INSIGHTS

MARKET SUMMARY: 2 TO 6 OCTOBER

Research Team, 6 October 2017

This week marked the start of the final quarter of the year, which gives us a good chance to review how markets have performed for the year thus far and check what is still to come.

September is traditionally the worst quarter of the year for equities, with the average return for the S&P 500 since 1950 coming in at just 0.5%. However, this year certainly bucked the usual seasonal trend and markets finished higher. The S&P 500 returned 4.0% for the period and set a fresh record high, as did the other indexes in the US. The US market was boosted by yet another solid earnings season together with talks of possible tax reform later in the quarter.

The Australian index bucked the global trend for the quarter, falling 0.7%. Earnings season was lacklustre in the region, while a dysfunctional political environment continues to affect sentiment. The index is dominated by a few sectors, like banks, which continue to face regulatory uncertainty.

The FTSE 100 in the UK eked out a 0.8% gain for the quarter, with September paring back solid gains from August and July. The British pound rebounded during the month which dragged on the multinational heavy index. The Stoxx 600 pan-European index gained 2.3% for the quarter, boosted by a strong September.

The NZX 50 also had a strong performance in the third quarter, finishing 4.2% higher. This was the third consecutive quarter of gains for the index, and saw it hit record highs during the period. The NZ market continued to benefit from a strong economy as well as a better than expected earnings season.

The top performing stocks for the quarter were a2 Milk and Synlait Milk, up 60.8% and 56.4% respectively. Both benefitted from positive earnings as well as news from Chinese regulators that a2 infant formula is allowed to be exported into the country. Metro Performance Glass and Sky TV were the two biggest decliners down, 27.5% and 21.7% respectively for the quarter. Both of these companies were punished over reporting season for giving weaker outlooks.

Locally, the biggest event on the economic calendar was the General Election, held on 23 September. The outcome was as expected with National getting the largest number of party votes, however didn’t receive enough to govern alone. This left Winston Peters the king or queen maker. But, in true Winston style he was not to be rushed. Peters would not make a final decision until special votes were counted and results were official. We are now expecting an announcement to be made in the coming week. As seen by the solid gains from September, when the NZX50 gained 1.4%, the market shrugged off political uncertainty, although trading for this period was lighter than usual.

The Reserve Bank of New Zealand kept rates on hold during the quarter, as Graeme Wheeler stepped down from the role. Grant Spencer is the interim governor however, a permanent appointment will be made in March next year.

There is plenty to look forward to this quarter, with central banks across the globe contemplating reversing the massive quantitative easing (QE) programmes they started during the Global Financial Crisis. The US Federal Reserve looks to be the first off the mark, outlining a plan to begin the reversal of its US$4.5 trillion balance sheet this year. QE was experimental and reversing it will be as well so we unsure on the reaction markets will have, although we are likely to see rising interest rates. However, the unknown certainly makes us cautious and we will be watching the great unwind with interest.

The December quarter is traditionally the strongest of the year, averaging a return of 4.1% for the S&P500 since 1950 and it is certainly off to a strong start, setting more record highs during the week. Third quarter global reporting season gets underway soon, and markets will be hoping for another strong showing to help justify current valuations. The Spanish situation will continue to evolve in Europe, as Catalonia looks to annex itself. North Korea remains on the radar as a risk, although recently, things have been quiet on that front with US president Donald Trump busy elsewhere.