Asset Class Performance and Outlook September 2024

Financial Advice

30-09-2024

Asset Class Performance and Outlook September 2024

Australian Equities 

We maintain there is a higher likelihood of better offshore equity market performance in the US and other developed markets in the medium-term, primarily due to a slowing path of growth and fewer growth-oriented industries and companies in Australia.  A weaker consumer in Australia continues to weigh on equity earnings as the combination of higher inflation and floating rate debt restricts consumer spending. The delay in RBA rate cuts doesn’t help consumer confidence or ability to spend, however Stage 3 tax cuts are supportive.  Stocks with a strong end-market exposure to China have had a recent boost in late September as more significant stimulus measures have been announced by the Chinese government and policy makers. This has had a positive impulse on Australian mining shares and the Australian dollar. A rate cut cycle that has commenced offshore is more likely to see the RBA commence cuts early 2025. The flow on from Fed rate cuts and Chinese stimulus is likely to support a ‘risk on’ environment that is supportive of small cap and cyclical stocks.  We have seen overall earnings forecasts decline in the last six months, however this may well reverse with positive offshore policy leads and likely positive revisions for commodity stocks from higher prices, if sustained. Some selective defensive sectors and stocks may suffer in this environment from sector rotation away from them into cyclical and mining stocks. This is despite what may be reasonable earnings outlooks for these defensive companies.  

International Equities 

International equities have performed well over most time periods this year and for multiple year periods despite some minor corrections in recent months. US large cap and tech stocks continue to perform well, particularly those benefiting from the AI thematic. Large chip makers, particularly NVIDIA, have performed extremely well, but so have other industries exposed to data centers.  At the index level, valuations have become elevated, and we have seen the rally stall over the past quarter as rotation away from large cap tech stocks has taken hold. Given the rate cut cycle commencing in the US, it is more likely we see this broadening out of participation from the largest companies into mid and small caps continuing. This is generally a healthy sign, but the market may trade in a range as the rotation drives a normalization in the still large valuation gap between larger and smaller stocks. With rate cuts likely to support major economies, we remain positive on the medium to longer term outlook for stocks as our base case view is that earnings growth helps stocks grow into their valuation. 

Fixed Income 

Bond markets have had a positive but volatile year since last September, with upswings in bond index values in Australia and globally driven for the most part by a decline of government bond yields as inflation concerns waned and rate cuts have been progressively anticipated. Whether it has been from recession fears or inflation declines causing real interest rates to restrict growth, the pressure has been for short and long maturity government bond yields to fall, and hence, bond prices to rise (bond prices move inversely to yields).  The other major component of bond markets has been credit spreads which have remained relatively low. Volatility in prices has mostly occurred when equity markets have sold off and credit spreads have risen temporarily.  We expect bond market valuations to continue to strengthen in value as cash rate falls get transmitted further out into government bond yield curves. All in all, a lower inflation and lower interest rate environment provides a better diversification role of fixed income versus equities. We do expect bouts of inflation concerns as we don’t expect a return to zero and near zero interest rates due to sticky inflation contributors. Hence bond diversification to equities will not be quite as effective as over the last 10 years. 

Fundamental - Neutral

Economic fundamentals have been challenged but appear to be stabilizing and starting to improve over the last month. Forward-looking surveys are still weak across consumer and business confidence indicators, however there are signs of an improvement. Leading indicators continue to point to a more favourable outlook internationally compared to Australia, as the RBA remains on hold with Australia further behind on the inflation front.

Valuation - Moderately Negative

Valuations in equity markets have continued higher, driven by the AI thematic. The Australian equity market has lagged the US market due to a lack of technology leaders. This can be seen in earnings revisions where the US has seen upgrades since the start of the year, while Australia has seen downgrades. At the headline level, valuations are above historical averages but there is a wide dispersion of valuations for international equities, with mid and small caps still at cheaper valuations than very large stocks despite the recent rotation.

Technical - Neutral

Investors have been adding to equities and positioning is modestly overweight amongst US retail investors. Institutional investors also have a modest overweight to equities and underweight to cash. Sentiment across both segments of the market also remains bullish but not yet at historical extremes that signal an imminent correction. Market breadth has broadened more recently as we have seen a rotation away from US large cap tech. The corrections over the last quarter have helped to wash out some of the excesses in the market and we see a more supportive technical backdrop compared to the previous quarter.

Overall view for growth asset classes

 Our net scorecard view is neutral for equities, riskier credit and growth asset classes. We see pockets of opportunities as the commencement of a likely significant rate cut cycle drives a rotation in markets. We have added to global property and currency hedges, which should benefit from lower global rates relative to an RBA that is likely slower to cut. We also made rotations within our Australian Equity portfolios to more globally and cyclically exposed stocks that may benefit from the improving global economic outlook.

 

Portfolio Positioning

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.