It was a nervous start to the quarter for the Australian equity market (ASX 200), as the impact of China stimulus measures and implications of rising bond yields was being digested. The resources sector felt the brunt of this nervy start falling over 5% for the month of October, however the broader market did manage to reach an all-time high on the 15th of October closing above 8,300 for the first time.
It was a nervous start to the quarter for the Australian equity market (ASX 200), as the impact of China stimulus measures and implications of rising bond yields was being digested. The resources sector felt the brunt of this nervy start falling over 5% for the month of October, however the broader market did manage to reach an all-time high on the 15th of October closing above 8,300 for the first time.
November was a positive month off the back of potential market-friendly policies to be implemented by the Republican party. December did not produce the ‘Santa-rally’ as expected but quite the opposite as markets sold-off. This was driven by reduced expectations of interest rate cuts and further steep rises in treasury yields.
The Index ended up falling (-0.80%) for the quarter however the year remained quite solid rising an overall +11.9%.
At the sector level, Financials +5.9% and Industrials +3.3% led the way with Materials (-11.9%) and Real Estate (-6.2%) being the laggards. Over the 2024 calendar year, Information Technology +49.9%, continued its stellar run, benefitting from A.I. and innovation; and Financials +33.7%, driven by extreme banking valuations, were the clear winners. Resources (-14.9%) and Energy (-13.9%) suffered mainly due to lower overall global demand.
Across the market spectrum, the quarter produced similar results across large (-0.8%), mid (-0.7%) and small caps (-1.0%). Returns in the second half of the calendar year broadened the variance of outcomes, with the smaller end of the market outperforming the larger end as the rotation out of expensive large caps into undervalued mid and small caps began (during late Q3).
Broader global equity markets were the clear winners during the quarter and year, spurred on by a resilient U.S. economy that continued to defy expectation and was further helped along by three consecutive rate cuts by the U.S. Federal Reserve in Q3/4.
Much like the domestic market, global markets began the quarter with much trepidation as rising bond yields, third quarter U.S. company earnings, the impact (if any) of China stimulus and uncertainty around the November U.S. election weighed heavily on investor sentiment. Overall returns fell slightly in U.S. dollar terms.
November proved far more fruitful in the United States as Trumps commanding victory saw the U.S. market enjoy large gains and record highs. Other regions such as Europe and Asia, especially China, were much more muted due to concerns over implications from proposed tariffs and political instability (predominantly in Germany and France). Emerging markets did not fare much better recording negative returns more broadly as EM weakened in the face of a strengthening U.S. dollar, foreign equity outflows and general concerns surrounding trade implications after the U.S. election.
Overall, despite the slowdown and mixed bag of December, broader equity markets provided positive returns for the quarter and continued their strong run, which started at the end of 2022 and continued to remain resilient throughout 2024 despite increased geopolitical tensions, rising bond yields and heightened levels of uncertainty.
In USD terms, the US equity market (S&P 500) returned (+2.3%) for the quarter hitting multiple new highs throughout. Calendar year 2024 provided an impressive +24.5%. The tech heavy Nasdaq delivered a solid +6.4% for the quarter and a yearly return of +29.6%.
At the sector level, Consumer Discretionary led the quarter with a return of +14.3% whilst Materials (-12.4%) and Healthcare (-10.3%), hurt by rising costs, were the laggards. The Information Technology sector +36.6% once again dominated the yearly returns with the Materials sector (-0.04%) providing the only negative return.
In Australian dollar terms, the broader global equity market (MSCI All Countries World), gained +10.9% for the quarter and +29.5% for the year; Eurozone equities (STOXX Europe 600), rose a modest (+1.2%) for the quarter and (+12.4%) for the year; FTSE 100 (UK) returned +4.4% and +18.7% for the quarter and year respectively; Japan equities (Nikkei 225 Average) rose +7.7% and +19.9% for the year.
Emerging Markets, although outperforming developed markets in December, fell behind in the quarter and year. Overall performance was greatly assisted by the stimulus package and rate cuts by the People’s Bank of China (PBOC), however after the initial ‘sugar’ hit, financial markets deemed the measures taken by the POBC as not being sufficient with the returns plateauing in the quarter. Emerging Markets returned +3.1% and +18.5% respectively for the quarter and year. The China equity market (MSCI China) rose +3.5% for the quarter and +31.6% for the year, consolidating the strong rally that occurred from September to early October.
In contrast, Latin America (MSCI EM Latin America) produced its lowest annual return since 2020. The quarter lost (-5.7%) with the yearly return falling to a very disappointing (-18.9%). Depreciating currencies, high levels of inflation and political risk continue to hurt the region.
The return of the China market again flowed through the rest of emerging Asia with the MSCI EM Asia index recording a quarter return of +3.2% and a healthy +23.4% for the year.
Off the back of a solid 2023, 2024 ended on a somewhat sour note as bond-proxy sectors such as listed property and infrastructure sold-off due to rising bond yields as US central bank rate cut expectations were slashed for 2025; and with European assets hit hard as investor sentiment soured to the region on rising political risks.
The domestic listed property sector (ASX 200 A-REIT Index) fell (-6.0%) during the quarter however posted a healthy return of +18.5% for the year. The benchmark Global REITs index rose +2.0% for the quarter and a solid +13.3% for the year.
The infrastructure sector experienced another tough quarter. Political uncertainty causing falls in October, gave way to buoyed investor optimism after a Republican clean sweep in the U.S elections in November and ending the quarter on another low as profit taking drove indices lower to close out the year.
Towers / Data Centre prices fell as the US 10-year treasury yield approached its highest levels of the year whilst North American energy midstream, freight rail and waste management stocks rose strongly in anticipation of a pro-growth US agenda. Renewables-focused utilities fell out of favour. Emerging Markets were out of favour, following in the footsteps of broader emerging market equities, whilst political risk concerns also soured investor sentiment in Brazil and Mexico.
Global Infrastructure (FTSE Global Core Infra 50/50) rose +5.8% for the quarter helping it reach its largest annual gain since 2022, +21.7%. The hedged equivalent fell (-3.2%) for the quarter however relative appreciation of the AUD in the earlier part of the year helped the yearly number maintain its positive status, returning +13.0%.
The December quarter finally saw plenty of central bank action with several rate cuts across the board by many major central banks. The RBA however was the exception, holding the cash rate at 4.35%, the ninth straight month of keeping rates unchanged.
Fixed income markets experienced extreme volatility throughout the quarter driven primarily by political tension, central bank policy and fluctuating economic data. As previously noted, central banks began their rate cutting cycles in vastly different ways to accommodate their own economies. The U.S. Federal Reserve joined the party in late September with a jumbo 50 basis point cut which many took as a signal for cash rates and subsequent yields to dramatically fall in the coming months. This did not eventuate as envisaged and although the Fed has cut since, smaller cuts were implemented and optimism of a raft of cuts in 2025 have dissipated to a degree off the back of Republican policies and their inflation potential.
The U.S. 10-Year Treasury rose quite substantially over the quarter, potentially signalling the taming of inflation is far from over. Starting at 3.79% and rising 78bps to end the quarter at 4.57%. The Australia 10-Year bond yield, although not as dramatic a move as its U.S counterpart, also rose quite considerably in the quarter. A 41 basis point movement saw the yield end the quarter at 4.37%.
Australian treasury bonds (Bloomberg AusBond Govt) fell (-0.453%) for the quarter, ending the year with a moderate rise of +2.44%, whilst Global Treasury bonds (Bloomberg Global Treasury TR Hedged) returned (-1.05%) for the quarter and +1.85% for the year. Overall, quite a subdued, yet fickle year for the sector.
Credit market spreads, both investment grade and high yield, continue to remain at multi-year lows. The Global Credit index (Bloomberg Global Agg Corp) fell (-1.22%) in the quarter, (one-year: +2.23%), in AUD, whilst the Australian corporate market (Bloomberg AusBond Credit), rose slightly by +0.67% for the quarter and +5.40% for the calendar year. Overall, spreads remain tight across the board and continue to reflect positive sentiment and continued optimism of a soft economic landing.
Most major currencies lost ground against the U.S. dollar, reversing gains made during the previous quarter, primarily due to decreased rate cut expectations because of a resilient economy and the US election result.
The DXY, which measures the strength of the USD against a basket of major currencies, rose +7.67% in the quarter, reversing last quarter’s (-4%) fall. The Australian dollar ended at 0.6189 USD, falling (-10.55%) for the quarter.
A more sanguine finish to the year for markets in the December quarter to cap off a bumper year for growth assets, with cash and bonds also finishing in the black.
The December quarter was dictated by watered down US central bank rate cut expectations, a Donald Trump US presidential election victory, Chinese government stimulus, and rising political and geopolitical tensions.
The quarter started with a bang for Asian and emerging markets as long awaited, and desperately needed, Chinese stimulus was announced. Their economy had been languishing since the covid period ended, with house prices through the floor, consumer sentiment in the doldrums, and a weakening global growth backdrop. The move boosted Chinese equities which supported broader sentiment across the region. Surging Chinese exports also assisted during the quarter as manufactures and exporters rushed to front-load orders and deliveries before Trump tariffs kicked in. Elsewhere in emerging markets, Indian inflation came in higher than expected on rising food prices whilst economic growth continued to slow, making it a tough backdrop for the Reserve Bank of India looking to cut rates.
Closer to home, the news of Chinese stimulus boosted commodity prices, but the boost was short-lived as traders and investors sought greater detail and timelines on the Chinese policy announcements. A bigger Australian government budget surplus than expected was delivered, assisted by temporary factors with a deficit still forecast for the coming financial year. There was evidence of stage 3 tax cuts not being spent, with weak retail sales and private sector credit rising amid weak consumer sentiment. That changed somewhat following the RBA’s removal of hawkish forward guidance from their statement (i.e. taking rate hikes off the table), which saw consumer sentiment lift. Better than expected Australian jobs growth and in-roads being made on headline inflation, saw retail sales show some signs of improvement though helped along by increased discounting by retailers. Australian economic growth continued to weaken, with more noticing the lack of robustness in the economy which is being kept afloat by government spending and the surge in immigration. All of this didn’t help the Aussie dollar, as it struggled to fight back against a rampaging US dollar. This hurt Australian dollar exposed asset prices in the quarter.
The quarter was dominated by all things US as had been the case all year. The period was one of disappointment for those hoping for a continuation of the outsized September rate cut, with the Fed trying to talk down rate cut expectations for 2025 whilst delivering two smaller rate cuts to round out the 2024 calendar year. US inflation slightly reaccelerated in the quarter whilst better than expected jobs growth didn’t help the Fed’s cause. US consumer sentiment also rose leading into the US election result whilst third quarter company reporting saw strong results. Whilst investors clamoured for every word spoken by the US tech giants, there was some concern regarding the rising costs for A.I. in the period ahead.
US government bond yields rose (prices lower) on lowered rate cut expectations and an increasingly likely Trump victory. Confirmation of Trump’s election win, with a strong mandate (both Houses), exacerbated the trend higher in yields with investors growing uneasy regarding the inflationary effects of tariffs and the potential for another profligate four years of US government spending. Rolling daily announcements of Trump’s cabinet picks (still needing to be confirmed) also created some market volatility given the potential for these candidates to shake things up. US voters very clearly voted for change, and whilst we’ll have to wait to see what changes can be pushed through, investors took note that the Trump victory almost guarantees tax cuts and deregulation just like we saw in 2016. This lifted optimism in the outlook for the US economy and put further upward pressure on the US dollar. US economic growth remained robust in the quarter whilst lawmakers averted yet another last-minute US government shutdown.
Rounding out the rest of the globe, European economic conditions continued to weaken. UK inflation fell enough, with wages growth slowing, to allow the Bank of England to cut rates again but this was short-lived as inflation then began to reaccelerate. The UK government budget position continued to worsen, and this together with rampant immigration, saw polling fall sharply for the ruling party. Headline Eurozone inflation fell below target for the first time in three years, allowing the European Central Bank to cut rates further. The French government collapsed yet again, the German government moved to the brink of collapse as they rounded out the year with back-to-back years of negative economic growth, whilst Canada’s Justin Trudeau rebuffed calls for an early election and held on to leadership by the grit of his teeth. Japan moved a step closer to raising interest rates again whilst the Bank of Japan heeded these calls as they carefully try to the thread the needle given decades of deflation and likely upward pressure on their currency.
Trade and technology security tensions rose as the US government capped sales of advanced A.I. chips to specific countries, and increased bans on semiconductors, which saw China retaliate.
The clear winner for the quarter was unhedged global equities, significantly currency enhanced as the AUD/USD fell to 61c, with an admirable showing from both unhedged global infrastructure and global emerging market equities.
The consensus outlook remains rather positive for now, with recession averted in 2024 and renewed optimism regarding a potential US economic renaissance. However, investors will need to deal with the implications of tariffs, particularly any inflationary effects, and an enormous US government debt position, a significant part of which needs refinancing in 2025 whilst another US$2 trillion is added to the pile this year.
With less rate cuts on the table in 2025 than previously expected, company earnings will be closely watched as lofty valuations create increasing room for disappointment. Whilst all-in yields on bonds remain very attractive, the absence of significant rate cuts will mean less impetus for capital gains with the likelihood of heightened bond volatility remaining.
Unassailable US dollar strength remains problematic, particularly for emerging markets where valuations remain somewhat supportive, whilst the macro outlook for Europe looks increasingly dire and investors eagerly await action on Chinese stimulus announcements.
Considering this, we remain cautious and well diversified in our approach for now. But also stand ready to take advantage of market mispricing and opportunities as they arise.
2024 was a memorable one for investors, with asset prices powering ahead.
The year started with a bang, as the positive market momentum from the fourth quarter of 2023 spilled over into the new year, under the premise that inflation would fall sharply through 2024 enabling central banks to deliver large interest rate cutting programs.
The Australian equity market (ASX 200), although starting the quarter in good spirits and continuing to rally, driven by lower-than-expected inflation data and positive sentiment, witnessed an acceleration in market volatility due to various economic and political factors. This did not deter investors as the index made history on 17 July by surpassing the 8,000 mark and closing at an all-time high of 8,057. Off the back of positive momentum supported by optimism of interest rate cuts by the US Federal Reserve as early as September the benchmark delivered a strong quarterly return of +7.8%.
A new generation of just over 5 million Australians – born between 1965 and 1980 – are approaching their retirement years.