Monthly Market Review - March 2024 (Australia)
Steady as she goes
March brought further evidence of the resilience of the U.S. economy, and that Australia was passing the low point in economic activity. At the same time, progress on cooling inflation globally has slowed, but the trend remains downward. This gave central banks the confidence to continue signaling the markets that cuts are coming.
The better economic news was cheered rather than feared by investors, and equity and credit market performed well over March. The MSCI World Index rose 3.4% over the month and 10.1% over the quarter. Emerging market equities lagged, but performance started to turn late in the quarter as the MSCI EM Index rose by 3.1% in March.
Meanwhile, central banks took another step closer to the rate cutting cycle, leading to a fall in yields on government bonds. The Bloomberg Global Aggregate Index rose 0.6% on the month (all total returns in local currency).
Central banks can still surprise, as the Swiss National Bank cut rates in March, the first developed market bank to do so. Meanwhile, the Bank of Japan increased its interest rates for the first time in 17 years, abandoning the negative interest rate policy, yield curve control and the purchase of exchange traded funds in the process.
However, even with this move, the Japanese yen (JPY) continued to weaken. There are two currencies in any pair and the weak JPY is more a reflection of the strength of the U.S. dollar, as the market contemplates a shallower cutting cycle from the U.S. Federal Reserve and the demand for U.S. dollars driven by the resilient economy.
With a macro backdrop settling into a “steady as she goes” soft landing and some positive views that a stronger U.S. economy does not have to come with higher inflation, the bigger challenge for investors is current valuations across equites and credit markets, which reflects most of the upside. This places a greater onus on corporate profitability to deliver against market expectations, providing scope for potential disappointment.
However, any consolidation in equities would more likely be treated as an opportunity to add risk at a better entry point. It is worth noting that since 1994, the U.S. equity market has experienced a 5% pullback, on average, five times a year, and there are only two years in that 30-year period where the market did not face a 5% drawdown.
Risk assets are likely to continue doing well but may be more volatile. The breadth in the equity rally away from the mega-cap companies in the U.S. and Europe, into more cyclical and non-tech sectors is an encouraging sign.
Australian economy:
- The Australian economy expanded by 0.2% quarter-over-quarter in the last three months of 2023. While in line with market expectations, the figure was still very soft for Australia. Consumption was very weak, and the savings rate moved higher. A rise in real household incomes and a small savings buffer offer some offset against future drags.
- The monthly consumer price index report for February was unchanged at 3.4% from the prior month (non-seasonally adjusted). The underlying data was mixed, as inflation ex-volatile items fell but the trimmed mean measures of inflation (the Reserve Bank of Australia’s (RBA's) proxy for core inflation) rose slightly. The services component of this inflation data still appears to be too high, but we expect further moderation in the months ahead.
(GTM AUS page 5) - The volatility in economic data continued as the unemployment rate reversed January’s rise to fall by 0.4% to 3.7% in February, as employment surged by 116,000. The fall in the unemployment rate was largely dismissed given the temporary distortions with continued softening in the labour market expected. Job vacancies fell 6.1% in the three months to February.
(GTM AUS page 9) - The RBA struck a more neutral tone at its March meeting but would not be drawn on forward guidance. Slight tweaks to the statement suggest that while the next move in rates will be down, the RBA is in no hurry and is seeking further confirmation that inflation will fall to target over its forecast horizon. Market pricing for the first rate cut has been pushed into the fourth quarter of 2024, but our view is that it is unlikely to come until early 2025.
(GTM AUS page 53) - House prices rose by another 0.6% in March, matching the February increase. Price increases were the strongest outside of the eastern capital cities. Price appreciation may be supported by the positive net migration outcome and the resilience of prices even as housing supply has come to the market.
(GTM AUS page 10 and 11)
Equities:
- The ASX 200 rose by 3.3% in March. Australian small caps returned a larger 4.8% for the month.
- The real estate investment trusts were well ahead of the rest with a 9.3% gain, with energy being the next best performer at 5.3% for March. Also, recording positive returns were utilities (4.8%), materials (3.7%), financials (3.1%), Information technology (2.9%), industrials (2.9%), and consumer staples (2.5%). Telecoms was the only sector in the red (-0.6%) on the month.
- The ASX 200 kept pace with the global equity benchmarks in March, but some country specific indices outperformed. The S&P 500 rose 3.2%, while MSCI Europe was up 4.6% and Japan by 4.4% on the month. However, Australia has lagged well behind compared to the first three months of the year. The ASX 200 gained 5.3% in the first quarter compared to the 18.1% rise in Japanese equities, 10.6% gain in the S&P 500 and the 8.4% increase in European stocks.
(GTM AUS page 32) - Valuations continue to rise as earnings expectations have not experienced material downward revisions. There may be some expectation that better top line growth will allow margins to be maintained. For the ASX 200, the forward price-to-earnings multiple is at 16.9x, which is the highest excluding the COVID period, and over one standard deviation higher than the 20-year average. Australia is not alone in rising equity market valuations but has a much weaker earnings outlook, making it more susceptible to a period of consolidation.
(GTM AUS page 33)
Fixed income:
- The Australian 10-year government bond yield moved down 17bps month-over-month to 3.97%, helping lift the return on Australian bonds by 1.2% over the month. The U.S. 10-year Treasury yield fell by a more muted 4bps to 4.20%.
(GTM AUS page 48) - Global credit markets recorded modest gains. The Global HY bond index was 1.1% higher in March and 2.0% for the first quarter. Meanwhile, the higher quality Global Investment Grade index was 1.2% higher in March but down -0.8% for the quarter.
(GTM AUS page 47) - Spreads in credit markets remain tight, but the improving economic outlook suggests they can remain so.
(GTM AUS page 50)
Other assets:
- Commodity prices were broadly higher in March, led by energy prices. The Bloomberg Commodity index rose 2.9%, as did the price of Brent oil, taking it to USD 87 per barrel in March.
(GTM AUS page 63) - Metal prices were mixed as copper was 4.9% higher but nickel ended 5.2% lower. In precious metals, the price of gold continues to grind higher and ended the month up by 8.1% to USD 2,214 an ounce. Iron ore dropped sharply to USD 110 per ton, 12.3% lower than where it started the month.
(GTM AUS page 66) - The U.S. dollar index was 0.4% higher and the Australian dollar gained 0.2% against the greenback.
(GTM AUS page 68)