Milder inflation and US and European Central Bank interest rate cuts saw solid global share market returns for the July to September quarter. With the notable exception of Australia, falling inflation has resulted in interest rate cuts in all major economies.
In October, technology stocks led US and Australian share market indexes to brief record highs. However, these gains were reversed with concerns over rising government bond yields, unexpected high inflation and employment, the US Presidential elections and escalating global conflict. Global shares ex-Australia returned -1.9% (in USD), while Australian shares (ASX 200) had a negative return of -1.3%. Lacklustre economic data from China, the ongoing cost of living crisis and uncertainty surrounding the timing of interest rate cuts impacted Australian markets.
Central banks interest rate actual and projections
US election result
In the US, all three major US stock indexes hit record highs on 6 November after Republican Donald Trump won the 2024 US presidential election, with the Dow and S&P 500 experiencing their biggest one-day % gains since November 2022. Shares of small-cap companies also soared.
While commentators expect that the Trump presidency will be pro-growth within the US, the impact on global growth may be negative. US business and the US economy will benefit from the platform of extended tax cuts, reshoring of business back to the US, and deregulation, together with rising US budget deficits and government debt. Expansionist policies, together with the proposed tariff increase, are likely to be inflationary, resulting in both higher bond yields and the US Fed keeping short-term interest rates higher for longer.
It is uncertain what the impact on Australia will be as Trump is likely to be more combative with China. Even if we avoid direct tariff increases, this could undermine our exports to China and other Emerging Markets. The other possibility is that this may prompt the Chinese Government to implement significant fiscal stimulus which would be positive for Australia.
Overall returns show that it has been an exceptional year for global share markets, however, returns have decreased and become very volatile since April.
The ongoing weakness in the Australian economy combined with the RBA deferring interest rate cuts to 2025 (along with the strengthening of the Australian dollar) explains the relative underperformance of Australian shares to Global shares over the last year. There has been considerable dispersion in the returns of the components of the Australian share market since January 2024. Banks, Australian Real Estate Investment Trusts (A-REITs), and small companies performed well, while industrials and resources (in particular) did poorly.
The positive move in bond prices (with declining bond yields) reflected optimism that inflation will fall in Australia and globally.
Returns of major asset classes as at 31 October 2024
Outlook for economies and markets
Post-election, most commentators have a positive US market outlook, “a soft landing” in the short term with a very low risk of recession. There is also confidence that
inflation is gradually falling worldwide, allowing central banks to cut interest rates. A lower interest rate environment should support corporate profits and share prices within the US.
In its October 2024 update, the International Monetary Fund described global growth as stable but underwhelming at 3.2% for 2024 and forecasted for 2025. Upgrades to the forecast for the United States offset downgrades to those for other advanced economies, with the largest European countries showing signs of recession. The relatively high valuation of shares in both the US and Australia may limit the upside in share market returns. The US 10-year government bond yield has increased from about 3.6% in September to just under 4.5% on 14 November, which will further constrain the share market as rising bond yields have probably not been factored into share prices.
Australia’s economic outlook is uninspiring. However, some believe the economy will ease in 2025, offering grounds for modest improvement. Meanwhile, the cost-of-living crisis and low productivity mean the outlook for earnings growth is subdued.
Conclusion
Despite the low growth and uncertainty, active managers can find good opportunities in Europe and the Emerging Markets. Other opportunities include interest rate sensitive stocks such as Smaller Companies as well as Global Listed Infrastructure and Global Real Estate Investment Trusts (G-REITs), which are inflation hedges provided real yields do not rise above certain levels.
Fixed Income will continue to play an important role in portfolios, with fund managers able to position parameters such as the fixed rate term, known as the duration, credit quality, issue selection, etc., to suit the investment and economic environment and provide good yields as well as opportunity for capital gains.
Against this background, diversification and the ability of portfolios to react quickly to changing conditions remain very important for portfolio performance going forward.
