After 3-6 months of solid financial market performance, both equity and bond markets moved lower across September.
Local Equity Market
Local equity markets were down 2% over the course of the month. This was driven by the selloff in resources, which was down over 6.5%.
Iron Ore was down 25% over the months as demand in China moderates. Other parts of the commodity market, particularly those within the energy space, such as oil, thermal coal and natural gas, continued their upward trajectory.
Due to the shortages in both petrol and natural gas in countries such as the UK, there has been a significant increase in demand for these fuels. Thermal coal was up close to 25%, while natural gas went up by over 30%.
Local bond markets were down roughly 1.5%, while global markets were also around 1.0% lower. This was quite a significant decline, driven by higher yields right across the curve.
Our 10-year bond yield was up over 30 basis points during the month while our US 10-year yields went up roughly 18 to 20 basis points.
The move in bond market was influenced by concerns about inflationary pressures continuing to build and inflation remaining elevated relative to the expectations of central banks.
Higher commodity prices have created inflationary pressures, along with the other challenges in the market such as higher freight & logistics costs, rising labour prices as well as raw materials and other input goods. Supply challenges continue to impact commodity prices and the global recovery, which we believe will create ongoing headwinds for the global economy well into 2022.
The Delta variant is still having a significant impact on the speed of the reopening of the global economy. This strain of virus is proving to be a challenge, as manufacturing capacity is struggling to meet the demands as factory closures and reduced capacity remain the norm around the world.
However, if we see the supply issues start to dissipate throughout the second half of next year, we expect this to be positive for the growth outlook.
Given this backdrop, we do expect central banks to start to move more aggressively in how they think about the policy framework going forward. Furthermore, we do expect that financial markets, particularly as they relate to bond markets, will start to price in higher rates through the cycle. We also believe that the upward trend that we’ve seen in bond yields over the last three months will continue over the course of this year, and certainly into 2022.
Given the current financial market and economic conditions, it’s currently one of the more challenging periods that we have witnessed for some time. We remain positive on the long-term outlook for growth assets. However, a rising bond and inflationary environment, coupled with an equity market outlook that in our view will look more benign in terms of earnings growth over the next 3-6 months, does make getting the right mix between growth and defensive assets across our portfolios a more vexed discussion.
Given this backdrop, it’s likely that the portfolio positions and the asset allocation framework that we’ve had over the last 12-18 months will require some refinement, as we look to stay on top of these current challenges as best we can.
Piers Bolger is Chief Investment Officer at Viridian Advisory.
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