Market Overview
Two major events happened in September: the US central bank cut its interest rate by 0.50% (to a range of 4.75% – 5%), and China introduced new stimulus measures (the most significant since 2015 to support their very weak economy). Given these positive announcements, most asset classes performed well. Commodities were up the strongest, with metals and mining indices rising 13% over the month. Other ‘real’ assets like gold and property also performed well, as did other risk assets like small companies and Emerging Market equities. Hedged strategies also performed well, insulated from the rising Aussie dollar.
Global shares
China’s support packages included not only rate cuts and programs to support property markets but also funds to directly support ailing equity markets. China’s various stock markets had traded at a roughly 50% discount to global markets and rallied strongly on the news. Australian shares outperformed the US and other developed share markets. Some European markets, like Germany, performed well, while others, like France and the UK, performed poorly. Unhedged developed markets posted small negative returns for the month impacted by the strong Australian dollar – a key beneficiary of a ‘risk on’ demand for commodities. Korean markets had a 3% sell off, with Samsung (a large Korean tech company) down materially over the month.
Australian Shares
The local market was similar to global markets, with materials/resources outperforming by a meaningful margin. Financials largely funded the rotation, particularly the banks and insurance companies, which had been very strong performers over the past year.
Whilst resource names dominated the list of top performers, consumer discretionary names did well, supported by stronger than expected retail sales data (in turn, a function of energy rebates and tax cuts flowing through to the consumer), as did real estate investment trusts which have enjoyed the prospect of lower rates (which, at present, is more of a global phenomenon, the Reserve Bank of Australia (RBA) is not likely to cut rates in the very near term).
Fixed income
Bond market returns were again positive, and the market expects more interest rate cuts to come, with future cuts in the US and across other developed markets.
Corporate credit continues to show resilience, with investment-grade bonds performing well.
Economic Data
Growth
Global gross domestic product (GDP, a measure of economic output) remains slightly higher than the 3.2% recorded in 2023.
Australian GDP is trending lower. Australia is already in a “per capita recession,” and if it wasn’t for positive immigration, the economy would be in a recession. The federal government’s plan to limit foreign student study visas will harm immigration which is our third largest ‘export’ (after iron ore and coal).
Inflation
The US Federal Reserve noted progress on inflation and risks but emphasised that economic activity is still strong. Despite this, it cautioned that inflation remains above its 2% goal.
Inflation remains the critical issue for central banks and policymakers worldwide. Although it continues to moderate toward long term averages, it is still above pre-pandemic levels.
Production is responding to shortages, and goods inflation has slowed, but in many countries, there are pockets of sustained cost increases in services.
Employment
Higher interest rates (required to slow growth and inflation) are forcing unemployment to rise worldwide.
The larger-than-usual US rate cut reflects a shift in focus from inflation risks to employment risks due to recent weakness in the US labour market, including slower job gains and a rising unemployment rate.
Equities can perform well during rate-cutting cycles unless growth is weak. If the labour market stabilises, rate cuts may be seen as “insurance” benefiting small-cap, cyclical, and lower-quality companies. However, if labour market conditions worsen, rate cuts may not be enough to counter recession risks, potentially leading to lower equity markets. Overall, a soft landing is more likely, provided there isn’t a sharp downturn in the labour market.
Geopolitical Developments
Now that Iran is entering hostilities in the Middle East, the oil price has moved higher to $75.
Investment Outlook
With equity markets reaching record highs, we remain cautious about the outlook but not bearish.
Interest rates
The level of US interest rates affects all markets, and the US Federal Reserve Chair Powell has indicated that ‘the time has come’ to cut interest rates with more cuts expected.
Central banks worldwide (including the European Union, UK, Canada, and New Zealand) have started to cut interest rates in response to slowing inflation, economic growth, and rising unemployment.
Corporate profits
The US economy remains strong, with robust earnings growth and moderating inflation resulting in strong corporate profits, which in turn support current market valuations.
Corporate profits remain very strong in Japan, too, while equity valuations are less demanding than those in the US and Australia.
Europe appears to be headed for or is already in recession. The market remains sceptical that the Chinese government’s stimulatory measures will produce a consistently higher level of growth.
Equity valuations are less demanding across Europe, the UK and Emerging Markets, including China.
Australian investors
While higher interest rates are impacting Australian consumers, confidence remains intact. The RBA has shifted its language regarding interest rates, indicating that additional increases are not currently being considered: “We didn’t explicitly consider an interest rate increase at this meeting…” However, the RBA is not signalling any imminent rate cuts, stating that “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.”
In contrast, the likelihood of a soft US economic landing appears reasonable, as the Fed has initiated its rate-cutting cycle early in the slowdown phase.
However, the high valuations of fast-growing US technology companies have become less appealing. We expect interest rates to trend lower over 2025, which would positively impact fixed-income valuations and equities (good for all types of investors). If inflation returns to target levels, this could allow for a decline in interest rates while keeping unemployment low, thereby supporting growth and maintaining strong corporate profits, a crucial driver of earnings per share, market valuations and dividends (good for retirees with an income focus).
A key concern for investors is the labour market data, which is holding back allocations to growth equities that remain expensive relative to bonds. Should equity markets pull back, our strategy would be to sell bonds and invest in cheaper equities.
Ultimately, successful wealth creation over the long term relies on the principles of time in the market, adapting well-diversified assets as market conditions change, and maintaining the right mix of investments to achieve financial goals and objectives.
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.
