Global
Equity markets managed to finish the September quarter strongly despite a bout of market volatility during late-July to early-August, which saw a 7% correction in the US market. The market correction was sparked by worries over a US recession and the Japanese central bank increasing interest rates (in stark contrast to the rest of the G7 countries).
We viewed this as a ‘technical correction’ and noted that it sparked a couple of key positives – a retreat in global bond yields and the oil price. Subsequently, it became clear that the US economy was headed for ‘a soft landing’ and that inflation was gradually retreating to target. Markets duly recovered with Property, Infrastructure and Equities all finishing the quarter with strong gains. Bonds have also moved into positive territory, as interest rates ease (bond prices move inversely to interest rates).
A key area of weakness has been China and commodity prices. Towards the end of the quarter, China offered an additional round of stimulus and there was a general recovery in commodity prices and resource stocks. Whether this is sustainable or not, will largely depend on global growth prospects, which do seem to be improving based on an easing cycle underway in Europe, North America and China.
Geopolitical conflicts in Eastern Europe and the Middle East remain key risks to the outlook, if they upset global trade and commodity prices. The US Presidential election, in early November, also looms as a key event that could change US policy around foreign relations, global trade and the US budget deficit. That said, we don't think the election result will adversely affect markets either way, as the House and Senate are likely to be split, and it will be hard for either President to make major legislative changes. We would view Harris as slightly negative for equity markets but positive for bond markets (due to tighter fiscal policy), while Trump is likely to be the opposite.
Australia
The major news over the past quarter is that inflation is slowing (August headline inflation 2.7% and core 3.4%). The monthly figures are within range of the RBA’s 2.0-3.0% target range, and it looks like the RBA will have room to ease interest rates by December 2024, at the earliest, or more likely February 2025 (the RBA doesn’t meet in January 2025).
With an easing cycle ahead, the Australian share market has gained momentum over the past quarter, with gains broadening across most sectors. The Materials and Energy sectors were lagging for most of the quarter but recent China stimulus, and events in the Middle East, have sparked a sharp rally in these sectors in recent weeks.
Banks have led gains for most of 2024 and it will be interesting to see if they can hold their gains in the Bank reporting season coming up in November 2024 (for the September 2024 financial year). Bank earnings are expected to remain flat to negative for the period, so clearly the market is relying on an improving outlook, as interest rates ease and the cycle recovers. We also move into AGM season in November, which is a chance for companies to give an update on how they are tracking in FY25.
It would be remiss not to mention that Australian Property was the top performing asset class over the past 12 months with a 45.9% total return! This was driven by expectations of an easing cycle ahead and bond yields moving below 4.0%. Asset managers like Goodman (GMG) and Charter Hall (CHC) have led returns but traditional REITs have also seen a strong recovery.
We also note the AUDUSD has gained 5 cents over the past year and is now trading around $0.69. With the US Federal Reserve set to ease the cash rate by another 75bps by December 2024, while the RBA is likely to remain on hold, we expect the local currency to have further upside.
Outlook
Inflation is gradually retreating to target, and a soft-landing scenario looks probable. Interest rates are already easing in Europe and the US, with Australia likely to follow suit in early 2025. We expect a recovery in global growth to emerge in 2025.
Geopolitics remains a key known risk but seems unlikely to upset global growth and financial markets (at this stage). The US election is another upcoming political event but again unlikely to upset financial markets (at least initially).
Overall, we expect a broad-based earnings recovery across most sectors during FY25 and into FY26. A broadening of the market rally should drive further gains and hence we retain our bullish view.
The next key events on the calendar include:
Australian CPI (September quarter) - 30 October 2024
RBA meeting – 5 November 2024
US Presidential election – 5 November 2024
US Federal Reserve meeting – 7 November 2024
Australian Bank reporting season – November 2024
Australian AGM season – November 2024
Bill Keenan
Principal, Portfolio Manager
Bill Keenan is the founder of Sunbird Portfolios. Sunbird provides independent advice to leading financial advisers across Australia.
Bill has 30 years’ experience in financial markets and holds a Bachelor of Business in Accounting and a Graduate Diploma in Finance and Investment.
Warnings
General Product Advice - any advice provided in this document, is general in nature only and does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, the reader must consider whether it is personally appropriate considering his or her financial circumstances or should seek independent financial advice on its appropriateness.
Past performance is not a reliable indicator of future performance.
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