Market Data – December 2024

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

Market Commentary

December 2024 concluded an economically sluggish year defined by liquidity-driven financial markets and escalating geopolitical tensions. The S&P showcased its resilience this month by reaching new highs, despite aggressive trade tariff rhetoric from President-elect Donald Trump targeting both neighbouring countries and BRICS nations, though his unilateral trade authority has fuelled market uncertainty.

The Federal Reserve's December meeting marked a pivotal moment, delivering a 25-basis rate cut alongside surprisingly hawkish forward guidance. Markets reacted sharply to the reduced projection of only two rate cuts in 2025, down from previously expected four, with technology stocks leading the decline as the Nasdaq fell 3.6% following the announcement. The U.S. dollar strengthened broadly against major currencies as markets repriced rate expectations. Globally, European equities struggled under political uncertainty in France, following governmental  turmoil and President Macron's appointment of a new Prime Minister. Asian markets found support from China's Politburo announcement of fiscal stimulus and monetary easing measures for 2025, including allowing the fiscal deficit to exceed the traditional 3%. Japanese markets remained sensitive to central bank policy shifts as the BOJ maintained steady rates.

In Australia, while unemployment fell to 3.9%, persistent inflation dampened consumer sentiment, leading to a 2% decline in the Australian dollar following the Fed's decision. The RBA maintained its cautious stance, with Deputy Governor Michele Bullock emphasising the need for sustained inflation within the 2-3% target before any policy easing.

The coming year presents a mix of opportunities and challenges, with an expected U.S. economic boom counterbalanced by risks from trade policies under the incoming Trump administration. For Australia, addressing weak productivity remains key to boosting living standards and the economy's resilience to global crosswinds.

Australian Equities

The ASX 200 rose 3.8% in November buoyed by a decisive Republican victory in the US election. While the Trump victory helped equity markets surge on the prospects of continued resilient growth and potentially more policy stimulus (deregulation & tax cuts), the policy updates from China to support its domestic economy were once again, underwhelming.

The impact of the sharply different outlooks for the US and China was stark in terms of overall equity market price performance in November, in which Growth stocks overwhelmingly outperformed Value stocks.

Metcash is contending with several challenges that weigh on its near-term performance and growth prospects, particularly in its hardware division. Declining activity across the housing construction pipeline, persistent margin pressures, and subdued trade activity have affected results. Despite cost-cutting efforts, fixed cost leverage remains a challenge, with labour and overhead costs outpacing sales growth. The discretionary nature of Total Tools, a major component of the hardware segment, heightens vulnerability to macroeconomic cycles. Furthermore, the illicit tobacco trade continues to impact independent retailers, with regulatory progress slow and outcomes uncertain. 

Defensive Income

December was a mixed month of performance in fixed income. Whilst the US Federal Reserve cut interest rates for a third consecutive time, the market was caught wrong footed with the central bank’s forecasts, seeing an end-of-year benchmark rate of 3.75 - 4.00%. This implies two cuts for 2025, against what was three priced in by the market. The US 10y yield increased markedly, up 40bps to 4.5%. High yield spreads pushed wider, up 18bps to 310bps on the CDX HY 5y spread.

The duration grinch was not present in the Australian bond market. The domestic ACGB 10y yield increased just 2bps to 4.4%, and our 2y yield actually fell 10bps to 3.85% (vs a 9bps increase in the US). A strong unemployment result of 3.9% vs survey of 4.2% was largely ignored by the market, with weakness in economic growth being the main driver of yields. Our year-on-year GDP was well below at 0.8% vs the survey of 1.1%. Nonetheless, domestic credit spreads compressed month-on-month, with the AusBond Credit FRN OAS 8bps tighter at 63bps. The AusBond Credit BBB- to BBB+ OAS fell 6bps to 130bps. Our 5y constant tenor Big Four Tier 2 FRN spread tightened 8bps to 145bps.

Prime delivered a solid return of 0.42% in December, marking another strong month in 2024. This performance contributed to an impressive annual return of +6.51%, with no negative months recorded. Over the past 24 months, the portfolio has achieved a robust return of +6.72% per annum. At the 1- and 2-year markers, Prime is ahead of the Bank Bill Index by 2.05% and 2.55% p.a. respectively. This excellent performance has been achieved while maintaining consistently low exposure to interest risk (~1.5y duration) and high credit quality (A- portfolio average credit rating).

The top performers for the Portfolio were Yarra Higher Income Fund (+0.77%) and MA Priority Income Fund (+0.71%), contributing weighted returns of +9bps and +8bps, respectively. Pimco Global Bond Fund (-0.45%) was the worst performing detracting -6bps from the portfolio, reflecting weaker offshore duration performance following a strong month prior.

International Equities

The Prime International Growth Portfolio returned 2.8% in December, amid a market environment dominated by geo-political uncertainty and shifting monetary policy expectations.

The Munro Concentrated Global Growth Fund led performance with a 3.44% return, benefiting from its exposure to resilient large tech companies. Similarly, the iShares MSCI Japan ETF performed well, returning 3.01%, despite speculation around potential Bank of Japan rate hikes cooling by month-end.

The iShares S&P 500 ETF, returning 3.00%, also contributed positively to performance, supported by optimism around potential pro-growth policies but tempered by uncertainty around trade policy implications, with particular focus on aggressive Trump trade tariff rhetoric.

Value-oriented strategies faced headwinds during the month, with the Pzena Global Focused Value Fund returning just 0.12%. This reflected the challenging environment for value stocks as markets focused on growth opportunities despite the uncertain backdrop.

Looking ahead, the portfolio maintains its focus on attractive company valuations and broad diversification across regions and styles, providing resilience against ongoing market uncertainty and U.S. trade policy developments.

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