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%.
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%.
At the sector level, Information Technology, was again the lead performer providing a strong quarterly return of +16.1% as the AI thematic kept thundering along although not without incident and concern. Interest rate sensitive sectors fuelled by the potential of rate cuts sooner rather than later, also performed strongly. As investors positioned for expected improvement in consumer spending, Consumer Discretionary shot up +10.4%, as did the Real Estate sector which rallied an impressive +14.5%. Materials provided the highlight for the month of September, surging +13.1%, after China announced measures to support its ailing property market and support general growth, to end the quarter up +10.8%. The laggards for the quarter were Energy (-6.2%), off the back of retreating demand and soft expectations coming out of China and Utilities (-1.2%), as defensive assets gave much away in the risk-on buying frenzy of early July.
Across the market spectrum, the global rotation into mid and small caps at the expense of over-valued large tech, spurred on by weak inflation and jobs data out of the U.S., resulted in the S&P/ASX Emerging Companies index topping the returns for the quarter with an impressive +9.6%. All market segments provided attractive returns for the quarter averaging +8.0%.
The September quarter also included corporate earnings season which ended up being quite underwhelming. Overall, Australian corporate earnings fell (-4.4%) in FY24, which was in line with consensus and the second straight year of falling profits for the index S&P/ASX 200.
Earnings misses (38% of the market) outnumbered beats (32%). Disappointments were driven more by margin, as revenues were largely in line with expectations.
The outlook for FY 2025 has now been revised to basically zero. EPS (Earnings Per Share) growth has been cut from 3.7% to 0.4%, putting in play a third-straight year of negative growth for the index. Most sectors had downgrades, led by Energy, Media, Utilities, Mining, Health and Capital Goods. Only four sectors (Tech, Telecom, Banks and Financial Services) received upgrades. A tough and challenging year ahead, however this will create opportunities.
Considering the significant turbulence encountered across the world, global equities achieved solid gains over the quarter despite concerns over the conflicts in the Middle East and Ukraine. Optimism on Artificial Intelligence prospects, milder inflation outcomes, and both the U.S. and European central banks cutting interest rates were the key drivers for higher global share prices.
In USD terms, the S&P 500 returned +5.8% for the quarter, hitting new highs at a regular rate throughout the quarter. A new high was reached on the last day of the quarter, 30th September, the 42nd record so far this year. Calendar year return is an impressive +22.1%. The tech heavy Nasdaq, after experiencing a whirlwind quarter delivered a solid +2.8% and an equally impressive calendar year to date return of +21.8%.
At the sector level, all sectors provided a positive return except Energy (-2.3%) which was hurt by softer oil prices on concerns regarding the demand outlook. The best performers for the quarter were led by Utilities +19.4% and Real Estate +17.2%, rocketing higher on a large rate cut, whilst Communication Services +1.7% and Information Technology +1.6% lagged.
In Australian dollar terms, the broader global equity market (MSCI All Countries World NR AUD), gained +2.4%, Eurozone equities (STOXX Europe 600 NR), rose +4.1%, FTSE 100 returned +4.2%, Japan equities, Nikkei 225 Average TR, jumped +4.5%, and the MSCI AC Asia Ex Japan index retuned an impressive +6.3% driven by increased confidence post the release of the Chinese stimulus package. A rising Australian dollar negatively impacted unhedged global equity returns in the period.
Emerging Markets once again outperformed the broader global markets in AUD, with the MSCI EM Index returning +4.7% driven by the China equity market (MSCI China NR) which saw an increase in confidence post the release of the PBoC stimulus package returning +18.9%. This cascaded through to strong returns in emerging Asia, MSCI EM Asia +5.4%; and MSCI EM ASEAN, a whopping +16.7%. Europe, MSCI EM Europe had a poor quarter returning (-6.2%), as concerns surrounding GDP growth, inflation, and unemployment rates hurt company earnings.
Latin America, MSCI EM Latin America NR (-0.1%), hurt by a mixture of rising rates in Brazil and uncertainty over Mexican judicial reform.
The domestic sector as measured by the S&P/ASX 200 A-REIT TR Index, rallied hard during the quarter off the back of declining nominal bond yields, posting a strong +14.5%, and despite the sectors challenges, has returned and extraordinary +26.1% calendar year to date. The pleasing aspect is the fact the rally has become broader and not just at the mercy of the biggest stock in the index (Goodman Group).
Global listed property trended much the same way as the domestic market. The benchmark FTSE EPRA Nareit Global REITs TR index posted an attractive +11.9% for the quarter, whilst the hedged equivalent returned a superior outcome of +13.7% due to the appreciating AUD, which climbed relative to the U.S. dollar, circa: +4.0%. Calendar year returns, +11.0% and +11.8% respectively, have not been as impressive as the domestic market due to in part, by problematic valuations in a number or countries.
The fall in bond yields was the key driver of returns for Infrastructure in the September quarter. As the demand for defensive assets grew in the volatile month of August and coupled with heightened expectations of interest rate cuts by the U.S. Federal Reserve, provided both the initial and subsequent tailwind to the asset class.
Best performing sectors through the quarter included Utilities, Renewables and Energy Midstream which were buoyed by forecast increases in power demand, bond yield-sensitive Towers and Utilities whilst political risk concerns held Toll Roads back.
The FTSE Global Core Infra 50/50 index rose +9.5% for the quarter improving the previously lacklustre year to date return to +11.0%; the hedged equivalent aided by the rising AUD posted returns of +13.7% and +11.8%.
The September quarter saw the divergence in interest rate cutting cycles commence in many major economies, which proved a major trigger to one of the most volatile periods in the bond markets since the global financial crisis. Although the MOVE index, which measures bond volatility, only ended four points lower at the end of the quarter, inter-month movement was extreme.
The U.S. 10-year Treasury, outside of a few spikes, trended down for the whole quarter. Starting at 4.39% and hitting a low of 3.66% on 8 September (lowest since May 2023), it settled at 3.79% come quarter end. The movement again highlighted the weaker U.S economy and the expectations of rate cuts which finally eventuated in mid-September by a whopping 50bps. The 10-Year Australian Treasury yield, also experienced a broader downward spiral, ending the quarter at 3.96%. A fall of 40 basis points.
Australian treasury bonds (Bloomberg AusBond Govn 0+Yr) rose +3.03% for the quarter, underperforming the Global Treasury bonds (Bloomberg Global Treasury TR Hedged) +3.99%.
Credit market spreads, both investment grade and high yield, continue to remain at multi-year lows (valuations high) as spreads continue to contract as investors remain optimistic on financial conditions and less worried about corporate defaults. Global credit (Bloomberg Global Agg Corp TR) rose +1.72%, in AUD whilst the Australian corporate credit market, Bloomberg AusBond Credit 0+Y TR AUD, provided a healthy +3.06%, both underpinned by further spread contraction. Overall spreads remain tight across the board and continue to reflect positive sentiment and continued optimism of a soft economic landing.
During the quarter, as noted, the US Federal Open Market Committee (FOMC) cut rates for the first time in four-years with a larger than expected 50 basis points, dropping the official funds rate to +4.75% - +5.00%. The Fed noted "greater confidence" in trajectory of inflation while job gains have "slowed", changed from prior "moderated", as the rationale behind the bigger than expected cut. The RBA once again remained unmoved, maintaining rates at 4.35% for a sixth and seventh consecutive meeting. Inflation remaining too stubborn and sticky for the RBA begin their rate cutting cycle.
The ECB once again lowered its three key interest rates. The Bank of England finally cut during the quarter, lowering the Bank Rate from 16-year highs, to 5.00%; as noted, the People's Bank of China (PBoC) got the ball rolling with a surprise cut in July with the Bank of Japan (BoJ) going in the opposite direction, delivering only a second rate hike in seventeen years.
Most major currencies appreciated against the U.S. dollar during the quarter primarily due to rate cut expectations and faster monetary policy easing by the Fed.
Central bank policies dominated the direction of currencies during the quarter with the BoJ’s rate rise providing the Yen with an 11% kicker (relative to the USD). Political uncertainties and one major remaining election in 2024 could see volatility rise in currency markets.
The DXY, which measures the strength of the USD against a basket of major currencies, fell (-4.81%) in the quarter after two straight positive quarters. The Australian dollar ended at 0.6919 USD, rising +4.03% for the quarter. Since hitting a year low of 0.6404 USD on 17 April, is now up 8.04% to 30 September.
“Nothing to see here” was the first thing that came to mind in the September quarter given how exceptionally strong returns were. But that couldn’t be further from the truth given how action-packed the period was with bursts of heightened market volatility, a perplexing mix of economic data, and rising political and geopolitical risks.
Interestingly, the strongest returns came from yield sensitive growth markets like listed property and infrastructure, and Australian equities which were also assisted by a rising Australian dollar. These asset classes benefited from a combination of central bank rate cuts (abroad) and declining bond yields all whilst inflationary trends remained somewhat stubborn in certain jurisdictions (namely, Australia and the US).
Relatively strong returns from bonds in the quarter, benefiting firstly from concerns regarding the economic outlook, and then from central bank rate cuts, both of which put downward pressure on bond yields and hence an uplift in capital values (growth). Corporate credit also performed well with strong buying from investors and healthy yield levels. Within equity markets, we saw a surprising change in leadership with Chinese equities rocketing higher on much needed and eagerly awaited Chinese government and central bank stimulus.
Other market moves largely added confusion to the mix. The Australian dollar rose strongly against the USD, largely driven by the latter falling on concerns regarding the US economic outlook and the outsized initial rate cut from the Fed. Oil prices fell sharply in the period, which appear to better price recession risks than both equity and bond markets. Even a widening of the conflict in the Middle East wasn’t enough to arrest the decline in oil price. Increasingly noticed and watched gold prices rose in the quarter, likely pricing in concerns regarding potentially stickier inflation and a weaker economic and hence lower bond yield environment.
All this played out in a backdrop where the economic picture and outlook became increasingly obfuscated, with different asset classes pricing in or exhibiting different economic expectations. A couple of sharp and sudden changes in expectations in the quarter saw some rather large single day falls in equity markets, with US tech front and centre, which provided proof points of the lofty expectations already baked into asset prices and little sneak-peeks at what happens when markets price risks correctly.
A mixed bag across the globe on the inflation front. Cheers of success in Europe, the UK, Canada, and New Zealand; inflation remaining somewhat stubborn in Australia and the US linked to services (tight jobs market) and property-related factors (supply, rents, construction costs); deflationary risks persisting in China; and rising inflation in Japan. The June quarter Australian inflation print showed some inroads being made, with subsequent data resulting in the RBA taking further rate hikes off the table, but with underlying inflation still too high for rate cuts. US inflation, particularly headline inflation, saw growth slow significantly in the period satisfying the Fed enough to cut rates by a large 0.50%! Interesting move with core inflation above target, particularly with inflation re-accelerating slightly at the back end of the quarter.
Inflation at or very close to target saw central banks in England, Canada, New Zealand, and a few others cut rates in the period, whilst the Bank of Japan raised rates for only the second time since 2007 putting significant upward pressure on the Yen. This move resulted in significant market ructions as many traders were forced to swiftly unwind huge cross currency positions. In contrast, both the US and Chinese central banks cut interest rates for very different and perplexing reasons, with Chinese officials succumbing to pressure to provide much needed stimulus to the property and household sectors.
In one of the oddest central bank decisions in recent history, the US Fed cut rates by what has historically been seen as an emergency level cut – 0.50%. All whilst communicating that the economy remains strong, labour markets tight, and core inflation still well above target. The move caused confusion amongst non-equity investors (bonds and commodities) whilst equity investors took the champagne and didn’t look back.
On the economic front, a “soft-landing” remained consensus, but we did see markets attempt to price in both hard-landing and no-landing scenarios in the period, with investors realising that a soft-landing scenario isn’t a forgone conclusion. Headline economic data remained robust in most jurisdictions (outside of China) but underlying and less well followed data did start to show signs of weakness in the period – something we’ve been watching closely as headline data generally operates with quite a considerable lag and is subject to large revisions. This was true on the Australian economic front – unemployment still very low but jobs growth patchy and quite large declines in job ads; healthy house price growth and anaemic bad debts, but signs of some weakness in NSW and particularly VIC, with increasing supply of existing homes for sale, whilst rental markets remained very tight; cumulative household savings high, but household savings ratios moved below pre-covid levels and retail sales growth continued to slow. The same was roughly true of the US economic backdrop.
China economic woes became significantly more apparent in the quarter forcing Chinese officials to act. The household remains pained by the significant falls in house prices, with most Chinese household wealth tied up in property, maintaining downward pressure on both confidence and sentiment. Manufacturing data also remained weak given lacklustre demand from local and global customers (e.g. Germany) and the imposition of tariffs by both the US and Europe as the trade war continued. Finally, foreign investor outflows haven’t helped but we did see that change somewhat in the period (off a very low base) following the announcement of stimulus measures.
Plenty of action on the political and geopolitical front, with the US election nearing, a stalemate in French elections (which markets applauded), escalations on the conflict in the Middle East and Western trade tensions with China (chips and electric vehicles). President Joe Biden succumbed to pressure from within, pulling out of the Presidential race with the Democrat Party anointing sitting VP Kamala Harris as their primary candidate. Former President Trump withstood two assassination attempts, whilst both Harris and Trump announced their VP choices and hit the campaign trail. Tensions in the Middle East rose as the Irael / Hamas war extended to Yemen, then Iran, and more recently Lebanon. Markets stood up and took notice, whilst oil prices oddly remained weak in the period.
The outlook remains a juxtaposition between deteriorating economic fundamentals, stubborn inflationary thematics, and government and central bank officials trying to ensure they hold onto every job gain over the last few years whilst bringing inflation back to target in a credible timeframe and alleviating cost-of-living pressures to shore up re-election chances. Bond investors want to price rising risks but are prevented from doing so due to significant bond supply; and somewhat unorthodox fiscal and monetary policy. Whilst commodity investors are pricing in significant economic woes in the absence of gargantuan Chinese stimulus.
We’re continuing to err on the side of caution in light of this, given the heightened risks of policy missteps, overcrowded trades, and quite full valuations which in some cases imbue fairly lofty expectations. But we’re also checking this caution against fiscal and monetary policy which, at least in the short term, has the ability to patch over and/or hide any of the negativity that usually follows a period of significant rate hikes. A balanced and diversified approach is sensible for now.
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.
A new generation of just over 5 million Australians – born between 1965 and 1980 – are approaching their retirement years.
The Australian equity market (ASX 200), ended the quarter in the red (-1.1%). Higher than expected year-on-year core inflation readings flowing through from the March quarter attributed to the weak performance whilst market anxiety also increased at the thought of a possible rate hike - a long way away from the cuts that had been priced in earlier in the year and in late 2023.