Equities finally saw a pullback in September, the ASX 200 Accumulation Index finished the month -1.9% lower and the MSCI World index in $Au was -3.0% lower.

Mounting fears of higher inflation and slowing growth weighed on equity markets last month.
Several factors are driving concern. These include persistent supply chain bottlenecks, the potential impact on export volumes from Chinese power shortages and a more hawkish tone on inflation from Fed Chair Powell. After a relatively dovish tone on inflation at Jackson Hole, Powell was slightly more cautious in the September Fed meeting. He was more hawkish still in his presentation to the European Central Bank’s (ECB) Sintra conference last week. This reflects inflationary data persistently coming in higher than expected and evidence that its drivers are shifting away from short-term factors. In particular, the Fed Chair noted tension between the Fed’s goals on inflation and employment. He also noted “transitory” inflation may last longer than expected.
In equity markets, higher bond yields have prompted a rotation away from growth stocks towards re-opening plays and companies offering protection against inflation.
In short, the risk of a continued correction reflecting these worries remains high – particularly with seasonal weakness for share markets running into mid-October in the US and into November in Australia. So far, from their recent highs to recent lows, US and global shares have fallen about 5% and Australian shares have fallen 6%. Being highly sensitive to the global growth cycle, the Australian share market is more vulnerable to some of these worries than US shares. However, ultimately we see the issues being resolved in a way that does not severely threaten global growth and so, with global monetary policy likely to remain relatively easy for some time, we continue to see the broader trend in shares remaining up. Reopening will also help local shares.
In the housing market macro prudential controls to slow housing are on the way. Housing credit growth is now running well above underlying household income growth and more than 20% of new loans are going to borrowers with debt-to-income ratios in excess of 6 times. With financial regulators now expressing concern about rising household leverage and set to release a paper outlining various options on lending restrictions in the next two months, we expect macro prudential controls to be introduced by year end. These are likely to focus on limitations on high debt to income and high loan to valuation ratio loans and on interest rate serviceability buffers. We expect that this, along with worsening affordability and a return to more normal listings, will contribute to a slowing in home price growth to 7% next year, from 21% this year.
Shares remain vulnerable to short-term volatility, with possible triggers being coronavirus, global supply constraints & the inflation scare, less dovish central banks, likely US tax hikes, the debt ceiling standoff and the slowing Chinese economy. Looking through the short-term noise however, the combination of improving global growth and earnings, vaccines ultimately allowing a more sustained reopening and still-low interest rates augurs well for shares over the next 12 months.
Cash and bank deposits are likely to provide poor returns, given the ultra-low cash rate of 0.1%. The setback from coronavirus lockdowns could push the first rate-hike back into 2024.
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