Market Data – August 2024

Market Returns - 1 Month to 31 August 2024 (in AUD)

Market Commentary

This past month saw a mix of economic data and corporate earnings that drove market sentiment, particularly evident in Australia's August 2024 earnings season. The period revealed a blend of resilience and uncertainty across sectors, with the banking sector showing strong performance despite valuation scepticism.

Mining heavyweights faced challenges. BHP Group detracted from index performance with a -3.62% return due to weakening Chinese construction demand, while Fortescue, South32, and Mineral Resources fared slightly better. Consumer spending diverged between sectors, with discretionary goods retailers like JB Hi-Fi and Super Retail Group posting impressive returns, whilst consumer services struggled. Webjet and Domino's Pizza Enterprises recorded negative returns of -11.90% and -6.87% respectively, indicating caution in travel and dining expenses.

Overall, the earnings season was soft, with flat earnings expectations largely met but more misses than beats, especially among larger companies. The outlook remains mixed, with little evidence of anticipated economic pickup.

Globally, Chinese e-commerce giants PDD Holdings and Dollar General faced headwinds, while Gap showed signs of a turnaround. Nvidia's eagerly awaited earnings exceeded expectations, doubling sales year-over-year, but a 6% stock selloff highlighted concerns about AI spending sustainability. Economic data showed resilience with hints of slowdown. U.S. core PCE inflation held at 2.6%, supporting potential rate cuts. European inflation slowed more than expected to 2.2%, but core inflation at 2.8% limits aggressive ECB action. Australia saw flat retail sales and declining business investment.

As September begins, the focus shifts to the U.S. jobs report. After July's big payroll miss sparked recession fears markets are hoping for a "Goldilocks" reading that shows a gradual labour market slowdown without signalling an imminent downturn, potentially shaping Fed policy and market direction for the rest of 2024.

Australian Equities

The ASX 200 rose 0.47% in August, to deliver the fourth consecutive monthly gain and register a new record high. Technology (+7.2%), Industrials (+3.5%), and Financials (+1.9%) led an impressive market recovery, clawing back a ~6% fall in the first week of August. In marked contrast, Energy (-6.2%) and Materials (-1.7%) were the worst sectors, underpinning the wide performance divergence between growth (Technology) and value (Resources) which has characterised returns over the last 12 months.

At a portfolio level, WiseTech (WTC), ResMed (RMD), and Northern Star (NST) were notable strong performers. Whereas Spark NZ (SPK), Santos (STO), and Ramsey Health Care (RHC) weighed on performance.

The Australian economy grew at just 0.2% in the June quarter to an annualised rate of 1.0%, the weakest in 30 years outside the pandemic. Of concern was a marked deterioration in private sector activity, with only public spending contributing to GDP growth. It was evident from the FY24 reporting period companies indicated that the impact of higher interest rates is finally slowing household consumption and private-sector investment.

The latest August earnings reporting period (FY24) highlighted both opportunities and challenges for the portfolio. Hence, over the course of August, we made several notable changes that reflected these divergent business performances, namely:

• We increased our position in Goodman Group (GMG) as the company recorded +14% EPS growth, which exceeded guidance and forecast further growth in FY25. GMG bolstered its strategic expansion in the data center sector, which is set to become an important driver for future earnings growth. Critically GMG has secured sufficient power capacity to enable >50% of its future work-in-progress to build data centres.

• The recent pullback in Origin Energy’s (ORG) share price following its FY24 result has provided an opportunity to increase the portfolio’s weighting. ORG is well-positioned to benefit from the structural shift towards electrification and decarbonisation as it invests in batteries and Virtual Power Plants to complement its existing portfolio of gas-fired peaking power stations.

• We sold Spark NZ (SPK) following its disappointing FY24 earnings result. SPK’s earnings quality deteriorated meaningfully in FY24 with both Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), and Net Profit falling below the downgraded guidance in May. Moreover, weaker-than-expected guidance for FY25 combined with a dividend payout ratio exceeding 100% of free cash flow prompted the divestment.

The August earnings reporting period highlighted that corporate Australia remains cautious, as the economy shows further signs of slowing and inflationary cost pressures persist for companies. Overall earnings growth for the ASX 200 for FY25 is forecast to be subdued at around +3%, at a time when the broader market price-earnings valuation is trading ~17.5 times, an almost 20% premium to its long-term average. With this in mind, we retain our focus on companies that are industry leaders that consistently deliver resilient earnings and dividends throughout the economic cycle.

Defensive Income

The month of August began with the continuation of the material risk-off move as exceptionally weak US PMI and jobs numbers saw the US 10-year yield compress to 3.79% on 2 August 2024, ending a 49bp tightening in seven days. Following this, markets whipsawed on contrasted data prints, closing the month with duration again outperforming both locally and globally. To reiterate last month's thoughts, the move at the end of July into the start of August feels overdone and we expect some of these bets to be wound back in time.

Broad strength was best illustrated by the Bloomberg Global Agg Index (LEGATRUU) returning 2.37% in August and 2.76% in July. Australian markets have been robust, but not to the same degree given the weakening economy Stateside is yet to be mirrored locally. The AusBond Composite Index (BACM0) over the same two months was 1.21% and 1.48%, respectively. Locally over the month, unemployment rose to 4.2%, which was higher than expected while CPI fell by less than forecast to 3.5% and retail sales were dead flat MoM.

There was a slight weakness in the BondAdviser All AUD AT1 Index for the month, returning 0.11% as margins pushed 18bp wider from starting August at 190bps. Meanwhile, the All AUD Tier 2 Index rose 0.84% in August as margins held steady. The AusBond Credit FRN Index

(BAFRN0) also produced a result in line with 2024 at +0.43% for the month, reflecting the strength in credit markets in addition to the duration tailwinds for other parts of the Prime Portfolio. Prime returned 0.51% in August, a typically low-income month in the lead into September. The result was a combination of 28bps in income and +23bps of capital returns, with gains from duration exposures being offset by weakness in AT1s.

The Portfolio has produced returns of 7.13% for the past year and 6.21% p.a. over the last 24 months with just two negative months (-0.03% and -0.11%) in that span. At the 1- and 2-year markers, Prime is ahead of the Bank Bill Index by 2.76% and 2.34% per annum, respectively. Top performers for the Portfolio were the local duration exposures in the Pendal Government Bond Fund and Yarra Higher Income Fund as well as the two private credit funds in the MA Priority Income Fund and Metrics Direct Income Fund. Each of these holdings contributed between 8 and 10 basis points to the weighted return. MQGPF was the main detractor for the month, returning -1.44% on an HPR basis (-4bps) as it traded ex-dividend late in August.

International Equities

August proved to be a challenging month for global markets, characterised by mixed economic data and corporate earnings. The highly anticipated Nvidia earnings report, despite strong results, failed to meet heightened market expectations, leading to broader tech sector weakness.

The portfolio's exposure to Japan underwent a significant transition in August, yielding mixed results. The Platinum Japan Fund, held at the beginning of the month, struggled considerably, showing little resilience during Japan's market dip. However, a strategic shift was made on August 9th, replacing the Platinum fund with the iShares MSCI Japan ETF (IJP). This decision proved timely, as IJP emerged as the standout performer, returning an impressive 7.8% from its inception in the portfolio to month-end.

Among active managers, GQG Partners Global Equity Fund (-0.2%) demonstrated resilience relative to a difficult month in the market. However, Langdon Global Smaller Companies Fund (-3.2%) due to their exposure to smaller companies.

Emerging markets faced significant headwinds in August, with the emerging market index down -2.3%, underperforming the broader global market. However, the Trinetra Emerging Markets Growth Trust demonstrated resilience in this challenging environment, returning -0.6% and outperforming both its benchmark and the broader portfolio.

Looking ahead, investors remain cautious as they await the results of the critical August jobs report, which could significantly influence Federal Reserve policy and market direction for the remainder of the year.

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_{The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.}

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