Insights

Monthly Market Update April 2024

• April reinforced that inflation is the key risk to the market outlook and has the potential to unwind the rally in risk assets.
• April saw major stock and bond markets decline due to a shifting interest rate outlook, following US higher than expected inflation data, which fuelled fears that the US Fed and other central banks would not ease their monetary policy as soon as hoped.
• Over the month The US S&P 500 had a drop of -4.1%, the ASX 200 fell -2.9%, whilst the MSCI World ex-Australia Net Total Return Index returned -3.2% in AUD terms, whilst emerging market equities returned +1.0%.
• Large growth companies continue to drive a large portion of the US equity market’s results during the past three and five years – April was no different. The S&P 500 (weighted by the size of the companies in the index) has outperformed the equal-weighted S&P 500 (representing the results of the average company) by an increasingly wide margin over the past 18 to 24 months.
• Implied volatility, often viewed as the market’s fear index, has increased significantly for the ASX200, S&P 500 and Euro Stoxx 50.
• As of April 30th, investors were no longer pricing a cut to the US Fed Fund rate for 2024, leading major bond markets to 2024 lows of -1.70% in April, Bloomberg Barclays Aggregate Bond Hedged AUD ATR Index.
• Speculation about when the RBA will start to cut rates has shifted to talk in some quarters of further hikes, as inflation proves harder to bring down than expected.
• On April 24, the ABS reported that CPI rose 1% in the first three months of 2024, bringing annual headline inflation to 3.6%, outside the RBA’s 2-3% target range.
• The Australian unemployment rate rose by 0.1% to 3.8% and employment contracted by 7,000 jobs in March. Weaker domestic demand suggests that the unemployment rate should rise.
• House prices across Australia’s eight capital cities rose 0.6% m-o-m or 9.4% y-o-y in April. Auction clearance rates continue to rise, pointing towards underlying strength in the property market.
• The shift in interest rate sentiment was reflected in the sharp movement in currencies. The US dollar gained against other major currencies over the month causing issues for smaller economies say in emerging market sector, that may be forced to defend currencies. Up +005% against the Australian dollar over the month.
• Gold rallied to a new high of USD 2,300 per ounce during the month before falling back but still +11% y-t-d.

Monthly Market Update March 2024

• Another record high for share markets at March end, on the back of expectations of US interest rate cuts later this year along with hopes of continued resilient economic growth.
• In local currency terms the US S&P 500 gained +3.1%,  the  ASX 200 rallied +3.3% whilst the MSCI World ex-Australia Net Total Return Index rose +3.1% in AUD terms.
• Reserve Bank of Australia (RBA) left interest rates unchanged at 4.35% as headline inflation data remained broadly stable at 3.4% y-on-y, with the services component sticky.
• RBA Governor Michele Bullock indicated a flexible approach to curb inflation amid economic growth slowdown, emphasizing that the interest rate path remains uncertain and data dependent. Headline inflation stood at 4.1% in Q4 2023, down from 5.4% in Q3 and a peak of 7.8% in Q4 2022.
• Australian Consumer Inflation Expectations dipped to 4.3% in March 2024: from 4.5% in February, the lowest level since October 2021. This easing is attributed to a moderation in goods prices following rate hikes totalling 425bps over the past two years by the central bank.
• Australian jobs data came in better than expected with the unemployment rate falling to 3.7%., and job vacancies dropped 6.1% in the three months to February. National houses prices rose +0.6% m-on-m in March to be up +9.7% y-on-y.
• Several Central Banks met during March. The US Federal Reserve maintained the Fed Funds rate at 5.25%-5.5% for a fifth straight meeting. The market is expecting the first rate cut in July but seems to be pushing it out due to robust economic data and sticky services inflation.
• European Central Bank indicated it could cut interest rates as soon as June, given the fall in inflation and continued subdued economic growth.
• China’s economy shows signs of awakening with manufacturing data showing signs of improvement for the first time in five months. But property investment and consumer confidence remain restrained.
• Bank of Japan increased short-term interest rates to 0-0.1%, the first time since 2007, while the Swiss National Bank unexpectantly cut rates 0.25%.
• Risks to the outlook for the global economy have become more balanced as inflation has eased, but global financial stability risks remain elevated.
• Many market participants have priced in an easing in monetary policy, likely later this year, with inflation returning to central banks’ targets. This leaves markets vulnerable to an adverse shock, including from inflation proving more persistent than expected or a severe geopolitical event.

Monthly Market Update February 2024

• Both the US S&P 500, and the ASX 200 made new record highs in February, currently insulated from the weakness in the Chinese markets, for now.
• Reserve Bank of Australia (RBA) expect inflation to decline to the 2–3% target range in 2025 and reach the midpoint in 2026. Services inflation remains high and only expected to decline gradually.
• The RBA kept the cash rate unchanged following their February meeting at 4.35% but did not indicate whether there will be an easing in interest rates.
• If the RBA’s forecasts are right, the inflation rate will be close to 3% and the unemployment rate will be over 4% by the end of 2024, then an interest rate cut is on the cards.
• Australian business conditions PMIs (survey of business conditions) for February rose with strength in services (possibly driven by optimism regarding a boost from Swiftonomics) but for the last 18 months they have been range bound around zero.
• Globally PMIs were mixed across major countries – up in Europe (but still soft), and the UK but down in the US and Japan (but to still okay levels).
• Australian December half year earnings reporting season came to close with 46% of companies surprising consensus earnings expectations on the upside and 36% surprising on the downside, better than the long term average for both of around 41%.
• 53% of Australian companies have increased their dividends on a year ago, below the norm of 59% and greater than usual 31% have cut their dividends, which suggests an overall degree of caution.
• Around 90% of US S&P 500 companies have now reported December quarter earnings with 76.5% coming in better than expected, which is just above the norm of 76%.
• US earnings growth for the quarter is running around +9.6% y-o-y, well up from consensus driven by technology companies (+40%) and financials (+11%) with resources earnings down 21%.
• Wall Street continues to be bolstered by Mega-Caps, particularly key components of the “Magnificent Seven” including, Meta +26%, Amazon +14%, and Nvidia +29%.
• Unlisted commercial property returns are likely to be negative due to the lagged impact of high bond yields and WFH.
• Australian home prices continue to show resilience on the back of supply shortage and by the prospect of lower interest rates later this year boosting buyer confidence.

Monthly Market Update January 2024

• Australian inflation is falling faster than the RBA expected (except for insurance and rents) inflation fell to 4.1% year-on-year in the December quarter, well below the RBA’s forecast of 4.5%, and a peak of 7.8% a year ago.
• Australian retail sales plunged 2.7% in December more than reversing the Black Friday driven 1.6% rise in November. The fall was concentrated in discretionary items more than reversing their Black Friday boost. 
• Global economic data released in January highlighted the divergence between weakness in Europe and the strength in the US.
• US GDP growth surprised on the upside at an annualised 3.3% pace in the December quarter, Eurozone GDP was flat both in the quarter and year.
• January 2024 saw a mixed bag of returns from asset classes following the stellar returns in the final quarter of 2023.
• Segments of risk assets were buoyed by as economic data further fuelled a “soft landing.” But optimism was slightly tempered at the end of the month when the US Federal Reserve (US Fed) struck a less dovish tone in January.
• Developed market equities (ex-Australia) were up +4.5% (unhedged), while emerging market equities were down       -3.5%, despite newly announced stimulus from the People’s Bank of China (PBOC).
• Core government bonds reversed some of last year’s gains, as markets scaled back the number of rate cuts priced for 2024.
• Global government bonds were down -0.3% over the month, but it was UK Gilts that remained the major laggard, as sticky services inflation and still elevated wage growth made the prospect of imminent rate cuts from the Bank of England (BoE) look unlikely.
• Global real estate investment trusts, which are sensitive to interest rates, struggled as markets pared back the magnitude of rate cuts priced for the US Fed in 2024 and ended the month down -3.4% (hedged).
• Australian house price growth slowed further in January with a 0.2% m/m increase in national prices.
• Commodities continued to perform well, with the broad Bloomberg Commodity Index rising +2.9% in Australian dollar terms over January. Oil prices rallied as tensions in the Middle East worsened and disruption to shipping through the Suez Canal continued. Drone attacks on Russian energy infrastructure added to the uncertainty in the global oil market.

Market Review Year Ended December 2023

• Australian shares are likely to outperform global shares, after underperforming in CY23, assisted to an extent by more attractive valuations.
• Global equities are expected to perform in a volatile and constrained manner over the first half of the year as growth weakens and valuations are deemed less attractive than a year ago. However, as interest rate cuts start to have their impact, and bond yields drop, global shares should ultimately provide positive return. Expect slight outperformance from emerging market shares.
• Bonds are likely to provide returns in line with their coupon or bit more, as inflation slows, and central banks cautiously cut rates.
• Cash and bank deposits are expected to fall in the second half of the year to somewhere in the 3% range.
• Unlisted commercial property returns are likely to be negative again due to the lagged impact of high bond yields and continued impact of WFH, however opportunities exist in other sectors.
• Australian home prices will fall marginally on the back of customers rolling off fixed rate home loans and rise in unemployment. However, continued supply shortfall should prevent a sharper fall. Expect there to be a disparity in the degree (and direction) of price movements between major cities.
• US dollar towards the end of CY23 started to retract against other currencies on the back of expected US Fed has finished with its aggressive campaign of interest rate increases, and we expect the pace of selling USD to increase in the first half of CY24. A$ is likely to move to US$ 0.72.

Monthly Market Update November 2023

• Geopolitical tensions between US-China appeared to thaw; a resumption in high-level military communications was agreed at the Biden-Xi meeting.
• Temporary ceasefire in the Middle East allowed for an exchange of hostages, assisting investment markets to take a more positive stance.
• Australian stock market had a stellar month, providing a return of +5.0%.
• Global equity markets rebounded by +4.5%(unhedged) in November, as did global bonds +3.2%. Global stocks recorded their strongest month in three years, nearly retracting their summer losses, in a broad-based rally that saw cyclical sectors outperform.
• Bond yields declined sharply; the US 10-year note yield fell by 60bps, delivering the best monthly return in more than 10 years.
• Other good news in November came from the commodities sector, Brent Crude oil prices fell for a second month in a row – despite further OPEC+ production cuts – to US$82.83 p/b, while gold remained above US$2,000.
• US Federal Reserve left its target interest rate range unchanged at 5.25 - 5.50% - a second consecutive pause – but Powell did not rule out further rate hikes.
• The UK economy stagnated in Q3, defying expectations of a contraction. With UK inflation headline inflation (CPI) falling by more than 2% to 4.6% in October.
• Euro area headline (CPI) and core inflation (CPI minus components that exhibit large fluctuations month to month) declined further in November, to 2.4% and 3.6% respectively.
• As widely expected, the Reserve Bank of Australia Board (RBA) increased the official Cash Rate by 0.25% pa to 4.35% at its November meeting. Annual inflation in Australia fell to 4.90% in October from 5.60% in September.
• The RBA is one of a few central banks still lifting interest rates, and where market expectations are, we may possibly see a further move higher.
• The Australian dollar recovered toward 0.62 as investors reassessed US monetary policy settings in 2024 and moved toward expectations of lower rates, thereby lessening the appeal for the US dollar.

Monthly Market Update October 2023

• Markets struggled in October as stronger economic data kept central banks hawkish, adding fuel to the “higher for longer” rhetoric.
• Shocking events in the middle east added to market uncertainty, given the unknown market impact, and implications for energy prices.
• Australia’s quarterly inflation numbers reinforced what the monthly series had been pointing too – stickier inflation. Prices were up +1.2% q/q in the third quarter, driven by rents higher fuel prices and insurance costs. Annual inflation standing at 5.4% and drifting lower.
• Reserve Bank of Australia (RBA) left its cash rate unchanged at 4.10%, for four consecutive policy meetings, but no indication that the RBA has completed its rate-hiking cycle.
• Australia’s job ads were down 3.0% in October, 11.4% lower than in October 2022 – which is expected as businesses tackle elevated inflation and higher costs.
• Equity markets continued their retracement in October as investors reacted negatively to rising bond yields and geopolitical events.
• The US recession that was widely predicted has yet to arrive, with Q3 U.S. GDP rising 4.9% amid strong consumer and government spending. However, these drivers could be short-lived as consumer saving rates decline from 5.2% to 3.8%, while facing tighter lending conditions, and higher interest payments.
• Sovereign bond yields surged throughout the month, as US Treasury yields rose to 5%.
• Still, US inflation is significantly lower than peak 2022 levels, US economic growth has been resilient, and the S&P 500 remains up +10.7% y-t-d as investors anticipate the Fed could begin the aggressively cut interest rates as soon as the first half of 2024.
• October’s euro-zone consumer sentiment report was released, the index indicated euro-zone sentiment had deteriorated for a third consecutive month.

Market Review December 2022

2021-22 (CY22) Calendar Year was a year to forget. After a bull market that lasted for more than a decade
since the GFC of 2008-09, markets around the world experienced a massive pullback. Both conservative investors with a concentration to high-quality bonds or high-risk investors with an allocation to technology stocks, incurred losses. In fact, 2022 was just one of five in the last 100 years where both US Treasuries and the S&P 500 finished in the red.

What largely drove the bull market between 2009 and 2021 were a few separate but related themes; outburst of revenue growth in high-flying sectors such as information technology and communications services, low inflation, and a very prolonged period of low-interest rates, coming out of the GFC. Persistently low-interest rates not only resulted in a low cost of capital for companies in growth mode but also caused investors to give very high multiples to companies who delivered high sales growth rates. In many cases, these companies were and are far from profitability.

2022 marked a dramatic change in investor psychology. For years, but particularly since the start of the COVID pandemic, the old standby valuation metric of price/earnings was ignored in favour of the clouded price/sales metric. Late in 2021 and more so in 2022, this growth mindset, at last, fell out of favour, quickly collapsing some of the high vaulting valuations in pandemic-darling stocks like Meta, Alphabet, Netflix, and Tesla.

In response to soaring inflation in 2022 founded on Covid-induced supply-chain issues, firm demand in major economies and the fallout from the war in Ukraine, central banks across the world scrambled to lift interest rates from emergency lows to levels that are generally regarded as necessary to reduce the rate of inflation. When interest rates begin to rise, long-duration assets experience the most dramatic falls in prices. This is precisely what we experienced in 2002. Duration is the financial term that measures the sensitivity of an asset’s price to a change in interest rates. In low or falling interest
rate environments, investors want to own assets with long duration, as they tend to rise in price the most as interest rates fall e.g., long-term bonds or the ultimate long-duration growth asset: growth stocks. Conversely, when interest rates do begin to rise aggressively, as in 2022, long-duration assets experience striking falls in value. For example, most bonds pay a fixed coupon (i.e. interest payment) and when rates go up, the only way a fixed coupon can equate to a higher interest rate is if the investor pays less for the bond.

But it is not all doom and gloom, the Australian economy outperformed in 2022. The year ended with trade accounts solidly in surplus, the federal budget broadly balanced; jobless rate at 50-year lows. And while the inflation rate lifted over the year along with wages, other countries are experiencing far hiker spikes in prices.

From a COVID-influenced low base, the Australian economy grew by 5.9% over the year to September, but it is likely to slow over 2023 in response to higher interest rates.

Starting in May, the Reserve Bank (RBA) lifted the cash rate from 0.1% to 3.1%, the most aggressive monetary tightening ever imposed. The Consumer Price Index lifted 7.3% over the year to September 2022.

The past three years have proven to be challenging and no let-up in the short term is expected for Australian investors. Inflation, together with uncertainty about where interest rates will settle is expected to dominate in 2023. High energy prices will persist, the war in Ukraine still rages and the re-opening of the Chinese economy poses risks and opportunities.

It is expected that the average balanced growth superannuation fund (41% – 60% Growth Assets) would have returned -6% pa for the 12 months to 31 December 2022. This followed a positive return of around 9% in the 2021 year. Balanced growth super funds returns have averaged around 3.5% pa over the last five years, above inflation, and bank deposit returns.