Quarter-End Market Commentary | January, 2024

    Overview  

 
• 2023 was a strong year for most asset classes.
 
• Equities and bonds performed well in Q4 2023, with a large rally for global markets in the final two months of the year.
 
• Market expectations are for interest rate cuts early  in 2024 despite central banks pushing back on the timing of eventual cuts.
 
• Bonds saw strong performance in the last quarter, due to falling interest rate expectations, with corporate bonds performing especially well.
 
• Commodities and commercial real estate underperformed  compared to other asset classes.
 

Asset  class recap of December quarter 2023

Global  shares

The MSCI  World Ex-Australia NR Index returned 9.9% over the quarter in local currency  terms, with the 12-month return coming in at 23.32%. In Australian dollar  terms, quarterly and annual returns were +5.31% and +23.23%, respectively, as  the AUD fell against major currencies across 2023 but made much of the falls  back rallying strongly in the quarter.

The  quarter showcased a robust performance across various sectors in local  currency terms:

 
• Information Technology led the way with a +17.0%  return.
 
• Industrials, Financials, and Communication Services  followed suit, each producing double-digit returns of +11.4%, +11.2%,  and +10.0%, respectively.
 
• Positive returns were also observed in Consumer  Discretionary (+9.6%), Materials (+9.5%), Utilities (+8.8%), Health Care (+4.2%), and Consumer Staples (+3.2%).
 
• Energy, however, faced challenges with negative  returns of -5.5% throughout the quarter.
 

Australian  shares

Australian  shares finished the year strongly, with the S&P/ASX200 accumulation index  returning 8.4%.

Some  notable sector returns included Health Care (+13.3%), Materials (+13.2%) and  Financials (+8.2%), particularly Materials & Financials, given the weight  they hold within the index.

Information  Technology (+6.4%), Consumer Discretionary (+6.0%) and Industrials (+5.8%),  also had positive returns for the quarter. Telecommunication Services (+2.5%) and Consumer Staples (+0.1%) were relatively flat, while Energy (-9.0%), and  Utilities (-2.1%) produced negative returns to round out the year.

Bonds

US  10-year bond yields fell over the quarter from 4.6% to 3.9% causing a massive  rally in prices of over 10% as inflation fears subsided. however late in  October it is interesting to note that yields did rise to 5.004% a 16 year  high before falling. This decrease in yields saw gains in the global  benchmark indices. Key 10-year treasury yields in local currency terms  (December 31, 2023): Australia: 4.0%, Global: 3.9%.

Global  property & infrastructure

Domestic  listed property & global listed property and global infrastructure had  strong positive results in the quarter alongside global equities.

Key  quarterly results (in AUD hedged terms, December 30, 2023): Australian listed  property (+16.5%), Global listed property (-17.6%) and Global listed  infrastructure: (+7.8%).

Currencies

The U.S.  dollar depreciated against some major currencies, with the Australian dollar  finishing the quarter at 68 US cents – up from 64 US cents at the start of  quarter.

Important  Perspective

As we  wrap up 2023, investors are likely to look back with satisfaction, aided by  the robust performance in the final quarter. The strength was largely driven  by the expectation the Federal Reserve will cut interest rates as many as six  times in 2024 (implied market expectations) as the worst of the inflation  spike is now considered behind us. The RBA and other central banks in the  developed world are expected to cut interest rates throughout the year.

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Several  equity markets now sit at or near all-time highs—including Japan, France,  Brazil, India, Mexico, and many others in local currency terms. Notably,  small companies outperformed large companies by a large margin in the last  quarter, reversing a long-term trend. At a sector level, 10 of the 11 major  sectors delivered positive returns for the quarter, with energy the only  sector to record a modestly negative number.

The  Morningstar Global Market index, a barometer of global large-cap equities,  posted an impressive gain of 11.2% for the quarter and 22.1% for the year,  defying earlier predictions of a difficult year due to an economic downturn.  To that end, the global economy has been resilient despite earlier  expectations, especially in the U.S. where unemployment has stayed low and  recession probabilities are falling.

At a  country level, U.S. stocks did particularly well with large gains through  2023 in the so-called “Magnificent Seven” driving the broad market higher,  finishing just below all-time highs. Gains were also recorded in Europe,  including the U.K., although not quite as strong. Japan continued its stellar  run through 2023 and had a great quarter in Japanese yen terms, as did  several emerging markets including Brazil and India. At the other end, China  saw losses, with poor investor sentiment and slower-than-expected economic  activity. The overall strength in equities painted a positive picture of  global investor health. The surge in small-cap stocks could also be  indicative of the market's renewed appetite for risk, often a harbinger of  economic optimism.

On the  fixed-income front, bonds also delivered a strong performance in the final  quarter of 2023, benefiting from the anticipated interest rate cuts by the  Federal Reserve. The correlation between falling interest rates and  increasing bond prices played out, with longer-dated bonds doing especially  well. That said, it was corporate bonds that stood tall among their peers.  These bonds, which are typically more sensitive to economic conditions,  outperformed government bonds. Contrastingly, inflation-linked bonds, which  are designed to help protect investors from inflation, failed to keep up with  their counterparts. Given the falling inflation prints around the developed  world, these securities were unable to attract the same level of demand,  leading to underperformance for the period.

Commodities  and commercial real estate underperformed compared to other asset classes.  Meanwhile, the U.S. dollar fell against major peers.

Looking  Ahead  

As we  enter 2024, it's essential we remind investors that the presence of  uncertainty does not imply a scarcity of opportunities. Our approach to the  year will be a blend of caution and optimism.

Of  course, the path of interest rates and inflation will continue to act as key  talking points among investors. Let’s not forget that investors went into  2023 worried about inflation and expecting a recession by the second half of  the year. This never transpired. Now in 2024, investors are expecting low  inflation, no recession, and significant interest rate cuts. This is a  Goldilocks-like scenario if it plays out, but it’s worth bearing in mind that  it is far from guaranteed.  

Most  investors have long-term goals, such as retirement, and should therefore  focus on long-term value creation. Similarly, it is worth noting that risk  management is a critical pillar of successful investing. An effective risk  management strategy balances investment opportunities with future  uncertainty, equipping investors to navigate through market volatility.

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