Financial Market Update

Quarter 2, 2024

Key points

  • Concerns in April that sticky inflation would delay interest rates cuts subsided over May and June.
  • Global equities continued to be led higher by the technology sector.
  • Australian equities underperformed as some commodity prices as resource stocks weakened
Asset Class Return Quarter 2 2024

Global Equities Rally As Inflation Fears Subside

Global Share Market Quarterly Returns
News of higher-than-expected U.S. inflation in April saw global equity markets sell-off and bond yields initially adjust upwards. However, more favourable inflation data released in the following two months restored market confidence and global equity markets then more than reversed April’s decline. Over the quarter, developed market equities averaged a 3.0% gain to bring the annual increase to 20.2%.


Global Share Market Quarterly Returns
The pattern of price growth over the quarter was like that prevailing for most of the past year, with the United States technology sector leading the market higher. Large tech stocks in the U.S. rallied 12.6% over the quarter, significantly outperforming the overall S&P 500 Index gain of 4.3%. Once again, the market’s focus was on computer chip manufacturer Nvidea, which became the largest listed company in the world in June based on market capitalisation (which is the share price multiplied by the number of shares on issue) following a quarterly gain in its share price of 36.8%. Actual earnings results and forecasts across the U.S. technology sector have progressively increased over the past year, with other sectors not showing the earnings decline that was feared earlier.

European markets were generally weaker over the June quarter, with European Union parliamentary elections producing a material swing to more right winged parties. This prompted the French President, Mr. Macron, to call a snap legislative election, which caused concerns on both French bond and equity markets. The French share market fell by 8.4%, with losses also recorded in Germany last quarter. The United Kingdom, which has its own election on July 4th, bucked the trend, finishing 3.6% higher.

The Japanese market also finished in negative territory, with the Nikkei Index falling 2.0%. Further weakness in the Japanese Yen (which has depreciated 11.1% against the $A over the past year), is placing some pressure on the Bank of Japan to increase interest rates from abnormally low levels as their domestic inflation shifts higher. Japan’s 10-year bond yield rose above 1%, which is the highest level for 11 years and reflects the expectation that Japanese monetary policy will be tightened.

Emerging economy share markets were mixed over the quarter. There were strong performances from India (up 9.9%) and Taiwan (up 16.3%). However, these gains were partially offset by a 2.6% fall in China, where concerns over the economic growth outlook are ongoing. This weaker Chinese growth outlook resulted in declines on some commodity markets, which also resulted in negative results from most South American markets. None-the-less, the overall MSCI Emerging Markets Index still finished in positive territory over the quarter with a gain of 2.6%.

With bond yields moving higher over the quarter, there was a sell-off on listed property markets. Global listed property finished 2.0% lower, with the Australian property sector declining 5.7%. Infrastructure, however, proved less sensitive to bonds yields and moved 2.3% higher. 

Australian shares continue to underperform

ASX Key Sectors Quarterly Change
The Australian share market continued its underperformance against global average last quarter, with the S&P ASX 200 Index falling by 1.1%. Resource stocks were a major contributor to the underperformance. A 2.9% reduction in the iron ore price led to falls across the major mining companies. Other sectors showed mixed results, with the finance sector making the largest positive contribution.




ASX Key Sectors Quarterly Change
Both banks and insurance companies were well supported, with Insurance Australia Group (IAG) jumping 12% following news of favourable reinsurance deals being secured. There was a particularly strong performance from the Utilities sectors, with the sector’s 13.3% increase being largely attributable to AGL Energy, which rallied 30%.

Yields Finish Quarter Higher Despite Some Policy Easing

10 Year Government Bond Yield
The direction of yields on bond markets continued to be set by the outlook for U.S. inflation. Bond yields rose in April following higher than expected inflation, but then declined in the following two months. Despite the more favourable U.S. inflation results in May and June, U.S. 10-year Treasury Bond yields still finished the quarter higher, rising from 4.21% to 4.36%
10 Year Government Bond Yield

There was a more significant increase in the Australian equivalent, with the 10-year yield here moving from 3.96% to 4.35%. Conditions on credit markets remained favourable, with an absence of any significant rise in corporate defaults. Higher credit security returns offset some of the small capital loss generated from rising bond yields last quarter.

Although there was no change in cash interest rates in Australia or the U.S. last quarter, there were policy reductions announced in the European Union, Canada, and Switzerland. Locally, there was more market participants predicting a cash rate increase by the Australian Reserve Bank this year because of higher-than-expected inflation indicator data for the month of May.

Despite some weakening in commodity prices, the $A held its value last quarter, rising from US 65.3 cents to U.S. 66.2 cents. Gains against both the Yen and Euro were more impressive, with the $A’s appreciation being 7.8% and 2.7% respectively. However, trade fundamentals may become less supportive for the $A, with the Current Account moving into a deficit position in the March quarter. A weakening in the Terms of Trade (the ratio of change in export prices to import prices) was also contained in the Commonwealth Government’s Budget forecasts made in May.

Considerations For Investors

The June quarter capped off an outstanding financial year for share markets, with global developed markets rising by an average of just over 20%. This increase is nearly 3 times the long-term annual average and reflects a combination of the following factors:

  • A global recession, that was widely predicted due to higher interest rates, did not eventuate.
  • Inflation has gradually moved back towards long-term targets across the globe.
  • There has been a significant increase in both actual and expected profitability from technology companies, with the evolution of Artificial Intelligence being a primary catalyst for this.

Despite areas of geopolitical tension and the uncertainty caused by a myriad of key elections, investor sentiment remains buoyant. Concerns stemming from the sharp declines in commercial property valuations, and the collapse of some second-tier banks in the United States, have not generated the same contagion effect on confidence that they would have in past periods when financial markets were more fragile and structurally deficient due to high leverage.

Notwithstanding the clear rationale for the rally on global equity markets over the past year, it is less obvious as to why the Australian share market has participated in this rally to the extent that it has. The lack of a sizeable Information Technology sector provides much of the rationale for an 8% performance differential between the Australian share market return and the global average over the past year. None-the-less, it could be argued that the 12% rise in Australian share prices is at odds with underlying fundamentals, which are far less favourable than those of the United States.

Effectively, the Australian economy is in recession. On a per person basis, economic growth has contracted by 1.3% over the past year. The latest National Accounts data showed a significant build-up in inventories, which adds to the probability of weaker growth data in the period ahead. Productivity has experienced the largest fall on record, and, with the household savings ratio now close to zero, there is limited scope for consumers to increase spending in the near term. Our major trading partner, China, is also experiencing weak economic growth and this has contributed to falling commodity prices and a shift in Australia’s Current Account (our net earnings from trade and foreign income) from surplus to deficit. Given this backdrop, share price gains for the financial sector (up 29%) and consumer discretionary stocks (up 23%) over the past year seem difficult to reconcile.

Company earnings growth fundamentals do appear weaker in Australia than those of the U.S. and, indeed, those of many emerging economies. As such, the case for healthy international diversification of equity exposure is strong. Conversely, an opportunity may be emerging within longer-term Australian interest rates, which may ultimately need to fall given that the Australian economy is weaker than perhaps bond markets are implying with 2-year yields above 4%.

Despite the challenges presented by the Australian economy, the past year has highlighted the resilience of financial markets and the robustness of corporate balance sheets and earnings. Share markets and corporate credit markets have rallied despite an unusual range of challenges and uncertainties over the past year. Notwithstanding this resilience, valuations for some assets have moved to the upper ranges of fair value and investors should seek to manage this valuation risk by holding healthy exposures to sectors such as emerging markets and smaller companies to diversify away from the more expensive end of the share market. These sectors continue to offer more attractive valuations yet still provide a reasonable prospect of further earnings growth.

Important Information 
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged).

This Market Update contains information that is general in nature. It does not constitute financial or investment advice. Any information, material or commentary is intended to provide general information only. Zone Financial Pty Ltd makes no representation as to the accuracy or completeness of the information. Before acting on any information contained on this website, each person should consider its appropriateness having regard to their own or their clients’ individual objectives, financial situation and needs. You should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision or recommendation.

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