Investment Insight | Monthly Review | The September effect
In the first Investment Insight of each month, we will look back at the key themes and trends for the previous month, and forward, setting out our views on what will affect client performance in the months to come.
An historical quirk?
The September effect refers to historically weak share market returns for the month of September. As with many other calendar effects, the September effect is considered a historical quirk in the data rather than any causal relationship. Nonetheless, it has lived up to its name in 2021 with volatility abundant during the month and the New Zealand share market ending the month up just 0.75% while United States and global share markets down -4.65% and -3.58% respectively.
The decidedly downbeat month for share markets appeared to be due to several factors. Primary among them were fears that a possible default by Evergrande – China’s second-largest (and the world’s most heavily indebted) property developer – might set off a global financial ‘contagion event’. While still ending the month in negative territory, the contagion appears contained, with share markets bouncing off their lows.
Volatility is likely to remain elevated over the next few months on the back of slowing Chinese growth, the United States Federal Reserve removing its stimulus, and rising interest rates. However, despite these headwinds, we are excited about the opportunity set across several different asset classes for the final quarter of 2021.
Mega Cap technology | Growth and Inflation Category
United States Mega Cap technology shares had a weak month in September with share prices falling around 6% on average. These technology shares underperformed the broad United States share market which was down -4.65%.
We have weighted our technology exposure to Google, Apple, Facebook, and Amazon which have been very strong performers over the last three months. Their recent underperformance was due to a general rotation in equity markets from high-growth shares like technology into more cyclical and value shares. The catalyst for this appears to have been the increase in interest rates as investors return to a more inflationary investment mindset.
These rotations have happened backwards and forwards throughout the last 12 months, however the Mega Cap technology shares have traded strongly as a whole, and pullbacks have typically been short-lived and an opportunity to add to positions. We had lightened our position sizing in Mega Cap technology in anticipation of a move like this, and we still maintain a positive long-term view on the return potential from these companies.
Clean energy | Growth and Inflation Category
Our investments in the commodities space performed very strongly in September. Firstly, the constructive view we have on uranium began to pay off with a large rally in the price from $35 to $43 (+24%) throughout the month.
Given the difficulty in buying uranium outright, we express our view through owning shares in companies engaged in uranium exploration and production. These uranium miners had very high returns in September with their share prices increasing by +10% to +54% over the range of the companies we own. For more information on our Clean Energy investment, see 10 September 2021 | Clean Energy.
Global gas shortage | Growth and Inflation Category
We entered an investment into United States natural gas in September. This investment immediately began to produce strong returns. As discussed, in 17 September 2021 | The natural gas price squeeze, Europe and China are facing an energy crisis with insufficient gas supply to meet demand.
We primarily trade United States natural gas futures contracts which we believe offer the most attractive risk vs reward payoff. The price of natural gas futures increased by 26% throughout September, with periods of increased volatility both up and down which is to be expected in natural gas. There remains very significant further upside to this position over the coming six months as the Northern Hemisphere heads into winter.
Interest rates | Income Category
Following two months of stability, longer-term interest rates rose during September. This was a broad-based move with Europe, Australia, New Zealand and the United States all seeing their 10-year bond yields higher at the end of the month by between 20 and 40bps.
These moves reflect Central Banks beginning to remove – or at least talk about removing – the extra stimulus they added at the start of the pandemic. For Europe, the United States and Australia, the initial step will be to reduce the volume of asset purchases. For example, the Federal Reserve in the United States is expected to wind back their US$90 billion per month bond purchases to zero by the middle of 2022. New Zealand, having already stopped purchasing bonds, is more advanced in the process so the next step is to raise the Official Cash Rate.
Digital assets | Growth and Inflation Category
September has been a challenging month for major cryptocurrencies, Bitcoin and Ethereum. Both saw prices increase early in September to not that far from their all-time highs. However, later in the month prices dropped sharply after China announced a fresh crackdown on digital coins.
China’ central bank announced that all cryptocurrency trading is illegal in the country and the mining of tokens is banned. Reasons for the action were not given but two likely catalysts are the plans for the introduction of China’s own digital currency, the digital yuan, and the more practical reason that China is experiencing electricity shortages and crypto mining is a power-hungry exercise.
At the time of writing, Bitcoin is down 8.0% over September and Ethereum is down 11.5% but we see prices stabilising and returning to the levels seen prior to China’s announcement.
Outlook
We are still in the early stages of the business cycle expansion, which is a supportive environment for share markets. While share market volatility has begun to increase and will likely remain elevated, we believe any drawdowns should be viewed as buying opportunities. Our investments across several different asset classes provide multiple drivers for clients’ portfolios to increase over the next six to 12 months.
An historical quirk?
The September effect refers to historically weak share market returns for the month of September. As with many other calendar effects, the September effect is considered a historical quirk in the data rather than any causal relationship. Nonetheless, it has lived up to its name in 2021 with volatility abundant during the month and the New Zealand share market ending the month up just 0.75% while United States and global share markets down -4.65% and -3.58% respectively.
The decidedly downbeat month for share markets appeared to be due to several factors. Primary among them were fears that a possible default by Evergrande – China’s second-largest (and the world’s most heavily indebted) property developer – might set off a global financial ‘contagion event’. While still ending the month in negative territory, the contagion appears contained, with share markets bouncing off their lows.
Volatility is likely to remain elevated over the next few months on the back of slowing Chinese growth, the United States Federal Reserve removing its stimulus, and rising interest rates. However, despite these headwinds, we are excited about the opportunity set across several different asset classes for the final quarter of 2021.
Mega Cap technology | Growth and Inflation Category
United States Mega Cap technology shares had a weak month in September with share prices falling around 6% on average. These technology shares underperformed the broad United States share market which was down -4.65%.
We have weighted our technology exposure to Google, Apple, Facebook, and Amazon which have been very strong performers over the last three months. Their recent underperformance was due to a general rotation in equity markets from high-growth shares like technology into more cyclical and value shares. The catalyst for this appears to have been the increase in interest rates as investors return to a more inflationary investment mindset.
These rotations have happened backwards and forwards throughout the last 12 months, however the Mega Cap technology shares have traded strongly as a whole, and pullbacks have typically been short-lived and an opportunity to add to positions. We had lightened our position sizing in Mega Cap technology in anticipation of a move like this, and we still maintain a positive long-term view on the return potential from these companies.
Clean energy | Growth and Inflation Category
Our investments in the commodities space performed very strongly in September. Firstly, the constructive view we have on uranium began to pay off with a large rally in the price from $35 to $43 (+24%) throughout the month.
Given the difficulty in buying uranium outright, we express our view through owning shares in companies engaged in uranium exploration and production. These uranium miners had very high returns in September with their share prices increasing by +10% to +54% over the range of the companies we own. For more information on our Clean Energy investment, see 10 September 2021 | Clean Energy.
Global gas shortage | Growth and Inflation Category
We entered an investment into United States natural gas in September. This investment immediately began to produce strong returns. As discussed, in 17 September 2021 | The natural gas price squeeze, Europe and China are facing an energy crisis with insufficient gas supply to meet demand.
We primarily trade United States natural gas futures contracts which we believe offer the most attractive risk vs reward payoff. The price of natural gas futures increased by 26% throughout September, with periods of increased volatility both up and down which is to be expected in natural gas. There remains very significant further upside to this position over the coming six months as the Northern Hemisphere heads into winter.
Interest rates | Income Category
Following two months of stability, longer-term interest rates rose during September. This was a broad-based move with Europe, Australia, New Zealand and the United States all seeing their 10-year bond yields higher at the end of the month by between 20 and 40bps.
These moves reflect Central Banks beginning to remove – or at least talk about removing – the extra stimulus they added at the start of the pandemic. For Europe, the United States and Australia, the initial step will be to reduce the volume of asset purchases. For example, the Federal Reserve in the United States is expected to wind back their US$90 billion per month bond purchases to zero by the middle of 2022. New Zealand, having already stopped purchasing bonds, is more advanced in the process so the next step is to raise the Official Cash Rate.
Digital assets | Growth and Inflation Category
September has been a challenging month for major cryptocurrencies, Bitcoin and Ethereum. Both saw prices increase early in September to not that far from their all-time highs. However, later in the month prices dropped sharply after China announced a fresh crackdown on digital coins.
China’ central bank announced that all cryptocurrency trading is illegal in the country and the mining of tokens is banned. Reasons for the action were not given but two likely catalysts are the plans for the introduction of China’s own digital currency, the digital yuan, and the more practical reason that China is experiencing electricity shortages and crypto mining is a power-hungry exercise.
At the time of writing, Bitcoin is down 8.0% over September and Ethereum is down 11.5% but we see prices stabilising and returning to the levels seen prior to China’s announcement.
Outlook
We are still in the early stages of the business cycle expansion, which is a supportive environment for share markets. While share market volatility has begun to increase and will likely remain elevated, we believe any drawdowns should be viewed as buying opportunities. Our investments across several different asset classes provide multiple drivers for clients’ portfolios to increase over the next six to 12 months.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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