Investment markets in review – Q2 2024
Pitcher Partners Investment Services (Melbourne) | The information in this article is current as at 18 July 2024
Despite a choppy start to the quarter, many financial markets quickly repriced back into the ‘no-recession soft landing’ scenario in the U.S. However, mixed data signals, especially around inflation and labour markets continue to delay the timing and magnitude of rate cuts from several major central banks (Australia included). We continue to believe that markets remain very susceptible to the risk of a harder landing / recession late 2024 / early 2025.
From a macro perspective, the momentum generally evident throughout Q1 ’24 carried over into Q2, albeit perhaps at a slightly slower pace. April fears of an overheating U.S economy saw very dovish rate cut expectations priced into markets at the beginning of the year erased to just potentially 1-2 in 2H24. Inflation has eased but in the Federal Reserve’s opinion, still remains “uncomfortably” above its long-term target band. In Europe, growth rebounded modestly off a very low base, which on the back of declining inflation was enough for the ECB to join the likes of Canada, Sweden and Switzerland by implementing a rate cut. In China, growth continues to be range-bound but a further deterioration in the property index data in June, shows that China still has many challenges to face both short and long term. Japan continues to teeter on the edge of a recession despite strong consumer confidence and a revival in some of its manufacturing sector.
In Australia, our economy continued to slow, posting growth of just 0.1% for the June quarter. Employment markets remain tight but unemployment is gradually rising, aligning with the RBA’s current strategy. Lower-income households continue to be most impacted by the current restrictive financial conditions, with consumer confidence, consumption and retail spending all still at weak levels. Whilst declining, inflationary pressures are still prevalent for many services-based sectors. This is forcing the RBA to keep the cash rate at its current level of 4.35%, which it believes is still sufficiently restrictive to get inflation under control. Whether the cash rate will next see a hike or a cut still remains unclear.
2024 will witness a large number of political elections around the world. We saw a number of surprise results this quarter which in turn impacted the markets. When Prime Minister Modi’s party failed to win an overall majority, we saw a sharp sell-off across the Indian share market, before a rebound following his successful acquisition of a coalition government. In comparison, Claudia Sheinbaum’s strong win in Mexico was negatively received by markets. The snap election called by French President Macron raised at the time a very real risk of France having its first far right Government since World War II. President Biden’s lacklustre performance in the first televised U.S presidential debate raised significant alarm amongst his Democrat party and supporters.
In turning to performance for the 2024 financial year, domestic property stocks defied a quite tumultuous period to sit at the top of the performance charts, with Goodman Group (41.7% of the index) rallying 75% over the year. Elsewhere within the sector, lingering fears over higher interest rates pressured their share prices, especially in the June quarter. Global REITS only produced a 3.7% gain for the year as higher funding rates weighed on asset valuations, especially within U.S commercial real estate.
Global equities also performed strongly, driven higher by the seemingly insatiable demand for Artificial Intelligence (A.I) exposure within the U.S tech and communications sectors. Performance was dominated by the ‘Magnificent 7’, most notably via the spectacular rally from Nvidia, whose share price nearly tripled, taking its market capitalisation to US$3tn by June 30 (its market cap was just US$10bn a decade ago!). Japan also enjoyed a resurgence as investors were buoyed by a variety of positive tailwinds including shareholder friendly governance initiatives, lazy company balance sheets and accelerating earnings. Europe and Emerging Markets delivered low teen gains which underperformed the broader market advance, the latter weighed down by the poor performance of Chinese equities.
Australian equities rose ~12% for the year, a period where the S&P/ASX 200 Accumulation Index hit record highs. Weaker commodity prices saw the resources and energy sectors post negative returns for the period, but financials (incl banks) and the consumer discretionary sectors shrugged off the effects of a slowing economy to post gains just below 30%. Large caps yet again outperformed their small cap counterparts.
Bond markets continued to oscillate widely across many major developed country markets due to shifting inflation expectations. The 10yr U.S and Australian bond yields traded within a band of 120bps and 100bps respectively before closing the financial year around 4.35%. Broad composite bond indexes delivered returns between 2% and 4% for the year.
Credit markets continue to shrug off concerns over any slowdown in global economic conditions, pricing out any lingering ‘excess’ default risk as credit spreads tightened across investment grade, unrated and lower quality market segments. Lower quality tranches of CLO’s (collateralised loan obligations), European High Yield and Capital Securities delivered some of the strongest returns over the period.
Commodity markets displayed their customary volatility, given the diverse array of influences over the year, ranging from shifting supply and demand dynamics, geopolitical conflicts, war and changing growth dynamics. In local currency terms, base and precious metals performed strongly, the latter driven heavily by central bank purchases. Oil rose 15.4% while the price of Iron Ore fell 5.9%.
The Australian dollar strengthened modestly against the US dollar, to close at $0.67 by June 30.
| Indices | Current Level | 3 Months | 1 Year |
| ASX 200 | 7,767.5 | -1.6% | 7.83% |
| ASX 200 (Acc) | 99,807.8 | -1.1% | 12.10% |
| US S&P 500 | 5,460.5 | 4.1% | 22.70% |
| Japan Nikkei | 39,583.1 | -0.6% | 19.27% |
| UK FTSE 100 | 8,164.1 | 2.7% | 8.40% |
| MSCI World (AUD) | 18,524.5 | 0.2% | 19.80% |
| German Dax | 18,235.5 | -1.4% | 12.93% |
| French CAC | 7,479.4 | -8.9% | 1.07% |
| HK Hang Seng | 17,718.6 | 7.1% | -6.33% |
| Shanghai Comp | 2,967.4 | -3.6% | -7.33% |
| ASX 200 Prop (Acc) | 71,875.4 | -5.6% | 24.65% |
| Global Prop | 2,637.0 | -0.8% | 4.60% |
| Australia 2Y Bond Yield | 4.16 | +41 bp | -5 bp |
| Australia 10Y Bond Yield | 4.31 | +35 bp | +29 bp |
| US 2Y Bond Yield | 4.75 | +5 bp | -14 bp |
| US 10Y Bond Yield | 4.40 | +9 bp | +56 bp |
| Commodities | |||
| Gold (oz) | 2,326.8 | 3.3% | 21.23% |
| Oil (Barrel) | 81.5 | -2.6% | 15.43% |
| Iron Ore (Tonne) | 101.9 | 4.7% | -5.87% |
| Aluminium | 2,524.5 | 8.0% | 17.34% |
| Copper | 9,599.0 | 8.3% | 15.44% |
| Lead | 2,224.0 | 8.2% | 5.93% |
| CRB Index | 290.5 | -0.6% | 10.87% |
| Currencies | |||
| AUD/USD | 0.6670 | 2.8% | 0.09% |
| AUD/EUR | 0.6226 | 3.1% | 1.92% |
| AUD/GBP | 0.5274 | 2.0% | 0.48% |
| AUD/JPY | 107.30 | 9.0% | 11.59% |
| AUD/RMB | 4.847 | 3.4% | 0.27% |
Source: Morningstar
Our Newsletter Articles
This quarter we share our thoughts on the quiet achiever that is the industrial property market. We also talk about the growing opportunities and risks presented by the growth in the private debt sector and explore how regular portfolio rebalancing can help deliver improved long-term outcomes for your investments.
We hope you enjoy the content provided in this edition and look forward to chatting through these issues and more with you in detail over the coming months.
