Market Data – September 2024

Market Returns - 1 Month to 30 September 2024 (in AUD)

Market Commentary

September 2024 saw financial markets grappling with significant developments and uncertainties. The month was dominated by speculation around the Federal Reserve's interest rate decision, with the larger-than-expected 50 basis point rate cut initially boosting market sentiment, driving equities and weakening the US dollar. This optimism however waned as conflicting economic data and divergent Fed commentary emerged.

U.S. markets ended the month mixed, with the S&P 500 reaching new record highs despite volatility. Treasury yields edged near 3.8%, while the U.S. dollar continued its descent against major currencies.

Internationally, Japan saw an unexpected political shift with the election of Shigeru Ishiba as the new Prime Minister, causing Japanese equities to sink 6% on expectations of faster Bank of Japan policy normalisation. In China, talks of a massive fiscal stimulus package boosted Chinese stocks, with the CSI 300 surging over 8% in a single day. Europe witnessed softer inflation prints, especially in Germany, increasing expectations for an ECB rate cut in October. The euro fell against the dollar in response.

Oil prices experienced volatility due to Middle East conflicts and potential changes in OPEC+ production cuts. Gold hit new record highs, surpassing $2,580/oz, as investors sought safe-haven assets.

In Australia, inflation remained a key focus as the RBA held rates at 4.5%, pushing back on market expectations for rate cuts in 2024. RBA Governor Lowe emphasized the need for rates to stay higher for longer to ensure inflation returns sustainably to target. A strong jobs report further supported this stance.

Looking ahead, markets remain focused on global growth concerns, central bank policy shifts, China risks and the upcoming US election. These indicators will be crucial in shaping central bank policies and market direction for the remainder of 2024.

Australian Equities

The ASX 200 rose 3.0% in September, to deliver its fifth consecutive monthly gain, and register a new record high. The strong rise in global equity markets was emboldened by the US Federal Reserve’s 50-basis point interest rate cut and was further supported by China’s announcement of new economic stimulus measures.

The reduction in US interest rates, despite ongoing economic resilience and near-historic lows in unemployment, underscores the unusual economic conditions in the post-pandemic world. Simultaneously, China has faced enormous challenges, grappling with the unwinding of its the oversupplied property market and anemic domestic consumption.

More broadly, the easing of financial conditions demonstrates the importance Central Banks are now placing on either maintaining economic momentum (US) or restimulating demand as is the case in China. At a time when Government debt levels are at record highs the burden on interest costs is prohibitive, thus underlining the importance of stimulating economic growth to service the debt.

China’s latest round of fiscal and monetary stimulus, including a 50bps RRR cut and property market stabilisation efforts, played a pivotal role in boosting investor sentiment. This policy shift has been a critical factor in driving demand expectations in the industrial sector. As a result, mining stocks in the ASX surged by 14.1%, the strongest sector performance for the month.

The policy easing by the two largest global economies has shifted market dynamics, driving a rotation towards companies positioned to benefit from a recovery in global industrial demand. This trend, led by mining, underscores the sensitivity of global markets to these policy shifts.

At the portfolio level, BHP has been a strong contributor while Premier Investments (PMV)

experienced a sell-off post a recent FY24 result. This was driven by weaker-than-expected revenue growth, a soft start to FY25, and concerns over strategic uncertainties surrounding the potential Myer merger and de-prioritisation of the demerger of Smiggle and Peter Alexander. Despite these challenges, the company maintains a strong balance sheet and continues to pursue long-term growth opportunities. It has not gone unnoticed that equities are starting this interest rate-cutting cycle at much higher valuation multiples.

While the Reserve Bank of Australia (RBA) has yet to cut interest rates here, the ASX 200 has nonetheless benefited from policy abroad. Yet, equity market valuations are elevated compared to long-term averages and earnings trends are modest at best. With this in mind, a level of prudence continues to be warranted, emphasising the ‘time-honoured’ principle of investing in high-quality companies.

Defensive Income

September was another positive month of performance across fixed income, but the duration performance was softer than prior months. Our 10y ACGB yield was unchanged at 4% month-on-month but at one stage fell 20bps. The 2y ACGB yield fell 5bps to 3.65%. US duration, as we opined last month, outperformed our market, with 10y UST yields falling 12bps to 3.78%. The Fed cut rates 50bps to 5.00%, and the 2y UST yield continued its fall to 3.64%, a nearly 30bps move on the month. For context, at the start of May 24, this number was 5.00%.

We continue to believe the RBA will not move this year, noting that there is a c.50% chance of a 25bps cut priced in for the December meeting – compared to a 75% chance that was priced in last month.

Domestic credit spreads were steady month-on-month, with the AusBond Credit FRN OAS at 70bps. The AusBond Credit BBB- to BBB+ OAS is 140bps. Our 5y constant tenor Big Four Tier 2 spread was unchanged at 160bps. In the US, high yield spreads pushed marginally higher, up 10bps to 330bps on the CDX HY 5y spread.

Prime returned 0.97% in September, which is a strong month, driven by positive contributions across all assets. The Portfolio has produced returns of 8.06% for the past year and 6.78% 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 3.67% and 2.80% per annum, respectively. This exceptional performance has been achieved even whilst taking little interest risk (~1.5y portfolio duration) and high credit quality (A- portfolio average credit rating).

The top performer for the Portfolio was Metrics Direct Income Fund, which saw a 0.66% capital price return (ex-income), contributing 16bps to the portfolio (including income). PIMCO Global Bond Fund also returned 16bps to the portfolio, continuing the good stream of offshore duration performance – noting this was an under-benchmark return. AT1 hybrids continue to perform well, a dynamic we see continuing, contributing 22bps to portfolio return.

International Equities

September was characterised by volatility as markets absorbed a significant 50 basis point rate cut from the U.S. Federal Reserve, mixed economic data, and diverging central bank commentary. Despite initial optimism, sentiment remained cautious by month-end.

Trinetra Emerging Markets Growth Trust was the portfolio's top performer, delivering a robust 7.2% return. This performance underscores the potential for select emerging markets to outperform even amidst global economic uncertainties.

U.S. equities demonstrated resilience, with the iShares S&P 500 ETF and Munro Concentrated Global Growth Fund returning 0.5% and 1.0% respectively. In contrast, Japanese equities struggled, with the iShares MSCI Japan ETF declining 2.3%, largely due to the Bank of Japan's continued loose monetary policy stance.

Value-oriented strategies, exemplified by Pzena Global Focused Value fund (-0.3%), faced headwinds as markets weighed economic uncertainties against potential rate cuts. The Langdon Global Smaller Companies Fund (0.6%) showed strength, outperforming despite the typically higher volatility associated with small-cap stocks in uncertain markets.

Looking ahead, markets remain focused on the interplay between growth, inflation, and monetary policy responses. The looming US elections add another layer of uncertainty, which investors are keenly awaiting.

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