Market Data – October 2024

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

Market Commentary

October 2024 witnessed significant market movements driven by shifting central bank expectations, geopolitical tensions, and a highly anticipated U.S. election.

The month began with markets adjusting to stronger-than-expected US employment data, with 254,000 jobs added in September, pushing unemployment down to 4.1%. U.S. markets demonstrated resilience with major indices reaching new highs before pulling back on tech sector concerns. The Q3 earnings season revealed a concentrated market, with the "Magnificent 7" tech companies driving most of the S&P 500's growth, while concerningly, the broader market showed minimal growth contribution. Internationally, Asian markets faced challenges as China's stimulus measures disappointed investors, with the announced 200 billion yuan ($28 billion) fiscal stimulus package falling well short of the anticipated 3 trillion yuan markets had anticipated. This led to significant volatility, particularly affecting the Hang Seng index and cyclical assets exposed to China.

In Australia, the economy remained resilient despite global uncertainties. The labour market added 64,000 jobs (51,000 full-time) while maintaining the unemployment rate at 4.1%. The participation rate reached 67.2% whilst the employment-to-population ratio hit a record 64.4%. Given the strong employment and wage pressures, the RBA maintained its hawkish stance, signalling that future easing will depend on inflation data.

Bond markets saw yields climb steadily throughout the month with Australia and the U.S. With U.S. 10-year Treasury yields reaching 4.29% - their highest level in months, reflecting both economic strength and evolving monetary policy expectations.

Looking forward, markets are adjusting to Donald Trump's victory in the U.S. presidential election, with a particular focus on potential policy shifts including increased government borrowing and new trade tariffs. These factors, combined with ongoing geopolitical tensions and central bank policies, suggest continued market volatility into year-end.

Australian Equities

The resilience of equity markets was tested in October, with the ASX 200 declining by 1.3%. The impact of higher bond yields and softer-than-expected AGM trading updates weighed on market sentiment. Notably, this has led to a decline in market earnings estimates for calendar 2024.

Initially, the negative revisions were confined to the resources sector, but they broadened in October to include the consumer staples and industrial sectors. The persistence of higher for longer interest rates and cost-of-living pressures is now having a dampening effect on corporate earnings. Yet, valuations remain elevated, with the ASX 200 trading on a 12-month Price-to-Earnings (P/E) Ratio of ~18 times, an almost +20% premium to the long-term average. The disconnect between the negative trajectory of earnings with near-record-high valuations is disconcerting and warrants a more cautious approach.

At a sector level, Gold (+10.3%), Banks (+3.8%), and Healthcare (+2.2%) performed strongly against a weaker overall market. In marked contrast, Utilities (-5.9%), Consumer Staples (-5.7%), and Materials (-3.9%) led the declines.

At the portfolio level, Northern Star (NST), Premier Investments (PMV), and Resmed (RMD) were notable strong performers. Whereas James Hardie (JHX), BHP Group (BHP), and Woolworths (WOW) weighed on performance.

In October, we adjusted our portfolio by trimming positions in WiseTech Global Technology (WTC) and Goodman Group (GMG), using the proceeds to increase our exposure to Premier Investments (PMV) and Santos Limited (STO).

Our decision to trim WTC was initially driven by valuation considerations, given its significant rally over the past year, with a return of approximately 116% compared to the ASX 200’s 23%. Shortly after this trim, governance concerns regarding WTC’s founder emerged, which added to the stock’s volatility. While we didn’t anticipate these developments, our reduced position provided some insulation from the recent share price impact. WTC remains a high-quality business with substantial growth potential, but we are mindful of the risks that accompany founder-led structures, particularly when key person risk is involved, and that the stock is trading at a PE ratio close to 100X, which we view as excessive.

In contrast, we increased our position in PMV after it saw a ~10% decline following its latest annual results, largely driven by weaker-than-expected revenue growth, a soft start to FY25, and concerns over strategic uncertainties surrounding the potential Myer merger with its apparel brands and de-prioritisation of the Smiggle and Peter Alexander demerger. Shortly after our addition, PMV announced the merger of its apparel brands with Myer, which was well-received by the market and led to a 10% increase the following day. We view PMV as maintaining a strong balance sheet and pursuing attractive long-term growth opportunities.

Meanwhile, increasing our position in STO reflects our view that the energy sector offers a compelling valuation opportunity, with the sector P/E Ratio remaining far below its 52-week highs. Santos is well-positioned to benefit from its strong production profile and ongoing demand for LNG.

Defensive Income

October was a shocking month of performance in fixed income. The domestic ACGB 10y yield increased to 4.5%, up c.50bps on the month. The extent of the move was the same in the US, increasing to 4.3%. Yields rose off the back of (1) stronger-than-expected jobs market data, (2) higher-than-expected underlying inflation, and (3) an increase in the term premium, which was attributed to the uncertainty of the US election and rising prospects of a Trump victory. As of writing, our ACGB 10y yield has spiked to 4.6% on the back of an assumed Republican sweep. Technically, this looks attractive, noting our peak was at 5.0% in November 2023.

Fundamentally, we are less convinced, as the strength in fiscal spending, both locally and in the US, and potentially soon in China, works against the grain of the RBA and the Fed. Many are assuming rate cuts will occur in Australia at the start of 2025. We would opt to fade this and do not expect local cuts until at least 2Q25 (CY).

Domestic credit spreads compressed month-on-month, with the AusBond Credit FRN OAS 5bps tighter at 65bps. The AusBond Credit BBB- to BBB+ OAS fell from 10bps to 130bps. Our 5y constant tenor Big Four Tier 2 spread tightened from 15bps to 147bps. In the US, high yield spreads pushed marginally higher, up 5bps to 335bps on the CDX HY 5y spread.

Prime returned 0.06% in October, a disappointing absolute result (but a strong relative result), as rising yields led to a decrease in the market prices of many underlying assets exposed to fixed-rate bonds. However, on a positive note, the portfolio has generated a return of 8.11% over the past year and 6.68% p.a. over the last 24 months, outperforming the Bank Bill index by 3.67% and 2.64% p.a., respectively. This has been done with 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 Metrics Direct Income Fund and MA Priority Income Fund, returning 0.67% and 0.71% respectively, with both contributing 0.08% weighted return. Following a quarter, PIMCO Global Bond Fund returned -0.23% for the portfolio, reflecting the poor offshore duration performance. Similarly, the Pendal Government Bond Fund contributed a -0.16% weighted return due to the poor duration performance domestically.

International Equities

The Prime International Growth Portfolio returned 3.47% in October 2024.

October was characterised by market resilience despite multiple headwinds, including strong U.S. economic data driving bond yields higher, geopolitical tensions in the Middle East, and uncertainty ahead of the U.S. election. Despite these challenges, equity markets demonstrated remarkable strength, particularly in the U.S. sector.

The iShares S&P 500 ETF was the portfolio's top performer, delivering a robust 6.66% return. Similarly, the Munro Concentrated Global Growth Fund performed strongly at 5.35%, benefiting from its exposure to large technology companies as the sector continued to lead market gains.

Value-oriented strategies showed moderate performance, with the Pzena Global Focused Value Fund returning 2.64% and the Langdon Global Smaller Companies Fund gaining 2.66%. The GQG Partners Global Equity Fund also contributed positively with a 3.43% return.

Regional exposures faced headwinds, with the iShares Europe ETF declining 1.14% amid economic growth concerns. Asian markets similarly struggled, with the Trinetra Emerging Markets Growth Trust down 1.12% as markets reacted to disappointing Chinese stimulus measures. The iShares MSCI Japan ETF produced a modest 0.14% gain.

Looking ahead, markets are digesting the implications of Donald Trump's election victory, with particular focus on potential policy shifts around trade and tariffs. These developments, combined with ongoing central bank policies and geopolitical tensions, are likely to shape market direction in the coming months.

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