Market Commentary
Last updated: December 2024
Economic overview
Australia – RBA remains on hold for now
The Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35% p.a. (in line with economist expectations) for the 8th meeting in a row. The RBA governor noted that whilst the year-on-year (YoY) pace of headline inflation had declined, underlying inflation was still too high on quarter-on-quarter (QoQ) basis. It is likely the RBA wants to see a further two quarters of falling inflation before they will be confident that the decline is sustainable.
Australia’s employment data for October came in broadly in line with expectations. The number of employed persons grew by an estimated 15,900 over the month with the unemployment rate remaining at 4.1% (vs September). The participation rate reduced slightly from a record high of 67.2% to 67.1% while the underemployment fell from 6.3% in September to 6.2% for October, the lowest reading since April 2023.
The Australian Westpac Consumer Confidence Index rose again in November, though it remains below average levels. The increase was influenced by consumer expectation around interest rates, with over 52% now expecting mortgage rates to be the same or lower by this time next year, compared to 27% in July.
International – US resilience continues
The US Federal Reserve (Fed) cut the interest rates target range by 0.25% to 4.50 - 4.75% p.a. (in line with expectations). US economic data continues to point to an expanding economy with job gains in the month of October and a stable unemployment rate that remains at 4.1%. In the UK, the Bank of England cut rates a quarter percentage point to 4.75%, as expected.
Business surveys also point to an economy that remains in expansion, an improvement in the November surveys suggest a lift in confidence following the US election where the Republicans won both the House and Senate. However, business surveys in Europe indicate that the economy remains weak.
The US 3rd quarter corporate earnings season ended strongly with the S&P500 showing an earnings growth of +8.2% year-on-year (YoY), with the Technology, Communications and Consumer Discretionary sectors experiencing the largest growth.
President-elect Trump announced his tariff plans to impose a 25% tariff on imports from Canada and Mexico and an additional 10% tariff on imports from China immediately after taking office. These countries are the US’s three top trading partners.
The Reserve Bank New Zealand (RBNZ) cut rates 0.50% as expected and plans to keep cutting rates since inflation is within their target range and the economy remains weak. An additional 1% in rate cuts is anticipated by October.
In October, inflation in the UK, Eurozone and Canada rose more than expected, mainly due to an increase in household energy prices in the UK and Europe.
In the UK, Gross Domestic Product (GDP) growth unexpectedly slowed to 0.1% in Q3 down from 0.5% growth in Q2. A 0.1% contraction in September, mainly due to weaker manufacturing output, contributed to the slowdown.
The latest data suggest a mixed outlook for China’s economy with manufacturing showing signs of expansion with growth in new orders and production, while non-manufacturing sectors face challenges due to a weakness in construction activity.
Market review
Australia
Australian Shares ended November higher following the direction of international markets as investors’ confidence likely improved following the US election.
The strongest performing sector was the IT sector, while the Materials sector lost some of last month’s gains and was the worst performing sector for November.
Sigma Healthcare was the largest gainer over the month after the competition regulator approved its merger with Chemist Warehouse.
Australian Small Cap shares didn’t follow International Small Caps lead and underperformed large caps in November.
International
International Shares (Hedged) rose higher in November due to positive corporate earnings and investor confidence being buoyed by the US election.
International Shares (Unhedged) also produced positive returns partly due to a slight decline of the Australian dollar (AUD) during the month.
International Small Cap shares outperformed large cap shares in November reflecting the valuation differential between the markets. Large cap shares are relatively expensive compared to small cap shares.
International Government Bonds rose following the US election likely reflecting concern on President-elect Trump’s tariff plans and the possible impacts to growth.
The fall in bond yields over the month reversed some of the climb we have seen in bond yields over prior months.
International Credit also had positive returns due to falling yields and positive investor risk appetite.
Market Insights
Australia – RBA interest rate hikes unlikely
Whilst the Reserve Bank of Australia (RBA) is cautious about inflation risks, we do not believe that it will raise interest rate significantly amid weak growth. Instead, we remain of the view interest rates have peaked for this cycle.
We expect growth to remain weak as higher interest rates and cost-of-living pressures are likely to keep consumption suppressed. We expect core inflation to slow but not as quickly as in other developed economies, with pressures from the residential rental markets expected to continue.
Domestically, we favour Australian sovereign bonds over cash with interest rates likely to have peaked this cycle.
International – Regional divergence expected
We expect international economic growth to remain resilient but regionally divergent.
We expect the US economy to grow at a slower pace than previously, but the global economy is likely to avoid recession.
Global central banks are likely to continue to cut rates but are likely to do so more gradually. The exception is Japan where we expect interest rates to rise as it emerges from a period of multi-decade deflation.
We favour global listed property where fundamentals are broadly healthy, and valuations are attractive. We also favour Japanese equities due to rebound in economic growth and solid earnings growth.
We expect China’s growth to improve with supportive stimulus policies and other emerging economies to benefit from these policies as well as their own central bank actions. The extent will depend on Trump’s tariff plans.
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