31 Jul Monthly Commentary: July 2024

Market Trends: The tug of war continued in June

The tug of war between growth and value exposures continued in June, with relative performance still broadly correlated with the movement in bond yields.

Indeed, the decline in bond yields encouraged a stronger rotation back into growth/technology/quality exposures in June at the expense of more value-oriented exposures such as energy and financials. Flat gold prices over the month also led to a pullback in global gold miners following strong performance.

On the value side, global banks eased 0.8%, while energy producers declined 1.5%. Global gold miners dropped 3.7%.

Offsetting these movements, the NASDAQ-100 returned 6.2% in AUD-hedged terms, while hedged global quality returned 3.4%.

With a return to more benign US inflation reports, along with ongoing euphoria around AI, the equity outlook remains encouraging despite higher valuations – especially in the US market.

Our hypothetical Balanced portfolio returned 1.1% in June, reflecting gains in both growth and defensive assets as bond yields eased further. A return to more benign US inflation reports was
the major driver of market returns over the month, while concerns over European far-right politics was the major drag.

Defensive assets rose 0.7%, reflecting modest gains in Australian and global fixed-rate bonds as bond yields fell. Gold prices were flat, reflecting some consolidation after recent strong gains.
Bond yields have moved broadly sideways since late 2022.

Growth assets rose 1.4% – the same as in May – with global equities in unhedged AUD terms returning 1.8%. The trend in global equities has been upwards since bottoming in late 2022.

Despite the decline in bond yields, the interest rate sensitive local listed property sector returned only 0.2%, while Australian equities returned 1.0%. The trend in the relative performance of both
Australian equities and bonds remains downwards since the bottoming in equity markets (and peak in global inflation) in late 2022.

Global Bonds

The Bloomberg Global Aggregate Bond Index (AUD hedged) returned 0.8% in June, in line with May’s returns, reflecting a further retracement in global bond yields. US 10-year bond yields declined 0.10% to 4.40% p.a. after having declined by 0.18% in May.

In turn, this reflected further good news on the US inflation front, with the May CPI coming in a touch lower than expectations. There was a further modest increase in US rate cut expectations over the coming year.

German bond yields eased, with the European Central Bank following through with an expected rate cut during the month. Japanese bond yields were flat.

Credit spreads remain reasonably tight, with a further modest rebound in emerging market spreads, though a small decline in high-yield corporate spreads.

All up, the yield-to-maturity on the Bloomberg Global Aggregate Index declined by 0.07% to 3.90% p.a.

Global Equities

Lower bond yields contributed to a further rebound in the MSCI All-Country World Equity Return Index of 2.5% in June on a hedged (local currency) basis, following a 3.7% increase in May.

There was a small tick down in FY24 and FY25 earnings expectations, leading forward earnings to rise on 0.3% after a 2.3% gain in May. Lower bond yields, however, allowed the forward-PE ratio to rise 2.1% to 17.7%.

The equity risk premium edged lower to (a still relatively tight) 1.25%.

In unhedged AUD terms, global equities rose by 1.8%, reflecting a firmer AUD over the month. On an unhedged basis, global equities have returned 19.0% over the past year.

With a return to more benign US inflation reports, along with ongoing euphoria around AI, the equity outlook remains encouraging despite higher valuations – especially in the US market. Signs of slowing in US economic growth and/or political tensions (Trump and the rise of the Far right in Europe) are new risk factors to monitor.

Global Sector/Factor Trends

The tug of war between growth and value exposures continued in June, with relative performance still broadly correlated with the movement in bond yields.

Indeed, the decline in bond yields encouraged a stronger rotation back into growth/technology/quality exposures in June at the expense of more value-oriented exposures such as energy and financials. Flat gold prices over the month also led to a pullback in global gold miners (MNRS) following strong performance.

On the value side, global banks (BNKS) eased 0.8%, while energy producers (FUEL) declined 1.5%. Global gold miners (MNRS) dropped 3.7%.

Offsetting these movements, the hedged Nasdaq 100 ETF (HNDQ) returned 6.2% while hedged global quality (HQLT) returned 3.4%.

Global Regional Trends

Along with the rebound in growth/technology, US equities produced a relatively strong performance again in June, with the S&P 500 up 3.6%. Not helped by a lunge to farright parties in EU and French elections, European stocks underperformed, with HEUR and H100 ETFs down 2.3% and 1.1% respectively.

Over the past six to 12 months, the strongest relative performance has been in Japan (HJPN) and the US (S&P 500). America’s performance is related to the ongoing strength in growth/technology exposures, whereas Japan’s performance can be attributed to relative cheapness, a weak Yen, and solid corporate earnings as more companies focus on improved shareholder returns.

Australian relative performance remains in a downtrend, with the A200 ETF only returning 1.1% in June.

Australian Cash and Bonds

Despite a modest increase in near-term official rate hike risks, declining global bond yields flowed through to the Australian market in June, allowing the Bloomberg Australian Bond Composite Index to return 0.8% – in line with that from global bonds in AUD hedged terms. Cash returns, according to the Bloomberg Bank Bill Index, lifted another 0.4%.

There was a small 0.08% increase in one-year ahead of official cash rate expectations over the month, reflecting somewhat more hawkish rhetoric from the Reserve Bank concerning potentially sticky inflation. Local 10-year government bond yields, however, still managed to ease 0.10% to 4.31% p.a.

Indeed, fixed-rate bonds have experienced choppy sideways performance against cash since the peak in bond yields in October last year.

Corporate credit spreads ticked higher in the month, though still within a broadly declining trend since late 2022, which has allowed corporate bonds to outperform government bonds.

Australian Equities

The S&P/ASX 200 Total Return Index rose 1.0% in June after a 0.9% gain in May. The market ended the month still above the trading range it was stuck in for the previous few years.

Forward earnings declined by 0.5% in the month, reflecting further downgrades to expected earnings growth. Forward earnings are down 3.0% over the past year, and it’s the weakness in earnings that largely accounts for the underperformance of the Australian market versus global peers.

At 16.5, the forward PE ratio is at the top end of its range over recent decades (apart from the COVID period spike).

Given positive expected earnings growth in FY25, forward earnings should rise over the coming year, but at this stage not as much as expected by the global market. The recent downtrend in earnings expectations, due to sluggish economic growth and renewed rate hike fears, is also concerning.

Australian Equity Themes

Within the Australian sharemarket, technology (ATEC), financials (QFN) and quality (AQLT) delivered relatively strong performances again in June – as has been the case over the past year – whereas small caps (SMLL) and resources (QRE) have tended to underperform.

The global trend towards technology and quality is being reflected in the Australian market, while the prospect of eventually lower local interest rates and a stronger housing market appear to be supporting financials. China woes continue to hold back resource stocks.

This article was originally produced by David Bassanese from BetaShares. You can read the full article here.

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