The S&P/ASX 200 Accumulation Index returned 1.9% during the month. Australian equities were supported by the release of the Federal Budget early in the month which saw increased spending and tax cuts to aid the economy as it recovers. Australian equities outperformed developed markets during the month, as rising COVID-19 cases in Europe and the US weighed on those markets. In major global developed markets Japan’s Nikkei 225 was down 0.9%, the US S&P 500 was down 2.7%, the UK’s FTSE 100 was down 4.7% and the DJ Euro Stoxx 50 was down 7.3%.
In October, the Reserve Bank of Australia (RBA) reaffirmed its commitment to support the financial system through a historically low cash rate of 0.25% and yield curve control to keep 3-year bonds at 0.25%. The RBA’s Term Funding Facility has extended AUD 83 billion in funds to date. These measures are intended to keep funding costs low and sustain credit availability.
Domestic economic data releases in October were somewhat better than expected. Employment fell by 29,500 positions in September, exceeding market expectations. The unemployment rate ticked up to 6.9%, which was also better than expected. The Q3 headline CPI rebounded, to be up 1.6% for the quarter, while the annual rate stands at 0.7% which was in line with consensus expectations. The NAB Survey of Business Conditions showed improvement, rising 6 points to 0 in September, with business confidence also rising to -4 (from -8). Retail sales were down 4.0% in August. National CoreLogic dwelling prices put the brakes on recent declines, ending the month up 0.2%.
Merger and acquisition (M&A) activity was on the rise in October, with Link Administrative Holdings receiving a non-binding indicative proposal from a consortium comprising Pacific Equity Partners and Carlyle Group to acquire 100% of the shares in Link Group. Coca-Cola Amatil announced that it had received a non-binding indicative proposal from Coca-Cola European Partners plc. On the last trading day of the month, AMP confirmed that it had received a non-binding, conditional proposal from US based private equity firm Ares Management to acquire 100% of the shares in AMP Limited.
Sector returns were mixed in October. The best performing sectors were information technology (9.0%), financials (6.3%) and consumer staples (4.8%). While delivering positive returns, consumer discretionary (1.5%), healthcare (1.2%) and real estate (0.2%) lagged the market. Communication services (-0.6%), energy (-0.8%), materials (-1.2%) and utilities (-1.5%) also underperformed the broader market. Industrials (-3.9%) was the worst performing sector.
Information technology was the best performing sector, unlike its US tech peers which underperformed. Key drivers of performance included Afterpay (20.9%), Xero (9.3%) and Link Administration (27.9%), with Link benefitting from a proposed takeover by a private equity consortium.
The financials sector also outperformed, driven by strong performance from the big four banks: ANZ (9.2%), Commonwealth Bank (8.5%), Westpac (6.4%) and National Australia Bank (4.8%). The banking sector was supported by the prospect of a loosening of responsible lending laws and expectations that bad debts may be better than first feared.
The consumer staples sector outperformed after lagging in September. Key contributors included Woolworths (4.7%), Coles (4.4%) and Coca-Cola Amatil (30.8%). The surge in Coca-Cola Amatil was driven by the proposed takeover offer received during the month.
The materials sector underperformed, as commodity prices eased slightly in October, with BHP (-5.1%) the biggest drag on sector performance. Newcrest Mining (-6.4%) and Rio Tinto (-2.0%) also underperformed.
The utilities sector underperformed with AGL Energy (-8.4%) and Spark Infrastructure (-3.2%) posting negative returns.
The industrials sector underperformed during October. Transurban Group (-4.6%), Sydney Airport (-7.0%) and Brambles (-8.6%) were the key drivers of sector underperformance.