September Report

Market Review

Global equities slipped in local currency over September as investors weighed higher oil prices, rising bond yields and a more hawkish tone from central banks.

Renewed conflict between the US and Iran pushed energy prices sharply higher, reviving inflation concerns and driving government bond yields to multi-year highs in several major economies. Central banks reinforced the move. The Federal Reserve raised interest rates for the first time since 2023 and signalled that another increase was likely this year. The European Central Bank and the Bank of Japan also tightened. The Bank of England held rates, although several members favoured a rise.

The equity market was more defensive than in previous instances of bond market weakness. US indices were close to flat, but the market was very “narrow” as a small group of large technology companies rose, while most other sectors and smaller companies fell. Elsewhere, Europe lagged on higher energy costs and rate hikes, while Asia was mixed as strong Japanese earnings offset weaker chipmakers. Rate-sensitive, capital-intensive areas were hit hardest.

Artificial intelligence was both the market’s chief support and, for some, its chief threat. The same enthusiasm that sustained the largest companies cast a shadow over parts of the software industry, as more autonomous AI tools revived fears of disruption and prompted heavy selling early in the month.

Higher energy prices also put energy security back at the centre of the policy conversation. The International Energy Agency said the disruption around the Strait of Hormuz is encouraging countries to look at electrification, and the incoming COP31 presidency has proposed a substantial increase in electricity’s share of global energy demand by 2035. Separately, the European Union’s Copernicus earth monitoring service reported its most recent month, August, as the joint hottest month on record. Global temperatures were once again above the 1.5°C increase from pre-industrial levels, which the Paris Agreement aimed to avoid.

Fund Review

The Fund delivered a -0.4% return over the month, underperforming the MSCI World Index’s AUD return of +1.8%. The Health theme was a tale of two halves, with life science tools and services among the strongest contributors and medical technology among the weakest. Despite this, Health was the strongest-performing theme, while Resource Efficiency was the weakest-performing theme.

In our Health theme, the life science tools companies were the stand-out. Thermo Fisher and Agilent benefited from a recovery in biotech funding, growing demand for biologics manufacturing and the reshoring of pharmaceutical supply chains. ICON, the contract research organisation, continued to benefit from growing investor confidence in its recovery, as the market increasingly priced in the strong demand shown in its second-quarter results. These included a “book-to-bill” ratio of order to revenue, of 1.51, and a backlog that has grown to $22.7 billion.

Autodesk, the design and engineering software provider in our Resource Efficiency theme, was the principal detractor, caught in a sector-wide software sell-off driven by renewed fears of AI disruption and rising bond yields. This came despite fundamentals that continue to point to strength in its construction software, with management raising its outlook for the year.

Steris, in the Safety theme, and Globus Medical, in the Health theme, were the other main detractors, as investors remained cautious on companies exposed to hospital activity despite both reporting steady procedure demand. Steris continued to be weighed down by concerns over a heavier investment programme and its effect on near-term cash flow, while Globus Medical was held back by signs of slowing growth in its US spine business and lingering questions over the integration of its Nevro acquisition.

Outlook

September’s rise in bond yields weighed on share prices across our impact universe, where many businesses invest today for rewards that unfold over years. Yet the setback has owed more to sentiment than to substance. In several cases, share prices have fallen even as the companies behind them have continued to grow.

The forces sustaining that growth have, if anything, gathered strength. With energy expensive and its supply uncertain, the case for using less of it, and for leaning less on imported fuel, has grown more persuasive, lending fresh momentum to investment in electricity grids, electrification and efficiency. The spread of data centres, each hungrier for power than the last, places a rising premium on technologies that deliver it more efficiently.

The opportunities arising from long-term structural change extend well beyond energy.. Across much of the developed world, water networks long starved of investment are at last being renewed. In healthcare, advances in diagnostics and treatment are rising to meet the demands of longer lives. And as households, businesses and governments seek to protect what they have built, solutions that make homes, infrastructure and supply chains more resilient are finding a ready market.

In the short term, however, movements in bond markets and broader investor sentiment can overshadow these longer-term fundamentals. While markets may remain volatile, the companies we own are well placed to grow through it. For patient investors, moments when sentiment and substance part company are often where opportunity begins.