September was an eventful month providing much to consider for those speculating on short-term market movements.

Domestically, the reopening trade continues to gain traction as we have a semblance of a roadmap out of COVID-19 and vaccination rates improve. Government spending continues at pace and interest rates remain low regardless of a robust economy and strong household and corporate balance sheets (increased savings). Inflation appears to be picking up, but those tasked with setting policy remain adamant it is transitory. Companies reported very strong numbers, and paid their owners (shareholders) handsomely, with about $40bn in dividends paid during the month. Add to this share buy-backs and take-over activity and things appear robust. The amount of money waiting to enter the market (on deposit at managed funds) is at record levels, which may be why the ‘dips’ were short-lived.

The negatives include China’s second largest property developer, Evergrande, as it is teeters on the edge of collapse. This has the potential to impact Chinese financial system, and confidence in other emerging markets. The Chinese government is asserting its influence over corporate China and their suppliers. One area that has impacted Australia is the price of iron ore, which collapsed about 30% during the month.

Increasing energy prices have been caused by supply constraints. The UK is seeing rationing at the bouser – blame Brexit, under-investment in oil producers and/or COVID-19 resulting in a lack of foreigners to drive the trucks. Regardless, energy is a key input into the cost-of-production, second only to labour costs, and will result in inflation if it continues. Inflation generally results in an increase in interest rates, as reflected in the 10-year government bond rate (interest rate forecasts) rising above 1.5%. This should place downward pressure on assets (eg: shares) as their relative appeal diminishes and the cost of capital rises.

And so it goes, another very interesting month during which time the market finished virtually flat, when adjusted for dividends. Beware of experts predicting the short-term direction of any volatile asset class, being commodities, interest rates, currencies, shares or any number of tradable items. Control the controllables – the companies you own and the price you pay. The greatest risks are not mentioned above, as they are unknowable. However, the opportunity cost of positioning a portfolio for potential downside can be significant.

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