Market Summary | August 2024

In August, the Australian equity market saw modest gains, driven by strong bank performance despite weakness in miners, energy, and small caps, with inflation data suggesting potential interest rate cuts in 2025. Globally, equities rose, recovering from early declines, supported by disinflation and prospects of rate cuts in the US, with defensive sectors leading the way. Europe outperformed, while Japan lagged due to interest rate hikes. Emerging markets saw mixed results, with China struggling in real estate and manufacturing, but strong growth in India, ASEAN countries, and a rally in Brazil.

Australia

The Australian equity market lagged global equities in August, rising 0.5 per cent to take the year to date gain to 9.1 per cent. Although the bank sector continued to lift, miners and energy were down heavily while the small cap index was off 4.4 per cent.

The market was supported by some good inflation data for July, where the government’s energy measures helped bring down power costs, resulting in a decline in annual inflation from 3.8 per cent to 3.5 per cent. With other areas of the economy struggling, the improved inflation data saw markets price in up to 100 basis points of RBA easing over the coming 12 months, most likely from early 2025. Recent tax cuts, equivalent to around 1.5 per cent of incomes, should also provide a floor for the economy although most observers expect a large proportion of the tax cuts to be used to replenish diminished savings rather than spent.

The earnings season proved to be better than expected as cost control measures and pricing power helped protect margins against a softer demand backdrop. For the financial year, earnings were down more than 4 per cent with the resource sector weak and banks and REITs also down. The industrials sector delivered growth. The outlook for earnings remains very subdued at around 5 per cent growth.

As noted, the bank sector continued to push higher and with forward PE multiples now close to 18 times, the sector trades at an unusually high premium to the broader market and considerably above global peers. Dividend yields are now below cash rates and bond yields. Meanwhile, ongoing weakness in the Chinese property sector and a reluctance by the authorities to implement old-fashioned stimulus continues to undermine iron ore and the resources sector.

United States & Developed Markets

In what was a very eventful month, global equity markets rose 2.6 per cent in August, taking the year to date return to 16.9 per cent in USD terms. With the AUD rising against a weaker USD, the MSCI World ex-Australia index in AUD was up just 0.1 per cent in the month while the hedged version was 2.9 per cent higher. However, that solid performance masks a significant shakeout in the early part of the month. On the back of weak July US labour market data and associated fears of US recession the S&P500 dropped 6 per cent to 5186 by August 5 before rallying to near record highs at 5648 at month-end. At the same time, Japan’s TOPIX index crashed around 21 per cent in the early days of August, including the largest one-day decline since 1987, following the Bank of Japan’s unexpected 0.15 per cent lift in interest rates which in turn prompted an unwind of the so-called yen “carry trade”. By the end of the month however, Japan’s equity market had almost erased those losses.

The recovery over the course of August reflected a more sanguine view of the outlook for the US economy and more soothing comments from the Bank of Japan. The proximate cause of the dive in US and global equities was the rise in the US unemployment rate to 4.3 per cent which triggered the so-called “Sahm rule” which states a recession is indicated when the 3- month average unemployment rate (4.1 per cent) is more than 0.5 per cent above the low in unemployment over the past 12 months (3.5 per cent in July 2023). However, as the month progressed the lack of recession signals from a broader range of indicators, continued disinflation and Fed chairman’s nod to the market in relation to imminent rate cuts helped support the equity market. Some of the mega-cap tech stocks that had suffered from failure to meet extremely high earnings projections also weighed on the market.

For the month the more defensive sectors led the market although so-called Quality stocks also performed well. REITs, utilities, healthcare and consumer staples managed to rise at least 4.6 per cent while IT, communications and consumer discretionary, sectors where the mega-cap stocks reside, rose but still underperformed the market. The MSCI Defensives index rose 4.3 per cent for the month, outpacing growth stocks, up 2.5 per cent.

In USD terms, Europe was the standout, rising 4.1 per cent with Germany leading the way. The UK market performed well, rising 3.3 per cent, helped by a rising pound while as noted earlier, Japanese equities lagged, notwithstanding a rise in the yen.

Despite markets ultimately performing well in August there is some fragility remaining. The mega-cap stocks appear to have lost some upward momentum while the US economy is throwing off mixed signals. Markets are factoring in 200 basis points of Fed rate cuts over the next 12 months which would appear to be aggressive under a soft-landing scenario while the upcoming US election will also become a source of uncertainty.

Emerging Markets

Emerging markets rose 1.6 per cent in USD terms during the month, lifting the year to date return to 9.6 per cent, although in AUD terms the index was down 1.8 per cent in August for a rise of 10.2 per cent this year. The sentiment towards Emerging markets is mixed. While the Chinese economy and equity market continues to exhibit weakness, particularly in the housing and consumer sectors, India and the ASEAN countries are showing more positive signs on growth and inflation. The prospect of lower US rates has also removed the headwind of a stronger USD.

EM Asia was up 1.6 per cent for the month with MSCI China up 1 per cent while Korea was down 2.2 per cent and Taiwan was up 3.4 per cent. EM Latin America had a strong month as Brazil rallied 6.7 per cent after a period of poor performance. Mexico and Turkey were down heavily.

The prospect of imminent and sizeable Fed rate cuts and USD weakness has allowed investors to focus on the higher growth ASEAN markets. MSCI EM ASEAN rose 9.7 per cent in August with rises of at least 9 per cent recorded in the Philippines, Indonesia, Malaysia and Thailand. With the exception of Malaysia, which has benefited from structural reforms and changed global supply chains, these countries have lagged over the past year.

As noted above, the Chinese economy continues with its painful adjustment. New real estate construction is down more than 60 per cent from 2019-20 levels as the authorities and developers deal with an oversupply problem and a lack of household sector confidence. The latest PMI data suggests the manufacturing sector is contracting while the services sector PMI has slowed to a very modest pace.

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