Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper PDS and TMD.
Lyndon: Hello, this is Super Informed Radio, the official UniSuper podcast. I'm Lyndon, and this is our monthly investment market podcast where we take you through the investment landscape of the past month and look forward to this month, being November. UniSuper economist and investment manager David Colosimo is here—David, welcome back.
David: Great to be back, thank you Lyndon.
Lyndon: David, in last month's podcast, it kind of felt like we spent quite a lot of time talking about surging bond yields and weaker share markets. Now I'm just looking at today's agenda… surging bond yields and weaker share markets!
David: Yeah, I suppose October does look a lot like September. There were falls in both bond markets and share markets again in the month. Share markets were down 4% in Australia and 2% in the US, and we saw similar sized falls, I suppose, in most markets around the world. Now, Australian bond yields were actually up another 0.5%, and we had a similar move last month as well—US bond yields not that far behind. So, when those bond yields are rising, it means that bond prices are falling.
Lyndon: Yeah, and bond yields have been sort of going up for quite a while now, haven't they, David—what's been driving them higher?
David: Yeah, they do feel like they've been going up for quite a while, a few years now. Even though it looks like the world's central banks are getting towards the end of the rate hikes, those bond yields just keep rising. So, in the last couple of months, there's been a lot of talk about the economic resilience and persistent inflation and that interest rates will need to be higher for longer. But it also does feel like there's a concern about the record volume of bonds that are being issued by the US government, and it just doesn't seem like there's going to be enough people to buy all of them, especially when a lot of investors are actually selling their bonds now: the US banks, the US Federal Reserve, offshore buyers, they've all been selling. With only a couple of months to go in 2023, it actually looks like we're going to have the third consecutive annual fall in the value of bonds, and that's unprecedented.
Lyndon: Getting back to share markets again, David—things are kind of sounding pretty grim on that front, though, aren't they?
David: Yeah, the falls in shares have been quite broad based this month. You combine those higher bond yields with stagnating economies and the outbreak of another war, and that tends to have an impact on most sectors. I've mentioned before that there's 11 major sectors in the share market, and in Australia and the US, 10 of those sectors fell in October. In both countries, it was only utilities – which is seen as a very defensive sector – that managed to eke out a gain at all. In the US, if you look at some smaller subsectors, the defence sector also rose strongly – names like Raytheon, Northrop Grumman and Lockheed Martin – they were all up about 8 to 9% in the month. But otherwise, if you're looking at the other major sectors, there was broad-based weakness—so, energy shares such as Exxon were down on weaker oil prices, and the financials, such as the banks, were weaker on credit concerns. While the performance of the ‘mega cap’ tech stocks was mixed, overall, the IT sector was also marginally weaker.
Lyndon: And US reporting season started last month as well, David—how is that looking?
David: In contrast to the fall in share prices, it's actually been going quite well. About half of the companies have now reported, and more companies than usual are beating forecasts for revenues and earnings than those that are missing them. It looks like earnings growth across the whole market will be about 3% higher compared to last year, and that's the first positive earnings growth we've seen in more than a year—that's despite a big drag from the energy and materials sectors. They both still have negative earnings growth as they cycle through last year's very high prices. I'd note that the strong US dollar is actually also pushing down earnings for those companies that convert their offshore earnings from other currencies.
Lyndon: Speaking of earnings, David, are there any particular earnings highlights that you’d like to talk about from October?
David: Of the big companies, Microsoft was up more than 7% in the month—they reported strong growth in both their cloud and office businesses. Amazon was also up 5% as their cloud business is also growing strongly. In contrast, though, those companies that missed their earnings did very poorly, especially those that started with elevated valuations—Tesla's probably the best example here. It was down 20% in the month, reporting a fall in profit margins as they cut prices on their vehicles to encourage sales growth. Alphabet, the parent of Google, was also down 5%, so they are experiencing quite strong growth in their cloud revenue but didn't quite meet expectations. Finally, while it hasn't officially reported yet, SolarEdge was also down more than 40% in the month after they cut guidance for their upcoming report. This also dragged Enphase down 34%. Here in Australia, it's been AGM season.
Lyndon: Yes, AGM season David—it feels a bit more contentious than usual.
David: Yeah, it certainly feels that way. So, normally for the market, the focus of AGMs is on trading updates, but this season has been more combative. Proxy advisors have been a lot more aggressive, advising big money managers to vote against remuneration packages to make sure they align with shareholder interests. And there's been a few board tussles as well, notably at Qantas and Endeavor.
Lyndon: We've seen quite a bit of corporate activity too, haven't we, David?
David: Yes, for sure. Lithium producer Liontown Resources plunged more than 45% this month—US-listed Albemarle walked away from their takeover offer. Meanwhile, another Australian lithium producer, Azure, was up nearly 30% when it received its own takeover offer from SQM—so, a lot of action in that space. BHP—they received a boost from the announcement that it would sell coal assets to Whitehaven, and Treasury Wines have announced an acquisition of California's Daou Vineyards. When I talk to our equity managers, they're actually telling me that outside of these specific situations, there's very little turnover in the Australian market at the moment.
Lyndon: Let's quickly touch on China, as we often do, David. Things finally appear to be turning a bit of a corner there, is that right?
David: Yeah. So, we mentioned last month that the Chinese authorities have passed through a lot of small policy adjustments and they're certainly starting to help boost the economy. But there's still these headwinds from the property sector and weak local government finances, and so until recently, the equity market was still weak. That's changed recently. This month, the Chinese central government stepped up and they announced a ¥1t bond issuance, which is about $200 billion AUD, to support infrastructure investment in the regions—so this should help offset weak local government revenues. The Chinese equity market appeared to like that—it's been stronger since then, but it's actually still down for the month.
Lyndon: Turning now to November, David, and the month ahead—what are we seeing on interest rates? Let's start there.
David: Well, the Fed announced the outcome of their November meeting on 1 November, which is actually this evening Australian time, so I don't know the outcome right now—but it will be out by the time most of our listeners hear this. Given the potential impact of those higher bond yields and weaker share prices on the US economy, we expect the Fed will actually keep rates on hold this month.
Lyndon: And what about the RBA, David?
David: The RBA meet next week on 6 November. The RBA board have been in a ‘wait and see’ mode for the past four meetings or so, and they've held rates steady as they've seemed reluctant to hike again as they assess the impact of those hikes. But we did have a very strong inflation report in October, so it does look like we'll probably see another rate hike this month.
Lyndon: And before we wrap up, David, is there anything else worthwhile covering that you'd like to call out?
David: It was only a month ago that the US Congress reached a deal to keep the US government functioning, but that deal runs out on 17 November. While it's likely we will see another deal reached, we do expect a little bit of noise in the lead-up as President Biden has to deal with the Republican-controlled House of Representatives. Also globally, there's a lot of important policy meetings. Asian Pacific leaders, for example, meet in San Francisco, we've got the Central Committee of the Chinese Communist Party—they're meeting for their so-called ‘third plenum’—and also finally, here in Australia, we have three of the four major banks reporting in the next few weeks. This will probably provide a window into how Australian households and businesses are coping with higher interest rates.
Lyndon: Well, we look forward to hearing all about that. But David, that's it for this month—it won't be long before we see you in December to do it all over again. Thank you for joining us today.
David: I'll see you then, Lyndon.
Lyndon: And that wraps up this episode. Don't forget to subscribe to us so you don't miss out on future episodes. or you can also check unisuper.com.au/podcasts at the start of each month. Quick reminder also—a couple of weeks ago, our Chief Investment Officer John Pearce released his quarterly investment update video and gave his overview of what's been driving recent market volatility and also discussed the age-old debate, ‘what is a better investment; shares or bonds?’ which is actually very interesting, so do check that out on our website.
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This podcast is of a general nature. It doesn't take into account your personal financial situation, needs or objectives, and we recommend you seek financial advice before making any decisions about your super. Also, remember to consider the product disclosure statement and target market determination that's relevant to you—they are available on our website. The past performance of any investment options that we discuss in the podcast isn't indicative of their future performance, and it's worth noting that just by talking about certain companies, we're not endorsing them for you to include in your personal portfolio.