Financial Market Update

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Global Share Market Advance Continues

In a turnaround from recent months, there was a sharp bounce higher on the Chinese market over February and March, with Chinese shares 4.4% higher for the quarter. Both the share market and the broader Chinese economy may have now passed the bottom of recent downturns, and the relatively cheap valuations on the Chinese equity market have been attracting some buying support. On an annual basis, the Chinese equity market remains in negative territory by 9.4%, with Hong Kong 15.7% lower. Outside of China, other emerging markets lagged the heady returns of developed markets last quarter. India (up 6.2%) and South Korea (up 5.2%) both underperformed the broader global average, as did Brazil (down 5.7%), which was impacted by the lower iron ore price. Taiwan, however, was an exception, with its technology orientation contributing to a 15.7% gain.

A small lift in longer term global interest rates over the first two months of the quarter detracted support for global property and infrastructure. In fact, global listed property finished the month in negative territory at -0.1%, with listed infrastructure mildly positive at 2.6%.

Although the March quarter continued to be dominated by technology and “growth” styled equities, there was some turn around in this trend in the final month of the quarter. During the month of March, the more “value” orientated sectors performed better, with property, resources and energy rallying. Smaller companies also outperformed larger companies in March, which was a reversal of the dominant trend of the past year.

Australian shares impacted by lower iron ore price

Consistent with the broader global trend, the Information Technology sector was the best performed on the Australian market last quarter with a surge of 24.4%. Listed property (up 16.2%) was also a standout and was again boosted by Goodman Group, which rallied 33.6% over the March quarter. Assisted by a positive outlook for data centre demand, Goodman has increased by 82.4% over the past year and now represents 35% of the value of the S&P/ASX 300 A-REIT Index.

Australian yields steady

There were some minor changes in monetary policy settings during the quarter, with the Swiss central bank lowering interest rates by 0.25% and the Bank of Japan increasing its policy rate to just above zero in March. However, policy settings in Australia and the United States remained unchanged. The Minutes of the Australian Reserve Bank’s March meeting did indicate a slight change in tone that possibly suggests a greater willingness to lower interest rates should inflation continue to decline.

However, there was an increase in global longer term yields last quarter with the U.S. 10-year Treasury Bond yield moving from 3.88% to 4.21%. This increase is likely to reflect money markets pushing back expectations around the timing and magnitude of U.S. interest rate cuts because of some slightly higher inflation results in the United States. In contrast, the Australian 10-year government bond yield remained unchanged at 3.96%. The 0.25% margin between the U.S. and Australian 10-year yields is the largest recorded on a month end basis since October 2022 and is indicative of the weaker economic growth outlook for Australia.

After strengthening towards the end of 2023, the $A returned to a declining trend over the March quarter, falling from U.S. 68.4 cents to 65.3 cents. Weaker iron ore prices and a stronger $US contributed to the lower the lower $A. The $A was also 2.4% weaker against the Euro but moved 2.2% higher against a softening Japanese Yen.

Considerations for investors

A key feature of the equity market rally over recent months has been its narrowness. Technology stocks inside the U.S. S&P 100 Index gained 31.6% since the start of November and are nearly 50% ahead for the past year. This is approximately double the annual gain in the global equity market as a whole. No doubt some of this disproportionate increase can be explained by the favourable profit results announced by companies in this sector, and the fact that many are well positioned to benefit from AI. However, history does suggest that financial markets can “over extrapolate” new information and operate with “irrational exuberance”. Only time will tell whether or not now is one of those occasions.  

Given the valuation risks that have potentially emerged in the technology sector, the change in the pattern of price growth evident in the final month of the March quarter was welcome. Areas of the market that had been ignored for much of the past year, such as infrastructure, smaller companies and property (where Goodman has been one of the few property companies globally to attract any positive sentiment) showed strong buying support and outperformance. This more balanced pattern of price movement, though, could be a sign that the equity rally is reaching a mature phase of the cycle whereby investors are being forced to look wide and hard for the remaining pockets of value. 

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