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Key takeaways

  • The US Federal Reserve (Fed) cut interest rates by 0.5% to 4.75 – 5.00% p.a. as confidence grew
    around the inflation outlook. Several European regions, Canada and New Zealand also cut rates
    during the quarter.
  • The Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35% p.a. noting that inflation
    concerns have eased according to the latest quarterly core readings.
  • China’s policymakers pledged necessary fiscal expenditures to meet this year’s economic growth
    targets and address the decline in the property market.
  • Looking ahead, we do not expect the US to enter a recession as consumer and corporate balance
    sheets remain strong, and growth across emerging economies are expected to be supported by
    government policy measures.
  • We favour emerging markets over developed markets due to their more appealing valuations
    and promising economic prospects.
  •  In Australia, we expect growth to remain weak and favour Australian government bonds, as cash
    rates have likely peaked this cycle.

Economic review

Australia: RBA remains vigilant to upside risks to inflation despite weak
growth

  • Economic activity remained weak over the quarter. Q2’24 GDP was 0.2% Quarter-on-Quarter (QoQ), bringing the Year-on-Year (YoY) rate to 1.0%, driven by weak household consumption.Business survey responses indicated slowing conditions, with retail facing the most challenges.
  • The trimmed mean CPI (the RBA’s preferred measure of inflation) rose by 0.8% QoQ in Q2’24, down from 1.0% QoQ in Q1’24, easing concerns about accelerating underlying inflation in Australia. More recent inflation indicators have also eased, driven by the government’s energy rebate for households.
  • The RBA kept interest rates unchanged at 4.35% p.a. over the quarter noting it “remains vigilant to the upside risks to inflation” effectively pushing back against expectations for an interest rate cut in the coming months

Market review

Equity markets end higher despite some volatility

  • International Shares overall continued to produce strong returns. The quarter saw some volatility, with markets initially declining due to fears of a US recession before recovering as the Fed began cutting interest rates.
  • International Small Caps performed well as investors rotated from International Shares.
  • Emerging Market Shares also performed well as investor optimism rose following the pledge from Chinese policymakers to address the decline in their property market. Fixed income markets rally
  • International Government Bonds rose due to US recession concerns and anticipation of a

US interest rate cut.

  • Australian Government Bonds also produced positive returns but lagged behind International Government Bonds as the RBA kept interest rates unchanged and noted it did not foresee a near term rate cut. Commodity markets experience mixed results
  • Gold prices hit a record high as central banks cut interest rates internationally.
  •  Industrial metals like iron ore ended the quarter slightly lower due to weak economic data from China, despite a late recovery after Chinese policymakers pledged to stop the decline in property markets.
  • Oil prices ended the quarter lower, despite rising tensions in the Middle East, due to speculation of supply increases by OPEC+.

Market Insights

Australia: RBA unlikely to commence a series of interest rate hikes

  • We expect high interest rates and cost-of-living pressures to keep household consumption and economic growth suppressed.Core inflation is expected to decline at a slower pace compared to other developed economies due to pressures in residential rental markets.
  • While the RBA has indicated vigilance against inflation risks, we do not believe it will commence a new series of hikes. Rather, we believe that interest rates have likely peaked this cycle.
  • We favour Australian government bonds over cash with interest rates likely to have peaked this cycle.

International: Soft landing expected for the US

  • We expect international economic growth to remain resilient but regionally divergent.
  • We do not expect the US to enter a recession but anticipate slowing yet positive growth, with corporate and consumer balance sheets remaining strong.
  • We expect US inflation to slow further, driven by a decline in services inflation, and expect the Fed to continue cutting rates. The market’s expectations for US interest rates cuts appears excessive.
  • We expect China’s growth to improve from its current slow pace, supported by favourable government policies. Other emerging economies will also benefit from these policies and their own central bank policies, aiding their growth.
  • We favour emerging markets over developed markets due to their better economic prospects and more attractive valuations.

Performance

Asset class

▲Australian Shares

  • Australian Shares rose as investor optimism for international interest rate cuts grew and Chinese authorities announced policy measures to support its property market.
  • Against this backdrop, interest rate sensitive sectors such as Real Estate performed well. The Materials sector also did well in the quarter, supported by a late recovery in industrial metals prices.
  • Australian Small Caps also performed well driven in part by a strong contribution late in the quarter from the Materials sector which benefited from the rise in precious and industrial metals prices.  

▲International Shares

  • International Shares ended the quarter higher,recovering from an earlier decline as US recession concerns eased and the Fed began cutting interest rates.
  • Utilities and Real Estate were the best performing sectors, supported by interest rate cuts and a decline in government bond yields internationally.
  • Emerging Market Shares performed well, recovering late in the quarter as Chinese policymakers pledged to address the decline in their property mark

▲Fixed Interest

  • International Government Bonds produced healthy returns as concerns about the US economy rose and expectations for US interest rate cuts increased.
  • International Credit and Emerging Market Debt also performed well, supported by the decline in government bond yields internationally and increased investor risk appetite following the US interest rate cut.
  • Australian Government Bonds produced positive returns but lagged International Government Bond returns as the RBA kept interest rates unchanged.

▲▼ Real assets

  • Rising anticipation of US interest rate cuts and declining bond yields boosted listed real asset markets with Australian Listed Property, International Listed Property and International Listed Infrastructure all recording strong returns for the quarter.
  • Australian Unlisted Property was down due to downward valuation adjustments, especially in the Office sector.

▲▼ Currency

  • The Australian dollar (AUD) recorded mixed performance against major currencies over the quarter.
  • The AUD appreciated against the US dollar, with the latter depreciating in anticipation of Fed interest rate cuts, while the AUD depreciated against the Japanese Yen as the Bank of Japan raised interest rates and signalled more increases ahead

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