Market Data February 2024
Market Commentary
February saw a continuation of the growth-oriented rally that persisted into the new year, despite some volatility driven by mixed signals on economic growth, inflation trends, and central bank policies. The U.S. markets hit new highs, with the S&P 500 crossing the 5,000 level and the Nasdaq benefiting from strong tech earnings, particularly from Nvidia. Japan led global gains with a rise of 10%, supported by a weaker yen and positive earnings from automakers. Europe and emerging markets also posted solid gains of 5-6%.
However, the picture was more mixed for commodity-driven economies like Australia and the UK, which ended the month flat. The Australian earnings season yielded varied results, while the RBA held rates steady with a mild tightening bias. The U.S. inflation data, though in line with expectations, showed stubbornly high core service inflation, prompting concerns about interest rates remaining higher for longer. The focus remains on services and wage inflation, with upward pressure on both, although disposable income is potentially waning.
In the fixed-income markets, bond yields were mixed, while credit spreads tightened slightly. The U.S. dollar weakened amid speculation of divergent central bank policies. Investors closely watched the developments in China, where authorities took steps to prop up equities, driving a rebound after significant declines.
Commodities experienced a mixed month, with oil prices declining on global growth concerns, while natural gas prices spiked due to cold weather forecasts. Despite the positive performance, the mixed economic signals suggest that volatility may persist in the near term.
Market Returns - 1 Month to 29 February 2024 (in AUD)
Australian Equities
The ASX 200 rose 0.8% in February and set its first new high since August 2021. The recent rally in equity markets has been driven predominantly by stronger economic growth in the US and in Australia on better-than-expected December half-earnings results.
Overall, for the ASX 200 there were more earnings beats than misses despite ongoing inflationary pressures, companies continued to benefit from resilient pricing power and a stringent focus on cost control. Companies are benefiting from an easing of raw material costs and the normalisation of supply chains. The half- year earnings results of Brambles and CSL provided clear signs of an improvement in operating cost
However, wage inflation and interest expense were the most significant cost issues for companies in the reporting period. This was particularly evident for Amcor (higher interest expense) and Woolworths (wage cost inflation).
In February at a sector level, there was a sharp divergence in returns. On the positive side. Banks (+3.6%), Discretionary Retail (+9.7%), and Technology (+19.7%) were the strongest sectors.
Technology was the best-performing sector, benefiting from the global enthusiasm for AI adoption and a continued robust profile for earnings growth led by WiseTech Global. An auxiliary beneficiary to AI and Cloud computing was Goodman Group, which delivered earnings ahead of expectations and remains well placed to benefit from the demand for new data centres globally.
Discretionary Retail benefited from a resilient consumer and a stronger trading update by Wesfarmers.
Investor optimism from the Bank’s latest results highlighted stable operating trends and well-capitalised balance sheets supporting dividends and share buybacks, nevertheless, valuations now look expensive with the banks' P/E multiple trading near record highs.
While on the negative side, Energy (-5.9%) and Materials(-4.8%) were weighed down by lower commodity prices.
At a portfolio level Goodman Group Treasury Wine Estate, and Pilbara Minerals were notable strong performers. Whereas Spark NZ, Woolworths and Woodside weighed on performance.
The recent US and Australian earnings reporting periods have again highlighted that corporate earnings remain relatively resilient despite the impact of rising interest rates. While earnings growth is expected to slow for the remainder of calendar 2024, there are tangible signs that the global de-stocking post pandemic is near to completion, signalling that demand is better placed to recover and in aggregate Australian companies' balance sheets remain well capitalized to weather the impact of higher interest costs.
The valuation of the ASX 200 now looks relatively full on a 12-month forward P/E of ~16.2 times relative to its long-term average of ~14.2 times. At a portfolio level, we remain positioned in Industry leaders with strong balance sheets that are well placed to deliver earnings growth through the economic cycle.
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Defensive Income
February was similar to the prior month for global bond markets as bond yields again pushed wider from late 2023 lows. The US 10-year peaked at 4.32%, up from 3.88% at 1 February 2024, closing the month at 4.25%. This move comes as the market’s previously priced in expectation of six rate cuts by the FOMC in 2024 was pared back to three. As treasury yields pushed out again, broader bond markets sold off with the Bloomberg Global Aggregate (LEGATRUU) which fell as much as -2.10% intra-month, then finished February at -1.26%. The Australian 10-year was far less perturbed, widening 13bps over the month versus the US 34bps, as the AusBond Composite (BACM0) Index was -0.30% lower month-on-month. The previously thought clear path ahead for the Fed has shifted as economic indicators have all begun trending to suggest inflation is going to be more persistent than once thought. Amid all this turbulence, local credit had its best month since October 2012 as the AusBond Credit FRN (BAFRN0) Index gained +0.53 %.
Both the AT1 and Tier 2 markets benefitted from momentum as spreads continued to move tighter for both spaces. Bond Adviser’s All AUD AT1 and Tier 2Indices produced +0.87% and +0.48% respectively. The Prime Australian Defensive Income Portfolio’s +0.46% return in February reaped the rewards of strategically trimming duration exposure via increased high-grade credit risk. Income was again the highlight, producing 38bps of the +46bps result. The Bloomberg Bank Bill Index rose 34bps over the month and the Prime Defensive portfolio exceeded the benchmark over the past 12 months by 1.90%.
The PIMCO Global Bond Fund produced a weighted return of -8bps for January from an HPR of -0.67%, another solid result considering the broader market fell by -1.26%. The Pendal Government Bond Fund and MQGPF were the only other negative results for the month with weighted returns of -2bps and -3bps, respectively. On the other side of the coin, there was no single stand out with each of SUBD, the Yarra Higher Income Fund, MA Priority Income Fund, State Street Floating Rate Fund and Metrics Direct Income Fund all producing contributions of 8-9bps. There were no transactions that occurred during the month however IAGPF will represent a ~2.7% holding when it begins trading on 27-Mar-24.
International Equities
The month saw a continuation of the growth-oriented rally that persisted into the new year, with Japan leading gains at 10%, followed by broad gains of 5-6% in Europe, the NASDAQ, and the S&P 500. Emerging markets also posted gains, while Australia and the UK remained flat as commodity-driven economies.
Within the portfolio, the top contributors were Munro Concentrated Global Growth Fund 12.0%), GQG Partners Global Equity Fund (12.1%), and Nanuk New World Fund (8.2%). These funds benefited from their exposure to growth-oriented sectors and the ongoing rally in technology stocks, particularly driven by strong earnings from companies like Nvidia.
However, the portfolio's value-oriented holdings, such as Pzena Global Focused Value Fund (2.1%) and Platinum International Fund (3.4%), lagged in comparison to the growth-focused funds.
Additionally, the Platinum Japan Fund (3.2%) underperformed relative to the broader Japanese market rally. Despite the slight underperformance against the benchmark, the Prime International Growth Portfolio delivered a solid return in February 2024. The portfolio's allocation to quality growth companies, particularly in the technology sector, helped capture the ongoing rally in global equity markets and ensured the portfolio did not miss out on significant upside potential, despite maintaining a more defensive positioning.
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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