Asset Class Performance and Outlook December 2024

Australian Equities

Some of the risks over the past year in Australian Equities appear to have dissipated as business confidence rebounds despite the slightly lower earnings estimates from a year ago.  While the Australian equity market is very concentrated in banks and materials, there has been a mixed story with a preference for financials over materials throughout the last year. If we have a rebound in Chinese growth, we expect a rotation like we saw in September when a raft of stimulus measures were announced.  Resilience overall is observed in consumer discretionary stocks outperforming consumer staples, despite a per-capita lag in retail sales, driven by strong immigration.  We expect Australian stocks can be further supported over the next year on our base case scenario, but risks are elevated as earnings revisions have been weak despite the rally.  In this environment, we might see the performance gap close with small caps reversing their worst performance over the year to close the gap on mid caps and large caps. Risks to this view include a migration cap moderating consumer activity and China not recovering.

International Equities

International equities have had a positive year with some extremes of performance in Asia with the Japanese Nikkei 225 falling dramatically when the Bank of Japan hiked while the Chinese Shanghai/Shenzen index rallied very strongly in September and October as stimulus measures were announced.  Overall, the US has led major global markets with the Nasdaq composite ahead of the S&P on yearly performance. The ‘Magnificent Seven’ have performed strongly for the year, in particular NVIDIA riding the AI boom. Valuations are at highs for the S&P however this isn’t the same extreme in other global equity markets. We see potential for a further run up in global equities despite high valuations, while creating vulnerability to a meaningful correction in 2025 before resuming an upward trend as earnings growth remains robust. Much uncertainty surrounds this scenario with political and geopolitical forces easily combining to upset this scenario of net positives.  The following chart gives some perspective on the US relative valuation on the forward price to earnings measure, at highs last seen in the late 1990s besides the 2020 pandemic highs.

 

Fixed Income

Bond markets have continued the theme of dramatic swings from last year with a range over the last year of 1.0% in US 10-year bond yields and a 0.9% range in Australian 10-year bond yields. A recent surge in government bond yields during November has rapidly cooled into early December, highlighting shifting views of the economic, financial and political environment. We have seen a moderation of the number of rate cuts by the Fed and RBA priced in for the duration of 2025 given the forward economic outlook is improving. Both US and Australian central bank policy makers are seeking soft landings for the economy and now are firmly focussed on labour force data while inflation appears to have cooled. In this environment that has been supportive for equities, we have seen credit spreads tighten further over the year in Australia and the US.  The risk of more upside economic growth than expected raises the prospect of government bond yields moving higher while credit spreads remain tight. There is not much of a negative scenario priced into government bonds and credit spreads. We expect a volatile year ahead for fixed income as some scenarios get priced back and forth by market participants.

Tactical Asset Allocation

Fundamental – Moderately Positive	We see the economic fundamentals in Australia as challenged but with some improvement recently. The US continues to stand above other economies as growth remains resilient and above trend.  Forward-looking indicators such as PMIs and OECD leading indices show some recovery from lows, but not consistently around the world.  Central banks have started to cut rates, helping to improve financial conditions, while fiscal spending is expected to remain solid. The path of US policy will be key to the outlook.
Valuation – Moderately Negative	Valuations in equity markets are higher in early December, noting the recovery from lows in October, following seasonal patterns of weakness and strength. The Australian equity market has lagged the US market as tech and other growth exposures continue to outperform.  At the headline level, valuations are above historical averages but there is a wide dispersion of valuations with mid and small caps at cheaper valuations than very large stocks. The rebound since the October correction has been driven by smaller stocks, driving a broadening of market breadth.
Technical - Neutral	Technical - Neutral Seasonality has played out much as we expected in the later months of the year with several wobbles since August rolling through to a stronger November and December in equity markets. Solid economic data, several rate cuts from the Federal Reserve, and the removal of uncertainty with a quickly decided and uncontested US election result provided a smooth path for a rally. Momentum in equity and bond markets looks strong, while volatility in these markets have declined. Credit spreads continue to signal confidence in the health of corporates.  Positioning is bullish across retail and institutional investors, but sentiment surveys indicate a more neutral mindset. Despite stretched valuations, there is no clear display of exuberance in conventional markets, though this could change quickly as the nascent rally in speculative assets indicate some level of froth in broader markets.
Overall view for growth asset classes	Our net scorecard view is neutral for equities, riskier credit and growth asset classes.  Extended valuations are supported by a solid outlook for the global economy and corporate earnings. However, we are watchful for exuberance spilling over into conventional markets.

 

 

Click here to read the Investment Perspective Public Markets Summary and Outlook for 2025

Click here to read the World Economies Update & Outlook December 2024

 

 

 

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.