Markets: Stocks are set to defy the curse of September

September gets a bad rap but this time investors surely can't ignore the best global conditions in years.

The coming weeks could see the hysteria of September being the worst month for equities every year decisively destroyed. Global GDP growth is finally picking up year-on-year for the first time in three years and economic data continues to be largely positive.

A surge of improving purchasing managers index figures is reinforcing the improving global growth story, gathering steam across the globe as we relish better numbers posted by China, Europe and the UK.

We can be confident recent growth has been sustained and is not just another flash in the pan. A holistic measure, JP Morgan’s Global Manufacturing PMI, came in at 51.7 for August. That was the eighth straight month to show an increase. 

In fact, of the past five years 2011 has been the only time September posted the worst returns in Australia and on the S&P 500. Hardly worthy of the hysteria.

There is no fundamental reason September should be the worst month for equities. For it to grab the moniker of worst month this year it must top the 5.1 per cent decline we saw in May.

Taking a macro perspective, uncertainty is at a six-year low. Commodity prices have stabilised and the eurozone has taken the necessary steps to begin rebuilding its economy. This is the best position we have been in globally for a really long time. 

Admittedly, global risks do exist but they are not particular to September. We have Syria, exacerbated emerging market volatility and of course, tapering in the United States. Recent equity and currency movements suggest emerging market risk is reasonably priced in, so we can discount from where we stand today.

There is plenty of time to address the risks we can identify. Regardless of record low cash rates, we are in an era of rising long-term bond yields prompted by tapering expectations. Armed with this knowledge, now is the ideal time to begin protecting portfolios against this by avoiding interest-rate sensitive sectors where possible.

Long-term bond yields have already factored in tapering but equities haven’t caught up to this just yet. Utilities, including electricity and gas, consumer staples and REITs are expected to be most affected by higher long term interest rates and September could mark the start of a miserable run for them.

Conversely, financials are ordinarily favoured under these market conditions. Any shift from less desirable sectors would see these stocks preferred. Ordinarily, industrials would also be sought after but recent conditions for the sector have remained soft, dampening investor appetite.

A bad month can provide opportunities by thinking ahead, and might just turn out to be a good one.