Market Summary | February 2024
In February 2024, Australian equities saw a modest increase with the ASX200 up by 0.8%, trailing behind global markets but maintaining a 10.6% growth over 12 months, driven by strong performances in IT, consumer discretionary sectors, and the Mid Cap segment. The company reporting season revealed better-than-expected results, showcasing resilience in the consumer market, effective cost management, and a positive economic outlook, despite challenges from higher inflation and interest rates, particularly affecting the energy, materials, and healthcare sectors.
Global markets, especially in the United States and emerging markets, experienced significant growth, with the S&P 500 and MSCI China index recording notable gains, reflecting solid economic data, strong earnings growth, and supportive governmental measures, despite ongoing challenges such as inflation and the anticipation of interest rate adjustments.
Australia
Australian equities notched a modest return following the January surge. The ASX200 was up just 0.8 per cent in the month, underperforming global markets. Over the 12 months the market is up 10.6 per cent.
Performance was led by IT, up 19.7 per cent, consumer discretionary 9.7 per cent while REITs and banks also fared well, up 4.8 per cent and 3.5 per cent, respectively. However, materials dragged the index down, falling 4.8 per cent, as did energy -5.9 per cent and health care, down 2.5 per cent. Of note was the strong performance from the Mid Cap segment of the market, rising 5.3 per cent compared with the ASX50 which was up just 0.3 per cent.
The February 2024 company reporting season recently concluded and showed stronger-than-expected results despite the higher inflationary and interest rate environment. The dominant themes have been a resilient consumer, strong cost management, moderation in inflation and a positive economic outlook. Many companies have managed the higher inflation and interest rate environment reasonably well, beating market expectations, particularly in the IT, consumer discretionary and real estate sectors. The energy, materials, and healthcare sectors did not fare as well due to falling commodity prices and rising costs. The much-feared fixed interest rate cliff did not flow through to retailers as much as expected, a nod to the resilience of the consumer and the strong financial position of older ( 55 years and over) customers. Disinflation in fruit and vegetables and meat impacted Woolworths. The CBA continued to rise against the backdrop of a resilient economy, minimal bad debts and rising dividends.
The RBA left rates at 4.35 per cent, as expected. The key take-out from the Policy decision, the first press conference from RBA governor Michele Bullock and the February SoMP, could be summarised by Bullock’s comment that “I really welcome the decline in inflation, but so long as it remains above target there’s a risk that inflationary expectations will drift further. That’s a risk we’re concerned about, and it would be costly to address if that happened”. Bullock went on to say “What worries me most is that we don’t manage to bring inflation back down to target without collateral damage in the labour market.” Markets now expect one cut, with an outside chance of a second cut, by end-2024.
United States & Developed Markets
Global markets continued to push higher in February, rising 4.3 per cent, taking many key market indices to record highs. Continued solid economic data, and relatively strong earnings growth supported equities even while bond yields drifted higher on market reassessment of the timing and magnitude of Fed rate cuts.
The MSCI World ex Australia index rose a further 4.3 per cent in USD terms, taking the annual gain to 25.3 per cent. The US market stood out with the S&P500 rising to a record high of 5096 at month-end, a gain of 5.3 per cent. In AUD terms, the global benchmark index was 5.9 per cent higher for the month and just under 30 per cent higher for the 12 months.
With over 90 per cent of S&P 500 firms having reported December quarter results, nearly three quarters have beaten analysts’ earnings forecasts. While the so called “Magnificent 7” stocks have rallied hard over the past 12 months, February was dominated by a 29 per cent gain in Nvidia, as revenue skyrocketed 265 per cent to US$22.1 billion, ahead of estimates at US$20.4 billion. Management provided a very optimistic guidance and expressed the view that margins are continuing to expand. Meta advanced 26 per cent on the back of strong earnings and announcement of the first Facebook dividend while Amazon gained 13 per cent. Markets may be becoming a little more nuanced, with Apple down 2 per cent, Alphabet 1.4 per cent while Microsoft was up 4 per cent.
The Japanese TOPIX rose a further 4.9 per cent to a record high, taking the annual gain to almost 34 per cent, despite news that the Japanese economy was technically in recession. European markets underperformed, with MSCI Europe ex-UK up just 2 per cent for a 14.8 per cent gain over the year. Portugal was off almost 7 per cent while in the UK the market was flat and up just 5.5 per cent for the year.
As mentioned above, earnings have been better than expected, although dominated by the mega cap names. For the overall US market, consensus 12 month forward EPS growth is just under 11 per cent, 8.8 per cent for Japan, 4.4 per cent for Europe and almost 17 per cent for EM.
On the economic data front the news on activity was modestly better. The US ISM index for manufacturing lifted in January, gave up some ground in February , and remains in contraction zone. The US services sector has been resilient. In Europe, the manufacturing PMIs appear to have stabilised. Overall US growth remains solid and consumer spending has held up well. The labour market does appear to be softening but from a very tight starting point. In terms of inflation, most countries have experienced a temporary halt to the disinflation of the past 12 months. The US PCE core prices data for January showed a 0.4 per cent rise, the biggest in a year, taking the 6-month annualised inflation series to 2.5 per cent after having been consistent with the Fed’s 2 per cent target in the previous two months. Services inflation remain too high.
With the economy resilient and most of the disinflation behind us, by early March markets had unwound any expectation of a rate cut in the first half of 2024, and was factoring in a total of three cuts in 2024 and a further 4-5 in 2025 to reach 3.5 per cent by late 2025. This would be some 75 basis points above what many would consider to be “neutral”. Similarly, in Europe, sticky inflation in February may have strengthened the resolve of the ECB to resist calls for an imminent rate cut. Inflation fell to 2.6 per cent in February.
EMERGING MARKETS
Emerging markets had a strong month, led by a bounce in Chinese equities. After hitting a five year low the MSCI China index gained 8.4 per cent in February as the Chinese government announced a number of supportive measures, including a cut to the 5-year loan prime rate, curbs on short selling, and stock purchases by state-owned investment firms. This comes at a time when China reported its smallest annual foreign direct investment inflow since the 1990s and against a backdrop where overseas investors in Emerging markets are seeking to access ETF’s, with China excluded.
In AUD terms the MSCI Emerging markets index was up 6.4 per cent in the month, more than half of the gain achieved over the past 12 months. EM Asia was up 5.9 per cent with Korea up 7.4 per cent and Taiwan 5.5 per cent. India lagged in the month but has been the standout over the year with a 37.3 per cent gain, supported by stable policy settings and solid growth. EM Latin America performed poorly, down 0.2 per cent.
In terms of economic data, the Chinese economy remains weak with the manufacturing PMI showing a modest contraction. Retail sales have lifted, and credit seems to be flowing more readily but the authorities have not gone down the path of traditional fiscal stimulus given already high debt levels and the acknowledgement the focus has to be on the household sector going forward. As noted last month, on a more positive note, China’s exports seem to be recovering, particularly in areas such as autos and renewable energy.
While emerging markets remain cheap in absolute terms and relative to developed markets, the key to a sustained period of outperformance is the maintenance of a higher growth premium over developed markets, together with easing monetary policy and a turn in the economic cycle. Such an environment is easier to envisage now than any time in the past 12-18 months.
Asset Class Returns (last 12 Months)
The above graph summarises the performance of the major financial markets and gives you an indication of how these markets performed over the last 12 months. The graph does not reflect your actual portfolio performance.
*Source Zenith Investment Partners