Monthly summary
Economy and Indices
Markets fell in October from Australia to across the world.
The only areas spared were energy (oil and gas) and some mining shares, most notably gold miners
Why did the markets fall?
The interest-rate market (think term deposits and home loans).
The interest-rate market is the bond market. The US bond market went up, meaning the interest rates in the US went up.
While it’s less about how much the interest rates went up, but more so the reasons behind the increase and how quickly that happened to most people’s expectations.
The reasons range from US politics of federal spending, US trade wars with China, US jobs growth (strong), US wages and other economic data.
Does US vs China Trade Wars matter?
Yes and no.
Yes, because trade ‘protectionism’ is not good for global growth (although some could actually help Australia)
No, because the media attention outweighs how much it will impact the world economy. Summarising the Trade Wars thus far the impact is expected to be 0.16% of US GDP in one year, and stretching out four years is 0.9%.
The risk is that more tariffs are added, and that won’t help the global economy, nor does all this non-productive focus and uncertainty that is holding back companies from investing in growth. In our opinion, thus far the media has blown the proportions out and fuelled the fire of further possible tariffs. Nonetheless, this is economics and these are the factors currently influencing markets and in turn our investment decisions.
Leading industry groups:
Materials (mining) -2% Utilities -3.3% Consumer staples (grocers) -4.1%
Materials was bolstered by gold companies proving somewhat of a safe haven as the rest of the markets fell.
Utilities and Consumer Staples are traditionally defensive companies and fell less than the markets. The flip-side is that Utilities and Consumer Staples are expected to increase by less than the market in good times.
Bottom industry groups:
Energy (oil and gas) -11.6% Industrials -8.6% Health Care -8.6%
Energy companies have been strong performers for almost two years off the back of rising oil prices – although the gains since August this year have all been given up in October.
Industrials and Health care both house some the high-flying companies or Market Darlings. These companies have been running hot, trading at what is traditionally deemed ‘expensive’ through a calculation of their annual earnings compared to the company’s total worth (price to earnings ratio or ‘PE’).
To justify the high PE, or high share price many investors had priced these companies to perfection. Meaning their expectations were nothing short of perfection and if the companies (and global economies, interest rates etc) didn’t keep reporting perfect growth numbers, the share prices would tumble – which they have, in a way, the bigger they are, the harder they fall, and such was the case for many top performers in October.
Summary:
Software, internet, energy and bio-tech stocks have performed well for the last few years (domestically and abroad). The US is comprised of 47% of these leading companies, whereas the rest of the world is about 28%, hence their strong out-performance (similar to AU in the communities boom 2004-07).
These trends and the thematics we look at are being re-set. Adjusting a portfolio for these themes without confirmation the theme will prevail out the other side of this movement is premature.
To keep our portfolios on track we should ensure that we’re not holding those that have become yesterday’s hero’s, keep most of the portfolios on watch until the new dominant driving force is defined and be prepared to make adjustments in the months ahead.
