Market Summary | March 2024

Australian equities rallied this month but underperformed global markets over the quarter, despite reaching record highs driven by strong sectors like mining and banking. The Reserve Bank of Australia held the cash rate steady, adopting a neutral stance on future rate movements amid improving economic signs, including employment and housing market recovery.

Globally, markets continued to advance, with notable performance in the U.S. and Japan, supported by robust economic data and corporate earnings. Emerging markets showed solid growth but lagged behind developed markets, with Chinese equities facing challenges. Signs of economic improvement in China and monetary easing in some countries offer a hopeful outlook for emerging markets.

Australia

Australian equities tracked global performance, rallying 3.3 per cent in the month, although, for the quarter, they underperformed global developed markets with a gain of 5.3 per cent. Nevertheless, the ASX200 hit record highs during March, propelled by a rally in miners, REITs, energy, insurance, staples, and banks. The earnings outlook appears to have improved, although the consensus is for EPS growth of around just 3 per cent. 

For the quarter, REITs were up 16.8 per cent, insurance 16.9 per cent, food and beverages 20.5 per cent, and IT more than 20 per cent, while banks rose 11.9 per cent. Weaker iron ore dragged materials lower over the quarter, while food retailers also suffered. 

The REITs sector has run hard in recent months after plunging in 2022-23, assisted by signs of a peak in bond yields and cheap valuations. The bank sector is now the most expensive on record, buoyed by a combination of a resilient household and housing sector, signs of a peak in rates, strong offshore flows and cautious investor positioning. Meanwhile, the materials sector, which had been weighed down by a 27 per cent decline in iron ore prices and concerns over China, rebounded as more evidence of a bottoming in the Chinese economy became apparent. 

The RBA maintained cash rates at 4.35 per cent on the policy front, the last rise being in November. RBA governor Michele Bullock suggested the RBA now has an open mind on interest rates, rather than a tightening bias. Michele Bullock said recent data suggested the central bank was ‘‘on the right track’’ in its fight against inflation, but stressed the outlook for the cash rate remained uncertain. It would seem the RBA board’s post-meeting statement pivoted towards a more neutral policy stance, noting ‘‘the board is not ruling anything in or out’’ on the next rate move.

In terms of economic data, the February labour market data showed a bounce in employment and hours worked and a drop in the unemployment rate to 3.7 per cent. Engineering construction continues to recover while house prices are up almost 9 per cent over the year. The NAB business survey shows weak forward orders and subdued confidence, although actual business conditions are not as negative. Inflation was steady in February at 3.4 per cent, with core inflation slightly under 4 per cent. 

The key to the domestic economic outlook is the household sector. After a year in which higher interest rates, higher tax payments and high inflation worked to offset gains in labour income and depress consumer spending, 2024 appears to be more encouraging. Although rate cuts appear some way off, lower tax rates, equivalent to around 1 per cent of incomes, should support consumers as we progress through 2024.

United States & Developed Markets

Global markets rose a further 3.2 percent in March, taking the quarterly gain to 9.1 percent and most key market indices to record highs. Continued solid economic data and relatively strong earnings growth supported equities despite higher-than-expected inflation news, which prompted a reassessment of the timing and magnitude of Fed rate cuts and contributed to a rise in bond yields. 

Unusually, even as risk appetite rose, the AUD declined 4.4 per cent in the quarter, adding to unhedged returns. In AUD terms, the MSCI World ex-Austral index rose a further 3 per cent, taking the March quarter gain to 14.1 per cent, the best outcome since 2013. The Japanese market stood out with the TOPIX up more than 17 per cent in the quarter, although with the yen declining, in USD terms the Japanese market was up by a slightly less impressive 11 per cent. 

The S&P500 ended the month at 5254, a 10.2 per cent rise for the quarter. Although AI chipmaker Nvidia continued to drive market performance, up a further 82 per cent in the quarter, the market has become more discerning across the mega-cap names. Tesla was the worst-performing stock on lower volumes and margins, while Apple was down 11 per cent, partly due to weaker demand for iPhones from China. 

US corporate earnings have been better than expected. Earnings expectations for the first quarter typically decline by 3.9 per cent, according to FactSet; however, the decline this year was 2.5 per cent. For the 2024 calendar year, earnings were revised down just 0.4 per cent during the quarter compared with the 25-year average of -2.1 per cent. Calander year 2024 EPS is projected at US$243.60, a rise of 11.7 per cent and for 2025, US$276.1, a rise of 13.3 per cent. These projections are broadly in line with the long-term average growth rate during expansion phases. 

As noted earlier, Japan’s equity market continued its strong rally. The TOPIX is up 38 per cent for the year, supported by earnings growth of more than 12 per cent, extremely accommodative interest rates, a weak yen, signs that the economy is emerging from more than two decades of deflation and, perhaps most importantly, corporate governance reforms prompting more shareholder focussed corporate behaviour. At 16 times forward earnings, Japanese equities are no longer clearly cheap, but neither would they be considered expensive. The market took the first BOJ rate increase (from -0.1 per cent to 0.1 per cent) since 2007, and the removal of the yield curve control program in its stride, and in fact, the yen was lower following the decision. Nevertheless, further tightening in policy is expected given evidence of the strongest wage growth in 40 years and given inflation has been above the 2 per cent target level for two years. 

On the economic data front, the news on activity was modestly better. After losing some ground in February, the US manufacturing index for March lifted above the critical 50 levels for the first time since October 2022, while GDP growth for the December quarter was revised up to 3.4 per cent. Furthermore, the latest GDP Now estimate for the March quarter is 2.8 per cent. Together with the ISM data, improving capex intentions and ongoing resilience in the labour market, the case for the “higher for longer” scenario looks more compelling. US inflation data has also deteriorated over the past two months, with the core PCE price index averaging 0.3 per cent in the past two months, from sub-0.2 per cent outcomes in the second half of 2023. These has seen markets remove at least three prospective rate cuts from 2024, with the Fed funds rate expected to reach 4.7 per cent by end-2024 and 3.6 per cent by 2026. The March quarter FOMC meeting updated growth projections to slightly above trend while the long-run Fed funds estimate was lifted to 2.6 per cent. 

Meanwhile, European activity appears to be stabilising, albeit at subdued levels, while inflation continues to decline, raising the prospect of policy easing in the second half of 2024.

On a sector basis, the more cyclical sectors performed well during the month and quarter with construction materials up a further6 per cent, banks 7.3 per cent, materials 6.5 per cent and retailers 2.9 per cent. Energy benefited from the jump in oil prices, up 9.1 per cent. For the quarter, construction materials are up almost 20 per cent followed by retailers, IT, communications services and banks.

EMERGING MARKETS

Emerging markets had a solid month but lagged global developed markets as Chinese equities struggled to hold on to recent gains. In AUD terms, the MSCI Emerging Markets index was up 2.3 per cent in the month, with EM Asia up 3 per cent, including a strong performance from Taiwan and Korea. For the quarter EM in AUD terms was up 9.4 percent, with Taiwan leading the way. The Chinese market was down 2.2 percent for the quarter. 

In terms of economic data, the Chinese economy is showing signs of improvement. The Chinese Caixin manufacturing PMI lifted to 51.1, a 13-month high, while the official PMI new orders index hit 53 from 49. Retail sales rose 5.5 per cent and industrial production rose 7 per cent, both above expectations. 

While emerging markets remain cheap in absolute terms and relative to developed markets, the key to a sustained period of performance is the maintenance of a higher growth premium over developed markets, together with easing monetary policy and a turn in the economic cycle. On this score, there are signs that the global manufacturing cycle is turning, while during the month, Mexico, Brazil, and Hungary cut rates as inflation declined and domestic conditions remained stable.

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