• Marcus Bogdan

Monthly Investor Update | September 2021

Portfolio Commentary


The indomitable optimism that has fuelled risk assets to be priced to perfection was punctuated by more sober expectations in September. Notably, after 11 sequential months of positive returns the ASX 200 contracted in September by concerns of slowing earnings growth and the Federal Reserve signalling they are ready to tighten monetary policy. On an attribution front, the Financials and Energy sectors provided the greatest contribution to overall index returns for September, whilst Materials were the worst performing sector.


Investors have enjoyed a long stretch of share price gains bolstered by an extraordinarily

recovery in company earnings and highly accommodative policy settings, underpinned by

government spending and record low interest rates. The combination of both factors has led the markets to recent record highs.


Principally, five key risks are currently weighing on stock market sentiment and trajectory

of corporate profits: (1) A slowdown in China’s economic activity particularly evident in their

commodity intensive infrastructure & property sectors, (2) rising energy costs and supply

disruptions, (3) ongoing global supply chain bottlenecks, (4) the deleterious impact of the NSW & VIC lockdowns, & (5) signalled tightening by the US Federal Reserve leading to rising bond yields weighing on risk asset valuations.


We firmly believe that our equity portfolios’ weighting tilted toward the attributes of Quality

(earnings resilience & industry leadership) and Value (margin of safety) are warranted. A cash weighting of ~7% also provides us the flexibility to invest counter cyclically as investment opportunities emerge. We can deploy our cash to existing stocks in the portfolio and/or stocks on our active watchlist.


Blended Australian Equities Portfolio

The Blended Australian Equity portfolio finished the month of September down -0.67% compared to the ASX 200 Accumulation Index down -1.85%. Positive contribution for the portfolio was driven by Santos (STO), News Corp (NWS), and Macquarie Group (MQG). Whereas BHP Group (BHP), CSL Limited (CSL), and Marley Spoon (MMM) weighed on attribution.


Australian Equities Income Portfolio

The Australian Income Portfolio finished the month of September down 0.47% compared to the ASX 200 Accumulation Index down 1.85%. Positive contribution for the portfolio was driven by Santos (STO), Commonwealth Bank (CBA), and Macquarie (MQG). Whereas BHP Group (BHP), Wesfarmers (WES) and Northern Star (NST) weighed on attribution.


Portfolio Outlook


The frequency and magnitude of earnings upgrades that distinguished the June 2021 reporting season is now showing signs of tangible fatigue. The profits outlook for the ASX 200 has moderated with consensus forecasts for June 2022 being revised to 12% EPS growth, down around 3% from the peak of earnings optimism at the start of August. Indeed, we expect EPS growth to further decelerate in the coming months.


With equity valuations elevated, coupled with earnings downgrades, we have further tilted the portfolio toward defensive assets. Recent weakness in Amcor and Brambles provides an opportunity to reconsider offshore earners with strong market shares facing into the consumer staples sectors. Both have pass through clauses in their contracts and are beneficiaries of weaker AUD.


Market Commentary


Global markets saw a volatile September. The ASX 200 fell 1.85% for the month, but still managed to grow 1.71% for the first quarter of fiscal 2022. The fall was largely driven by concerns on Chinese property giant Evergrande would fail with more than US$300 billion in debt.


The Energy sector was the biggest winner in September that rallied 16.38%, followed by Utilities (+2.07%) and Financials (+1.46%). Materials was the worst performing sector falling 12.09%. Following China’s clampdown on the property sector and pollution, cutbacks in steel production caused iron ore prices to continue plummeting. Health Care and Consumer Staples also fell by 5.50% and 4.43%, respectively. This month also marked the worst September for both the S&P 500 and the Dow Jones Industrial Average since 2011, which slid 4.8% and 4.3%, respectively.


The latest Federal Open Market Committee (FOMC) meeting signalled a slightly more hawkish tone, which Powell signalled that tapering could start at November 2021 and end at around middle of 2022, implying c.$15 billion reduction in bond buying each month. Bond yields and the US dollar both rose. US 10-year TIPs yield has increased by more than 30 basis points than it was in early August. While more FOMC members expect an earlier start to the rate hike cycle, the pace of adjustment is expected to be gradual.


Australian unemployment rate fell to 4.5%, which was the lowest in almost 13 years. It has been cushioned by a ~1pp drop in the participation rate (65.2%) and the government’s business support payments. However, the effective unemployment rate is higher at 6.3% and underemployment rate increased to 9.3%.


The manufacturing sector in Australia continued to expand in September, with the Purchasing Managers’ Index (PMI) posted 56.8 in September, up from 52.0 in August. Consumer sentiment and business conditions remain above average. However, suppliers’ delivery times continued to worsen significantly, which alongside increased demand led to severe price pressures for the manufacturing sector.


Australia now has 56% population over the age of 16 fully vaccinated. The RBA has commented that the 2021 delta outbreak delayed but not derailed the economic recovery, and with the delay approaching its end, it will prompt a more substantial tapering expected from 2022.