Market Data January 2024
Market Commentary
January's financial landscape was marked by mixed performances across global and Australian markets. The S&P/ASX 300 Index experienced slight gains, primarily driven by the consumer discretionary and technology sectors, despite a downturn in the materials sector attributed to reduced Chinese demand for steel. On the global stage, equities rallied, with Japan's market notably standing out for its strong performance. However, the US inflation data revealed a concerning uptick, largely fuelled by increases in rental and transport costs. Market reactions to the inflation news were surprisingly muted, suggesting an adjustment in expectations possibly in anticipation of Federal Reserve policy adjustments amidst broader economic uncertainties.
Within Australia, the materials and real estate sectors faced significant challenges, with notable declines in specific stocks such as Senetas Corp and Evolution Mining.Conversely, healthcare and communications sectors provided a buffer against these declines.
Internationally, semiconductor companies like NVIDIA and Advanced Micro Devices highlighted positive earnings reports, contributing to gains, while Chinese stocks weighed on emerging markets. The period also saw fluctuations in listed property and infrastructure investments, alongside slight dips in bond yields and commodities, reflecting a cautious stance among investors. Overall, January depicted a scenario of cautious optimism and volatility, with investors navigating through mixed economic signals, sector-specific developments, and global market dynamics.
Market Returns - 1 Month to 31 January 2024 (in AUD)
Australian Equities
In January, the ASX 200 recorded a 1.2% increase, driven by Energy (+5.2%) and Financials (+4.9%) sectors, and partially offset by the decline in the Materials sector (-5.7%). By the end of January, the Australian equity market gained 14% on the October lows, reaching an all-time high at 7681pts.
We have had 2 inflation prints locally. The CPI has declined from a peak of 8.4%/year in December 2022 to 4.3%/year in November 2023, and 3.4%/year in December 2023. Important for the outlook for monetary policy, the Q4-23 trimmed mean CPI is 4.1%, below the Reserve Bank of Australia’s forecast of 4.5%. Yet, spending was weak toward the end of 2023. Retail trade fell by 2.7% in December, below the market consensus of -1.7%.
At a portfolio level, ResMed (RMD) and Iluka Resources (ILU) were notable contributors. The share price for RMD increased 14.7% in January, following a strong improvement in gross margin (+90bps to 56.9%) and recovery from perceived threats from weight loss treatment drugs on Continuous Positive Airway Pressure (CPAP) machines. We have increased our position in RMD in early January since our initiation in 4Q23. ILU’s 4Q23 activities report indicated signs of stabilising demand and prices for the mineral sands market.
Negative contributors to portfolio performance include Cleanaway Waste Management (CWY) and Pilbara Minerals (PLS). The share price of Pilbara Minerals, as a pure lithium producer, felt the fluctuations faced by Australian lithium producers, with disappointing lithium prices and uncertainty in the near-term outlook for lithium demand from global EV sales.
We included a new position in IDP Education (IEL) during the month. IEL is a global leader in the tertiary student placement market and owner of the International English Language Testing System (IELTS) tests. A quality growth company with a long track record of double digit EPS growth underpinned by migration level and demand for global education.
In the immediate term, our focus is on the upcoming February earnings season for ASX listed companies. Consensus Earnings Per Share expectations for the ASX 200 is negative, while ASX 200 is trading at a slight premium, reflecting hopes of an imminent easing cycle. This is occurring before any material earnings outlook changes, though could prove justified if earnings recovery catch up. We remain cautious, observing limited room for further valuation expansion. In particular, we expect more moderate top line growth with the orderly decline in inflation, margins remain under pressure from elevated interest expenses and labour costs.
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Defensive Income
Following the global bond market’s roar to finish 2023, January saw market participants pare back expectations of early rate cuts by the US Fed. The skittish month for treasuries drove weakness in the Bloomberg Global Aggregate (LEGATRUU) which fell as much as -2.52% intra-month, before closing January at -1.38%. The AusBond Composite (BACM0) Index finished the month with +0.21% after falling as much as -1.33% during January. Global movements in bond markets continue to carry to local markets as the Australian 10-year reflected these girations, starting the month at 3.96%, peaking at 4.29% and finishing at 4.01%. As at 31 December 2023, the US futures market was pricing in 1 full rate cut at the March 2024 meeting, futures now reflect a one-in-six chance of this happening. Domestic futures markets continue to price in a cutting cycle that begins later and is slower paced than State-side. This is likely to cause a bifurcation in bond markets whereby Australian yields should stop moving in tandem with the US and create new tracks (staying higher for longer). Local credit was solid again as the AusBond Credit FRN (BAFRN0) Index gained +0.44%.
Both the AT1 and Tier 2 markets had stable months amid the turbulence with BondAdviser’s All AUD AT1 and Tier 2 Indices producing +0.41% and +0.47% respectively. The Prime Australian Defensive Income Portfolio’s +0.20% return in January is a reasonable result that illustrates the stability created by holding regular income-producing assets and having relatively low duration. Despite January being a low-yielding month in terms of holdings that pay distributions, it was the income received that drove 29bps of return. This means the loss from a weighted price return for the portfolio was only -9bps, compared with the -1.38% for global bonds. The Bloomberg Bank Bill Index again rose by 37bps over the month. Prime exceeds the benchmark over the past 12 months by 1.79%.
The PIMCO Global Bond Fund produced a weighted return of -3bps for January from a HPR of -0.28%, outperforming the market by 1.10%. Other detractors were CBAPJ and MQGPF, which despite the All AT1 Index having a good month, had HPRs of -0.43% and -0.26%, respectively. It was the income-producing assets that saved the day with MA Prioirity Income Fund and Realm High Income Fund the main breadwinners at +8 and +6 basis points, respectively from HPRs of +0.71% and 1.23%. Additionally, the Yarra Australian Bond Fund was replaced with a 2.7% holding in the Pendal Government Bond Fund and a 2.6% addition to the Yarra Higher Income Fund.
International Equities
The portfolio's allocation to US equities via the iShares S&P 500 ETF (+6.8%) was the top contributor, benefitting from the continued out performance of mega-cap technology stocks. Selection in other developed market funds like Platinum International (-0.4%) and Nanuk New World (+2.8%) lagged. Emerging markets also weighed on relative returns with Trinetra Emerging Markets Growth Trust (-1.2%) struggling amid a disappointing Chinese GDP report.
The GQG Partners Global Equity Fund posted an impressive 8.4% return, showcasing its strength in a month where diverse global market conditions prevailed. The Platinum Japan Fund returned +2.4% for the month, underperforming its benchmark the MSCI Japan Index on account of its high exposure to the industrials and materials which lagged globally.
In sector terms, the portfolio's tilt toward growth funds with tech exposure including Munro Global Growth (+5.4%) and Hyperion Global Growth (+3.7%) was mixed as software and semiconductor stocks rallied, however, not as uniformly as they have in previous months.
Small caps also bounced back from a slow start with Langdon Global Smaller Companies Fund (+1.0%) ending the month in the green.
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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