The month of September wrapped up another positive quarter for the year, with equities across both Europe and the United States (US) managing to recover the declines witnessed during the month of August.
European equities gained 2.5% while US equities delivered modest returns of 1.7% on the quarter, as investors digested the central banks’ reaction to further slowdown in economic data.
Both the US and European monetary policies turned accommodative over the summer months. The US Federal Reserve cut its interest rates twice during the quarter, over concerns that the uncertainty over the US-China trade war is slowing down the manufacturing industry and weighing on business confidence.
Moreover, the European Central Bank (ECB) lowered interest rates by another 10 basis points to - 0.50%, restarted the quantitative easing program and committed to reinvestment of maturing securities under the asset purchase program beyond the date when the ECB eventually starts raising interest rates.
A glance at the top-performing sectors for the month of September hints a rotation out of defensives, as investors favoured sectors of a more cyclical nature. The financial, energy and materials sectors were among the top-performingbus sectors across both regions.
The financial sector led the cyclical group higher, followed by the energy sector which befitted from oil supply disruptions caused by last month’s drone attacks on two Saudi Arabian oil facilities.
However, despite the turnaround in risk appetite during the month of September, a defensive strategy outperformed on a quarterly basis. Across both the US and European equity markets, the utilities sector locked in a quarterly return above 9%, followed by the real estate market and consumer staples.
As bond yields continue on their downward trajectory, steady yielding sectors such as utilities and REITs remain favoured among investors in search for yield. Meanwhile, despite the September gain in the energy market, the sector recorded the worst performance over the quarter.
As we head into the fourth and final quarter of the year, financial market’s sensitivity to surprises in economic data remains elevated. Stocks retreated earlier this week following a weaker than expected reading in the ISM US Manufacturing Purchasing Managers’ Index (PMI).
The PMI contracted for the second consecutive month and hit its lowest level since June 2009, at 47.8. The most notable declines were recorded across the materials and industrials sectors, which are highly exposed to the performance of the manufacturing economy.
Given the sustained weakening in economic data, it is unsurprising that a defensive investment strategy outperformed over the quarter.
Moreover, while trailing economic data continues to confirm the contraction in the manufacturing sector, it becomes increasingly important to follow labour market indicators and end of quarter earnings results, which will be indicative as to whether there might be cause for a broader concern.
This article was issued by Rachel Meilak, Equity Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.