outperformed the developed markets, falling by -2.5% across the month.

Apart from the Energy sector, losses in Australia were broad-based, with Healthcare the largest negative driver for the market fall, followed by Real Estate, Materials and Financials.

Australian 10-year bond yields rose by 46bps to 4.49% and hit their highest levels since October 2011.

Macquarie mainly attributes September losses on the ASX to this rise in bond yields, which resulted from a mix of higher oil prices, an increase in headline inflation and an expectation the Federal Reserve in the US may hike rates to contain inflation.

US 10-year yields also rose by 49bps to 4.57%.

Apart from rising bond yields, Morgan Stanley sheets home the ASX200 fall to both offshore leads and continued muted earnings signals at home. Market aggregate earnings have reset lower after results season, explains the broker, due to the lagged effects of monetary tightening.

UBS notes the cautious stance by investors around the impact of rising bond yields revealed itself in losses for the Technology and REIT sectors of -7.9% and -8.6%, respectively.

All the real estate stocks in the ASX200 lost ground in September, with the largest falls reserved for Mirvac Group ((MGR)), Charter Hall ((CHC)) and Scentre Group ((SCG)) of -11.6%, -10.6% and -10.2%, respectively.

The Healthcare sector lost -6.2%, while Energy (1.6%), Financials (-1.6%), and Consumer Staples (-1.8%) outperformed.

BHP Group ((BHP)) was the largest single stock contributor to the ASX200, notes Morgan Stanley, with ANZ Bank ((ANZ)) and QBE Insurance ((QBE)) also providing small positive contributions. On the other hand, value was detracted via CSL ((CSL)) , CommBank ((CBA)), Macquarie Group ((MQG)) Goodman Group ((GMG)) and Westpac ((WBC)).

Value outperformed Growth by 2.7% on rising yields as long-duration growth stocks were challenged, explains Morgan Stanley.

The Value-driven sectors of Energy, Financials and Materials all outperformed, notes UBS, while the key growth sectors of Technology and Health underperformed.

Weakness in growth stocks emanated from Healthcare, largely CSL, and via Materials mainly due to share price falls for James Hardie ((JHX)) and Northern Star Resources ((NST)), explains Morgan Stanley.

This Value outperformance also played out across the globe with Japan observing the largest spread against Growth at 7.4%.

Mid-caps and small-caps performed worse than blue chips in September with the MidCap50 and the Small Ordinaries Index losing -4.6% and -4.0% respectively. The latter index was mostly impacted by sector losses for Materials, Discretionary and Real Estate, while the Energy sector was largest positive contributor.

The Small Ordinaries Index has now posted back-to-back quarterly losses. Small caps have a greater exposure to Discretionary and Real Estate relative to large cap exposure to Financials, notes Morgan Stanley.

Commodity prices were mixed over September with the CRB Index rising by 0.9% to 285.

Brent Oil rose by US$8.45 to US$95.31/bbl, on a resilient US economy and bullish demand sentiment ahead of China's Golden Week holidays, explains UBS.

The iron ore price rose by US$2.00 to US$119.50/Mt, though the broker suggests depressed rebar prices and spreads signal softening steel demand by China.

The gold price fell by -US$71.80 to US$1,871/oz as a result of bond yields driving a stronger US dollar.

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, increased by 2.5% to 106.30, while the Australian dollar declined by -3.5% to US$0.6420.

Macquarie is pinning its hopes on a positive October, which tends to be a good month for equities, and usually represents the start of a more positive period for equities that often continues to April.

Over the last ten years, explains this broker, stock returns tend to be more positive in October when the preceding September was negative.

Around the beginning of 2024, Macquarie expects a transition to a slowdown phase for the ASX from the expansion-like phase which commenced in June this year.

During this slowdown phase investors usually see lower, but often positive returns, with more volatility, explains the broker. 

As risk appetite falls during slowdowns, Macquarie points out market leadership often shifts back to defensives.

ASX100 Best and Worst Performers of the month (in %)

ASX200 Best and Worst Performers of the month (in %)

ASX300 Best and Worst Performers of the month (in %)

ALL-TECH Best and Worst Performers of the month (in %)

All index data are ex dividends. Commodities are in USD.

Australia & NZ

The World

Metals & Minerals

Energy

Australian Banks

The average major bank total shareholder return of -1.0% in September outshone the -2.8% loss for the ASX200.

Apart from the -3.6% loss for Westpac, there was outperformance relative to the ASX200 by ANZ Bank, National Australia Bank ((NAB)) and CommBank with returns of 1.3%, 0.4% and -2.2%, respectively.

Among the smaller banks, Judo Capital ((JDO)), Bank of Queensland ((BOQ)) and Bendigo & Adelaide Bank ((BEN)) returned 8.7%, -0.3% and -2.8%, respectively. The share price rally for Judo Capital in September was some respite after a -32% fall in August following the the release of FY23 results.

Relative to the ASX Industrials ex Banks, the major banks are cheap compared to their average since 2010, but relative to bonds, they are expensive versus the average since 2010, explains Morgan Stanley.

New Zealand

The NZX50 in New Zealand lost -2.3% compared to the -2.8% loss for the ASX200.

Small caps closed flat for the month, a significant achievement set against the -4% loss for the Small Ordinaries Index in Australia.

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