Market Data March 2024
Market Commentary
In the first quarter of 2024, markets delivered impressive returns, with most diversified portfolios achieving gains typically expected for an entire year. The market brushed off weak data and focused on the positives in inflation and economic data. Japan was the standout performer Europe showed little volatility, and the US delivered the best returns but with higher volatility, particularly in large-cap tech stocks.
The market broadened out, with Europe, Japan, emerging markets, Australia, and the UK joining the rally. The Nasdaq lagged slightly in March due to valuation concerns. Long-term bond yields traded between 4% and 4.3%, with expectations of lower short-term rates consistently pushed out, leading to choppy bond returns. Australian CPI data confirmed the global trend of stubborn services inflation offset by goods deflation. The US Personal Consumption Expenditure Index for February came in line with expectations at 0.3%, suggesting slightly higher inflation for longer and central banks being less hurried to lower rates.
Investors question whether the low volatility environment is a sign of market complacency or solid fundamentals. Active managers appear to be taking a more defensive approach, underweighting duration and the US. The next few months could be difficult to predict, and advisers must choose between advocating a cautious approach in relative or absolute terms.
Looking ahead, the market's trajectory will depend on the interplay between inflation, central bank policies, and economic growth. If the Goldilocks scenario persists, with inflation moderating and growth remaining stable, markets could continue their upward trend. However, any unexpected shocks or signs of a more pronounced economic slowdown could lead to increased volatility and a reassessment of market valuations.
Market Returns - 1 Month to 31 March 2024 (in AUD)
Australian Equities
The ASX 200 rose 3.30% in March, extending its positive momentum for five consecutive months. From the market lows in October 2023, the ASX 200 has rebounded by around 15% to reach a new all-time high.
A more optimistic growth outlook supported by firmer economic data has helped extend the equity market rally. Indeed, since the peak in rate expectations last year, the Price Earnings Ratio (P/E) of the ASX 200 has expanded by ~15%, driven by valuation multiple expansions in the Banks, Discretionary Retail, Real Estate and Technology. Notably, an unbridled optimism regarding the pending AI revolution led by the US company Nvidia has expanded to include the broad sweep of technology and real estate providers of data centres. At the end of the March quarter, the ASX 200 was trading on a 12-month-forward multiple of around 16.7 times, a ~12% premium to its long-term average.
While elevated valuations can be a warning signal that markets are vulnerable either to a correction or that future returns will be more muted, we think it is equally important to consider the state of the economy and the outlook for corporate profits, which at this stage to continue to exhibit resilience.
With this backdrop in mind, the market has reassessed the likelihood that central banks will cut interest rates aggressively this year, particularly given the strength in labour markets and the buoyancy in residential house prices.
In March, the market breadth improved with all sectors moving higher, except Communications (-0.8%). On the positive side, Gold (+16.6%), Real Estate (+9.2%), and Energy (+5.6%) were the strongest sectors.
At a portfolio level Goodman Group, Resmed, and Northern Star were notable strong performers, whereas Pilbara Minerals, Spark NZ, and IDP Education weighed on performance.
While the global equity bull market has extended to 18 months, investor sentiment has changed dramatically over this period. At the beginning of 2023, concern over the impact of multiple interest rates rises to quell inflation had darkened investor risk appetite to be more defensive.
In a spectacular turnaround and a direct challenge to consensus thinking, equity markets were emboldened in 2023 with the banks, discretionary retail and technology leading the charge forward.
As we progress through 2024, the economic landscape and corporate profits are not only displaying signs of resilience but also expansion, as evidenced by indicators such as the US Manufacturing ISM New Orders Index. Equity markets are now reflecting this renewed optimism. It is now crucial to thread the needle carefully to achieve a tactful balance between defense and growth assets.
-
Defensive Income
March was a robust month for bond markets as the swings in yields of prior months were more subdued. Locally, the 10-year moved 18bps tighter over the month to 3.96% while the US10-year finished sideways following some slight reactivity to economic data prints later in the month. In the US, the February unemployment rate came in at 3.9%, 20bps higher than the expected 3.7% which created a mini-rally in the US 10-ear into 4.07%. This was short-lived when later in the week CPI print came in at just 3.2%. Intra-month, the MOVE Index (volatility measure for UST markets) fell to its lowest point in two years but remains elevated versus long-term levels.
Stability in bond markets resulted in the Bloomberg Global Aggregate Index (LEGATRUU) producing a return of +0.55% after the prior seven months seeing five results with a loss of between -1.2% and -3.0% and two uber-strong months of +4.2% and +5.0%. Australian markets were a bit stronger following the yield compression, seeing the AusBond Composite Index (BACM0) return +1.12%. Local credit had another strong month as the AusBond CreditFRN (BAFRN0) Index gained +0.50%.
Mammoth spread compression in the AT1 space saw BondAdviser’s All AUD AT1 Index produce a +2.16% return for the month while the All AUD Tier 2 Index rose +0.90% on similar but less pronounced strength. The Prime Australian Defensive Income Portfolio’s +0.72% return in March was a reflection of +44bps in consistent income contribution along with +28bps from favourable capital movements. The Bloomberg Bank Bill Index produced +37bps and Prime again exceeds the benchmark at all timeframes in Figure 2.
All of the Portfolio’s holdings except for the Ardea Real Outcome Fund (-5bps, -1.11% HPR) produced positive returns in March. The PIMCO Global Bond Fund led the way, which produced a weighted return of +16bps from an HPR of +1.25%, again outperforming LEGATRUU (+0.55%). Next were the Realm High Income Fund and the Metrics Direct Income Fund, producing respective weighted returns of +10bps and +9bps. Over the month, the ~2.2% holding in CBAPM was entirely sold down after going ex to free up cash for IAGPF (~2.7% weight). The weighting to SUBD was also trimmed by ~0.5% as we look to take advantage of the Tier 2 space broadly approaching expensive levels.
International Equities
Global markets continued their strong performance in March, brushing off weak economic data and focusing on the positives in the latest inflation figures. Japan stood out for the month, with iShares MSCI Japan Index AUD rising another 2.8%. However, the portfolio's exposure to Japan via the Platinum Japan Fund (-2.7%) detracted from relative performance as the fund struggled to keep pace with the broader Japanese market rally.
Recent laggards turned around to drive returns, with the Pzena Global Focused Value Fund (5.8%), Nanuk New World Fund (4.3%), and Trinetra Emerging Markets Growth Trust (3.2%) among the top contributors. These funds benefited from the broadening of market gains beyond just technology stocks, as investors rotated into cyclical and value-oriented sectors.
Whereas recent outperformers, the Aoris International Fund (1.5%), GQG Partners Global Equity Fund (2.4%) and Munro Concentrated Global Growth Fund (2.8%), whilst still delivering positive returns, underperformed as their styles revolved out of favour.
The iShares Europe ETF (3.6%) was another notable contributor to the portfolio performance in March. European markets showed resilience throughout the month, with little volatility despite the ongoing economic uncertainty. The ETF's broad exposure to European equities allowed the portfolio to capture the region's steady gains, which were driven by a combination of improving consumer sentiment, better-than-expected corporate earnings, and a supportive monetary policy stance from the European Central Bank.
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
Contact
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.
