Market Data April 2024
Market Returns - 1 Month to 30 April 2024 (in AUD)
Market Commentary
April was a tumultuous month for financial markets, characterised by significant volatility driven by mixed economic data, corporate earnings, and evolving expectations for interest rates and central bank policies.
Throughout the month, investors grappled with the uncertainty for fiscal stimulus in the U.S. election year and whether the economy was strong enough to stand on its own. Remarkably, strong U.S. wage data and retail sales figures painted a picture of a resilient economy, which led to market gains. Stronger than expected U.S. inflation data, casted doubts on the Fed's rate-cutting timeline which led to a rise in U.S. Treasury yields, briefly causing sell-offs in equities.
Despite the challenges, the tech-heavy Nasdaq Composite recovered from being over 6% down to finish just 2% down while the broader S&P 500 ended down similarly with slightly less volatility.
Cheaper cyclicals like the UK, Europe and emerging markets showed more resilience, with the UK and emerging markets delivering a monthly gain of over 3%, boosted by slightly better news from China, and a buoyant Latin America.
In Australia, the ASX 300 was also down 3%, weighed down by REITs, Banks, and smaller companies while Materials were steadier as Iron Ore prices stabilised. The Australian dollar strengthened against the U.S. dollar(+1.8%) to reach US 65 cents, supported by higher Iron ore prices and a softer USD.
Bond markets faced headwinds as yields climbed across the curve. Australian 10-year yields rose (+0.13%) to 4.52%, while U.S. 10-yearyields increased (+0.05%) to reach 4.67%. High yield credit (+0.4%) outperformed both investment grade (-0.2%) and government bonds (-0.4%). As April drew to a close, investors remain focused on upcoming central bank news, particularly the Fed, for auxiliary clues on the rate outlook.
Australian Equities
The ASX 200 fell 2.9 per cent in April, ending five months of consecutive gains. Higher inflation data and a more resilient global economy have dramatically shifted expectations on the trajectory of interest rates, where central banks (namely the US Federal Reserve) have pivoted away from multiple rate cuts in 2024 to rates held in a steady state for longer. This adjustment in rate expectations contributed to rising bond yields, which had a deleterious impact on equity valuations.
The broader market sell-off was felt across various sectors, particularly those sensitive to interest rates such as high P/E, Real Estate, and discretionary stocks. The decline in technology (high PE) and discretionary stocks is belated given their dramatic outperformance in 2023 where interest rates pushed aggressively higher. By contrast, Resources (+0.5%) proved to be a better hedge against rising bond yields in April. The relative outperformance of Resources was most evident in Gold and MidCap stocks. At a portfolio level, Resmed (RMD), Integral Diagnostics (IDX), and Iluka (ILU) were notable strong performers. Whereas James Hardie (JHX), Ramsay Health Care (RHC), and Goodman Group (GMG) weighed on performance.
Global economies are navigating a myriad of challenges, including persistent inflation which continues to delay anticipated interest rate cuts. Additionally, there are ongoing pressures from the cost of living and a tenuous geopolitical environment. With this in mind, it is crucial to maintain a vigilant posture in our equity portfolios. We focus on companies that retain strong competitive industry positions and balance sheets – attributes that equip them to withstand the chilling winds of higher interest rates and economic uncertainty. While a higher-for-longer rates environment is not an insurmountable obstacle to stock performance, it does suggest that earnings more than multiple expansion is likely to be the driver of stock performance from here.
Namely, the portfolios focus on companies that can generate earnings momentum in a world where bond yields remain higher for longer such as CSL, Cleanaway (CWY) and Goodman Group (GMG). Moreover, we believe that the opportunity in energy and resources stocks remains attractive given the recent cyclical recovery in commodity prices and the structural tailwinds of increased spending required for the global economy to transition to a lower carbon world.
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Defensive Income
Hotter than expected US inflation data released on 10 April 2024 sent markets into disarray as the perfect disinflation narrative was abandoned and rate cut bets were pared. The US 10-year yield spiked to 4.70% from 4.20% at the start of the month. Similarly, the Australian 10-year was slightly over 50bps wider over the month to a peak of 4.52%. The Global Aggregate Index (LEGATRUU) fell -2.52% in April while the AusBond Composite shed -1.98%. At the start of April, local markets were fully pricing in the first rate cut by the end of the RBA's September meeting, at the end of the month, there was a 50:50 chance being priced in for a rate hike. Local credit was again unperturbed by the swings in economic expectations with the AusBond Credit FRN (BAFRNO) Index producing +0.48%.
Credit spread compression in the AT1 space continued to defy gravity as the BondAdviser All AUD AT1 Index produced a +1.08% return for the month. Tier 2 saw some slight weakness despite spread compression on the back of the drastic widening in base rates. The BondAdviser All Tier 2 Index returned -0.52% for the month of April. The Prime Australian Defensive Income Portfolio's +0.18% return in April was a tale of two cities. The Portfolio's duration exposure drove -35bps which was more than offset by the floating rate and income producing exposures. Considering global and local bonds markets fell by -2.0-2.5%, the +18bps is a strong reflection of the portfolio's durability. The Bloomberg Bank Bill Index produced +35bps and Prime exceeds the benchmark at all timeframes in Figure 2 excluding the past month.
The duration heavy exposures in the Portfolio (PIMCO Global Bond Fund and Pendal Government Bond Fund) dragged performance by -18 and -17 basis points respectively. These two holdings comprise 19.5% of the Portfolio's allocated capital, a reflection of the low duration standpoint - 1.24 years as at 30-Apr. All of the Portfolio's other holdings drove returns higher with the Metrics Direct Income Fund and the MA Priority Income Fund leading the way with both producing +9bps contributions from HPRs of +0.72% and +0.71%. It was a slightly lower income month at +33bps which is a good ballpark for the minimum expected income cushion received each month with quarters offering an uptick. There were no transactions over the month aside from end of quarter rebalancing.
International Equities
The Prime International Growth Portfolio returned -2.6% in April 2024.
In large, investment markets experienced a downturn in April, as investors grew increasingly concerned about the potential for a recession and the impact of persistent inflation on corporate earnings. The portfolio's allocation to defensive sectors and value-oriented funds helped mitigate losses during this challenging period.
The portfolio's top contributors for the month were the Platinum International Fund (-0.5%), which benefited from its exposure to resilient companies with strong balance sheets, and the iShares Europe ETF (-1.4%), which outperformed global equities in general. The ETF's large exposure to sectors such as healthcare, consumer staples, and utilities helped cushion the impact of the broader market decline.
The Pzena Global Focused Value Fund (-2.0%) also outperformed its benchmark, as investors sought refuge in undervalued, high-quality companies.
On the other hand, the portfolio's exposure to growth-oriented funds detracted from relative performance, as these strategies struggled in the face of a “higher-for-longer environment” and slowing economic growth. The Aoris International Fund (-4.8%), GQG Partners Global Equity Fund (-3.8%), and Munro Concentrated Global Growth Fund (-3.8%) were among the bottom contributors for the month.
However, it is worth noting that these funds performed relatively better than other growth-focused funds in the market, due to their emphasis on investing in rapidly growing companies that still trade on a reasonable valuation.
If you would like further details on Prime’s Separately Managed Accounts (SMA), please contact your friendly adviser or our client services team via e-mail at clientservices@primefinancial.com.au
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