Investment Markets in Review – Q1 2024
Pitcher Partners Investment Services (Melbourne) | The information in this article is current as at 09 April 2024
Economic conditions held up relatively well over the quarter, especially labour markets where unemployment rates remain at or near historical lows in many key regions.
What was once feared as a potential hard landing recession has transformed into ongoing expectations of a soft landing, attributed to the current resilience and unique characteristics of the US economy.
A dovish US central bank meeting in March has set the tone for the financial markets. Investors are building confidence that Fed officials are on track to reduce policy rates in the second half of the year despite a resilient US economy. The sentiment was also reinforced with the surprise rate cut by the Swiss Central Bank in March which was expected in June this year. Additionally, European Central Bank officials have flagged a June rate cut as inflationary pressures continue to ease and economic concerns increase.
While the markets speculate on the magnitude of the rate cuts, which contributed to a rise in bond yields over the quarter, the performance of global equity markets was bolstered by expectations around the upcoming cutting cycles by major central banks.
The first quarter of 2024 saw elections in Bangladesh, Indonesia, Pakistan and Taiwan. About half the world’s population reside in countries holding elections this year. We are also set for a Trump-Biden rematch in November, with both candidates having secured their party’s nominations. Whilst the outcome of the US elections remains uncertain, the financial markets have a great deal of familiarity with both candidates and will likely focus on the implementation of the candidates’ policies when whoever takes office in early 2025.
Elsewhere, Japanese stocks drove the Nikkei 225 Index to new highs, eclipsing the peak achieved 35 years ago in December 1989! The favourable equity market conditions in Japan continued despite the Japanese economy dipping into a technical recession in the second half of 2023 and the Bank of Japan hiking rates for the first time in 17 years, finally ending its negative interest rate policy. Profits for Japanese companies are roughly triple what they were when the Nikkei hit its 1989 highs and investors have been optimistic about reforms to the corporate culture.
Domestically, the RBA continues to emphasise their data dependency and the need to see enough progress on inflation easing significantly before beginning any cutting cycle.
The RBA’s latest assessment on the current condition of the financial system highlights households and businesses in Australia have been resilient to date. Low unemployment and higher wage growth has supported nominal household incomes, and household behaviour has adjusted. Discretionary spending has been curtailed and savings are accruing at a slower pace or prior savings have been drawn down. Employment remains key to households’ resilience and a sharp rise in unemployment would test the resiliency of the household sector.
We now provide some key comments regarding the performance of the major asset classes in the March quarter below;
The global equity market rally continued over the quarter. Global equities outperformed our local share market over the period, as investors were buoyed over the anticipated upcoming cutting cycles by major central banks and the ‘Magnificent 7’ continued their ascent after posting strong quarterly results.
On a regional basis, Japan was the strongest performing major market, followed by the US and Europe. Global investors have been underwhelmed by the growth prospects in China whilst favourable conditions in Japan bolstered the performance of Japanese stocks.
Growth investors outperformed value given the ascent of the technology sector with the Artificial Intelligence investment theme. The North American re-industrialisation and energy transition investment themes also supported the industrial, communication, financial and energy sectors over the quarter.
Locally, the 1H24 reporting season highlighted that Australian listed companies continue to be in relatively good shape. Small caps outperformed large caps – small caps provided a higher proportion of results beating expectations as they positively surprised on margins and revenue. Leading sectors were consumer businesses, technology and financials. Telecommunication, resources and materials lagged.
In turning towards fixed income, speculation on the magnitude of the upcoming rate cuts by major central banks contributed to a rise in bond yields over the quarter. The negative impact from rising bond yields was largely offset by tighter credit and high yield spreads across the fixed income benchmarks. Credit remains supported by the positive sentiment in the financial markets and ongoing demand by investors seeking yield.
High yield credit spreads are relatively tight compared to history – near their 10-year lows. Whilst the quality of high yield assets in the benchmark improved over the time, the recent performance has been largely driven by ongoing demand from passive funds (driving 50% of the demand!) so we remain cautious of this segment if default rates increase when more refinancing is due to take place in the near term.
Listed property markets had a stellar quarter locally as investors have started to factor in the upcoming cutting cycle domestically as well as becoming more confident about valuations locally. Offshore, the listed property markets delivered a negative performance as they continue to face structural headwinds largely driven by funding challenges with US regional banks and other funding vehicles (e.g. CMBS) for parts of the unlisted property sector. This continues to impact the sentiment for this asset class as valuations remain a concern especially for the commercial real estate sector.
We witnessed a wide dispersion in the return of various commodities – the underwhelming stimulus plan to date for the Chinese economy impacted the likes of iron ore and coking coal. Concerns about Electric Vehicles demand and excess supply impacted lithium and nickel. In addition, geopolitical concerns remained elevated as the conflict in Gaza disrupts the Middle East and supported oil prices higher. Gold rallied to all-time highs near US$2,280 per oz on strong buying from central banks in the emerging markets and Chinese retail buyers.
The Australian dollar weakened slightly against the US dollar over the period, to close the quarter at $0.6517 as the weakness in the Chinese economy continues to weigh on the AUD.
Lastly, if you are a chocolate lover, cocoa prices are soaring to new heights, creating a buzz in the chocolate world that is expected to add a twist to our chocolatey delights. Cocoa prices have lifted 250% in the past year. Poor production of cocoa in Western Africa, a key growing region, is the main reason for the supply shortage.
