By David Bartels – Financial Adviser, Doctors Wealth Planning

How did markets perform in October?
Share markets performed strongly in October, going some way to recovering the losses of the previous two months.

All of the world’s major share markets recorded positive returns in local currency terms. America’s S&P500 Index increased 8.3% while the UK’s FTSE100 Index advanced by 4.9%.

Australia’s share market also delivered a positive return with the S&P/ASX200 Accumulation Index rising 4.4% in October. However, this return lagged many global peers. Unlike recent months, the S&P/ASX 200 Energy Index was the best sector performer with a return of 8.0%. This increase was due largely to corporate activity involving Santos and Oil Search rather than a significant recovery in the price of oil. Telecommunications was the only industry sector to record a negative return this month as Telstra’s share price was weak for the third consecutive month. However, Consumer Staples also came close to recording a negative return after Woolworths issued a profit warning, which also adversely impacted the price performance of other supermarket operators Wesfarmers and Metcash.

What were the key factors driving global markets?
Reassuring comments and action by central banks to ease monetary policy were undoubtedly important factors behind the markets’ recovery. During October, the president of the European Central Bank commented that further quantitative easing would be considered if required late in the year to support Eurozone growth.

In China, the People’s Bank of China surprised markets by reducing official interest rates, the sixth reduction since November last year, as well as reducing banks’ reserve requirements and scrapping deposit controls.

In America, the US Federal Reserve’s decision to keep rates on hold and its more relaxed commentary about the US economy and global outlook compared to a month ago were also factors behind the market’s October revival.

What is the outlook from here?
The share market recovery in October was no doubt welcome news for investors. However, it follows two very poor months in August and September when markets lost significant ground. The recent market volatility reflects the uncertain environment we are in. Conflicting economic data and confusion about when the US Federal Reserve will start raising interest rates, how weak the Chinese economy is, what’s going to happen to oil prices, and whether US company earnings have stalled have taken their toll. There is also a growing realisation that the extraordinary monetary policy stimulus in the last few years has certainly led to asset price rises, but the flow through to the real economy has been limited.

Caution is also warranted from an Australian market perspective. While recent market falls have improved valuations, the risks for our economy from China’s economic slowdown outweigh the positives. China is the largest or second largest destination for eight of Australia’s top 10 exports. China’s intention to adjust the drivers of its economy away from capital intensive activity (such as infrastructure construction) to a consumer and services orientation will have obvious implications for our economy in the coming years. This is occurring at a time when the prices of our major exports such as iron ore have fallen and the peak of the mining and energy capital spending cycle is behind us.