Overview
Equity and bond markets continued May’s positive performance into June. Major equity indices reached new highs in the first half of the year, while bond markets showed signs of stabilization following a period of volatility. Growth equities performed well, notably in the US. Value stocks gave up last month’s gains but are positive over six months and longer. The best performing asset class was international equities despite commodities falling on poor Chinese sentiment.
Equity Markets
Share markets globally continued their upward trajectory, with many indices achieving new record highs. This positive momentum was driven by robust corporate earnings reports, easing inflationary pressures, and expectations of policy support from central banks.
Economic Data
Investors were encouraged by recent data showing that inflation in key economies is moderating, albeit unevenly. This moderation was seen as a sign that central banks might soon consider easing monetary policies to support economic growth. Over the first half of 2024, global economic growth has been resilient. Global GDP growth has remained slightly higher than the 3.2% growth recorded in 2023, largely driven by the United States, the Eurozone, and China, with emerging markets also contributing.
Geopolitical Developments
Tensions in the Middle East and ongoing trade negotiations between major economies influenced market sentiment. Despite these uncertainties, global markets demonstrated resilience and continued to trend upwards.
Inflation Trends
Inflation has remained a critical issue for central banks and policymakers worldwide. After peaking in 2022, global inflation rates have moderated but are still above pre-pandemic levels. Consumer Price Index (CPI) inflation in developed economies has averaged around 3.5% year-to-date, down from the 4.5% average in 2023. Central banks have generally paused interest rate adjustments to assess the impact of previous increases.
Inflation
US Federal Reserve
The Federal Reserve has maintained a relatively hawkish stance through the first half of 2024. After raising the federal funds rate to a range of 5.25% to 5.50% in early 2024, the Fed has signalled a pause in future rate hikes, emphasizing a data-dependent approach moving forward. This reflects a balancing act between addressing persistent inflation and supporting economic growth. Data released over the June quarter (including owner’s equivalent rent) is consistent with core inflation returning to the 2% target rate. Inflation rates in Canada, the EU and Australia have popped higher in recent months, so the US Federal Reserve’s current higher-for-longer policy seems prudent after all.
China
The PBoC has leaned towards easing policies to support economic growth. Interest rates have been reduced slightly, and there has been a continued effort to bolster domestic demand amid concerns over a sluggish property sector and the need to stimulate economic activity in the face of a slower-than-expected recovery. However, the stimulus doesn’t seem to be making it out into the economy suggesting money and credit creation is impaired. So, China continues to rely on external demand to support growth, while domestic demand remains very weak.
Australia
The RBA has kept rates steady at 4.35% despite slightly higher inflation. Markets priced in a 50% chance of an interest rate increase which is at odds with the RBAs preference to cut rates once the US does. Australian Inflation at 3.6% is forecast to fall to 2.75% by mid-2025 (within the RBA’s 2-3% target). Lower personal income tax rates from 1 July and the $300 electricity rebate will help consumers navigate the high cost of living but will add to inflation.
CPI Trimmed mean
U.S. Shares
U.S. equity markets have posted additional gains year-to-date, buoyed by strong earnings reports from major technology and healthcare companies. However, market volatility remains elevated due to uncertainties surrounding the timing of interest rate reductions and geopolitical tensions.
Reasons to sell
Australian Shares
Australian equities rose again in June, continuing May’s positive performance. With Chinese demand falling, commodity prices have weakened. Materials and energy stocks fell, particularly iron ore and lithium miners. Most other sectors performed well as concerns about the domestic economy eased. The best performing sectors were consumer staples and financials. Bank shares are up strongly despite signs of consumer demand weakening, with retail spending slowing and housing loan arrears increasing.
Fixed income
Rising yields have challenged fixed income markets and returns as central banks continue to manage inflation with higher interest rates. The U.S. 10-year Treasury yield has increased to approximately 4.20% by June, reflecting higher interest rates and expectations of future inflation. Corporate credit markets have shown resilience, with investment-grade bonds performing relatively well compared to high-yield bonds.
Investment Outlook
As we reach the halfway point of 2024, financial markets have been navigating a complex and evolving landscape shaped by a mix of macroeconomic forces, geopolitical developments, and volatile investor sentiment. Geopolitical risks remain a significant factor in financial markets. Tensions between the U.S. and China over trade and technology continue to be a source of market volatility. Additionally, conflicts in Eastern Europe and the Middle East have contributed to market uncertainty. The remainder of 2024 is likely to see continued fluctuations as markets react to new data and evolving global conditions. If inflation returns to target and rates decline, unemployment should remain low, with which would support nominal GDP growth, in turn helping to maintain strong corporate profits and therefore earnings per share, the key driver of market valuations.
Corporate profits
Global Equities
Markets remain focused on, and on track for a “soft US economic landing” with US inflation gradually returning to target, robust earnings growth, and resilient consumers which should continue to drive economic growth. We are mindful of the current high US equity market valuations, which may not necessarily prevent further gains given expectations for continued economic growth and potential US Fed rate cuts.
Australian Equities
With delayed rate cuts and China under pressure, expectations for the Australian market remain less appealing compared to global equities in the short term.
Fixed Income
Bond market volatility is likely to persist as central banks remain focused on data and investors remain focused on central banks (and data). Interest rates should trend lower over time which is positive for fixed income and equities.
Property and Infrastructure
Infrastructure investments remain attractive for their defensive cash flows, inflation-linked revenue streams, and favourable structural trends such as opportunities from the energy transition.
Economic resilience and anticipated central bank monetary policy easing will eventually support a bottoming out of the struggling US commercial property sector, although we remain underweight Office stocks for now.
Commercial Property
Conclusion
June 2024 was a month of cautious optimism for global markets and positive for well diversified portfolios. Positive economic indicators and expectations of central bank policy support helped sustain market gains, while geopolitical risks and trade tensions provided sources of volatility. As we move into the second half of the year, investors will be closely monitoring economic data and central bank decisions to gauge the sustainability of current market trends. As inflation weakens around the globe, central banks are poised to stimulate economic growth through lower interest rates in 2025 thus providing a supportive environment for strong corporate profits, and resilient consumers both positive outcomes for long-term investors.
Some countries are seeing a rise in unemployment, and high valuations of fast-growing companies aren’t appealing. However, there are opportunities in stocks and bonds that offer better value. The key as markets ‘climb the wall of worry’ higher is to revisit and refresh your long-term investment strategy, remain well diversified with a good mix of investments, and be mindful to ‘turn down the noise’ knowing that you intend to remain invested for the long term.
EWK Investment Committee
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
