Market Data June 2024
Market Returns - 1 Month to 30 June 2024 (in AUD)
Market Commentary
The final week of June 2024 concluded a volatile financial year, marked by rising rates and resurgent inflation concerns in several countries. Australia reported higher-than-expected inflation, leading to speculation about further rate hikes. In the U.S., softer personal consumption expenditure figures provided some relief, but the first presidential debate unsettled markets, pushing the 10-year U.S. Treasury yield to 4.5%.
The year was primarily driven by interest rate movements, with rates trending higher in the first two quarters before market tremors in late 2023 caused a reversal. This disinflationary trend fuelled strong gains in tech and growth stocks in early 2024, with the Nasdaq surging 30%. Semiconductor stocks, particularly NVIDIA, led the charge with some sector-focused funds gaining over 40%. Software underperformed slightly, with more software-focused funds gaining a modest 10% or even remaining flat.
Diversified funds with a 70/30 growth allocation gained around 10%, with passive funds potentially outperforming due to higher exposure to U.S. tech stocks. Active managers appear to have leaned against this trend despite the gains. Industry super funds struggled as higher rates pressured private asset valuations.
Cyclicals, value stocks, and markets in Australia, the UK, and emerging economies lagged, rising only 5-10%, while Europe saw mid-teen returns. Some value funds benefited from financials exposure, but most underperformed, especially those focused on EM or smaller companies. Overall, equities saw sharp divergences based on sector and regional allocations, despite growth and value performing similarly at a broad level.
The bond market saw significant dispersion, with high-yield credit and investment grade floating rate funds gaining around 8%, albeit with higher volatility for high yield. Government bonds rose 2-3% with volatility of 5-6%. Australian floating rate corporate bond funds were standout winners, gaining 6-8% with minimal volatility.
Australian Equities
The ASX 200 rose 0.9% in June, lifting the benchmark’s total return for the 2024 financial year to 12.1%. A notable observation of equity markets in 2024 has been the wide divergence of returns across industry sectors.
The best-performing Industry Group was the Banks, which posted returns of +5.0% in June and +34.9% for FY24, compared to Metals & Mining which fell -7.2% in June and -4.2% for FY24.
The strong returns for the Banks were entirely driven by a willingness of investors to pay a higher price-earnings multiple for the sector, rather than an underlying improvement in earnings expectations. Clearly, the banks were beneficiaries of the remarkably resilient Australian economy, which underpinned a benign credit cycle for the banks.
At a portfolio level, CSL, Macquarie Group, and National Australia Bank were the strongest contributors to return. Whereas Pilbara Minerals, BHP, and Northern Star weighed on performance.
Our portfolios held an underweight position in the banks, and this heavily weighed on our performance in 2024. In marked contrast, our portfolios held overweight positions across healthcare, industrials, and consumer staples, all of which delivered returns well below their long-term average. We remain steadfast in our belief that the portfolio's exposure to leading healthcare, industrial and consumer staple companies is not only prudent but best placed to deliver more resilient earnings through the economic cycle. We believe our conviction is supported by growing evidence that economic momentum has started to decelerate which leaves equities more vulnerable to disappointments, particularly in those sectors, namely the banks, in which valuations are high.
A further potential risk that has emerged over the last year has been a meaningful increase in the concentration of equity market returns. Growing stock concentration has been evident in many markets, including Australia (Banks), but has been most pronounced in the US where the top 7 companies have contributed to over 60% of the return in the S&P 500 in 2024.
The combination of elevated valuations and a weakening economic backdrop has prompted us to increase our weighting in June to higher quality earnings companies, namely Origin Energy and Woolworths, whilst reducing our exposure to smaller capitalisation stocks. An increase in the portfolio's cash weighting also provides an important ballast to market volatility and the ability to take advantage of any meaningful pullback in prices of higher quality companies.
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Defensive Income
June was a tale of two halves. In the front half of the month, the shock of a premature French election sent yields higher, followed by US CPI surprising to the downside in the morning before the Fed held rates at 5.25-5.50%. Meanwhile, later in June, the Australian Monthly CPI surprised to the upside as did US manufacturing and sentiment. The US and Australian 10-year yields begun the month of June at 4.50% and 4.41% respectively, fell by around 30bps following the US CPI data release and then later recovered ~20bps to finish the month at 4.40% and 4.31%. The lack of month-on-month volatility saw flat to slightly positive results for bond markets globally. The Global Aggregate Bond Index (LEGATRUU) rose +0.14% while the AusBond Composite increased by +0.77% over the month. The AusBond Credit FRN Index (BAFRN0) had an ostensibly weaker month at +0.41%, compared to the usual +0.50-0.55%, as a result of spreads not continuing the yearly trend of compression. A reversion in the RBA’s monthly CPI figure saw an overreaction with fear-mongering over a rate hike in August. We think that is unlikely, but is still contingent on the quarterly CPI data which is due at the end of July.
Spreads in AT1s have reverted back to all-time tights in June after a sell-off in May. This saw the BondAdviser All AT1 Index return +1.33% for the month. Tier 2 traded relatively flat in June as the BondAdviser All AUD T2 Index produced a +0.50% return. The Prime Australian Defensive Income Portfolio returned +0.55% for June and continues to outperform the Bloomberg Bank Bill Index at all timeframes detailed in Figure 2. Over the past 24 months, there have been two negative months (-3bps and -11bps), with 20 being between 0.00% and 1.00%, a reflection of the predictability despite significant market volatility over that time.
International Equities
• The Prime International Growth Portfolio returned 1.4% in June 2024.
• The month unfolded against a backdrop of varied market performances shaped by geopolitical tensions, economic data divergences, and shifting investor sentiment. While certain sectors and regions demonstrated resilience, others faced challenges navigating the uncertain landscape.
• The Munro Concentrated Global Growth Fund emerged as a top contributor, returning 4%. Its focus on companies with robust growth prospects and innovative business models buoyed performance amidst sectoral turbulence. Conversely, the Platinum International Fund struggled, returning -2.%, hindered by its defensive stance and value-oriented strategy.
• The iShares S&P 500 ETF surged ahead of the rest of the world, returning 5.5%. This highlights the bull run that continues to dominate headlines and reflects the significant momentum seen in markets during the month.
• However, challenges persisted with funds like the Trinetra Emerging Markets Growth Trust (-3.3%) and the Pzena Global Focused Value Fund(-3.2%) underperforming. Their value-focused approach faced headwinds amidst global economic uncertainties and varying market conditions.
• Despite these hurdles, positive contributions from sectors like technology bolstered the Langdon Global Smaller Companies Fund, which returned 2.1% and outpaced the benchmark in a reaffirmation of small-cap resilience.
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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