Welcome to the Spring edition of On the Marc. In this edition, we will review markets for the first quarter of the 2025 financial year and consider the outlook for the foreseeable future.

Market update 

Global markets moved higher in the first quarter of the new financial year as inflation data in most major markets continued to trend lower and as central banks stepped up interest rate cuts. The US Federal Reserve (Fed) announced a 50 basis points (bps) interest rate cut in September, with a further 50bps in cuts expected before the year-end. Fed Chair, Jerome Powell, noted the committee’s growing confidence that inflation is moving back towards its target, allowing a greater focus on improving the slowing labour market. This eased investor fears of a recession and led to the US 10-year bond rate falling below 4% for the first time since February 2024.

Markets were supported further by China announcing a broad range of fiscal and monetary stimulus measures intended to correct housing oversupply, improve consumer sentiment and achieve a moderate rebound in economic activity. The Chinese Shanghai Shenzhen CSI 300 index rose 25% in the five trading sessions post the stimulus announcement, offsetting losses in July and August and resulting in 16% gains over the quarter. The below chart shows global market returns for the US, developed world excluding the US, emerging markets excluding China and China since the start of 2020.

Source: DNR Capital 2024

The Australian market returned 7.8% in the quarter. Technology (+16.1%), Property (+14.5%) and Materials (+10.8%) were the strongest performers, while Energy (-6.2%), Utilities (-1.2%) and Healthcare (+0.3%) lagged. The Technology and Property sectors were supported by lower bond yields, as the Fed started its easing cycle. The Materials sector rallied on the back of the China stimulus announcements. Meanwhile, Energy was impacted by concerns over weaker global growth and potential excess supply.

We continue to contrast this with Australia, where growth remains close to zero, with the modest growth there is being driven by the public sector. The Westpac Consumer Confidence Index dropped by -0.5% to 84.6 in September, while the NAB business confidence index fell 4.6pts to -3.9. Headline inflation did fall to 2.7% year on year in August (from 3.5% year on year in July). This reading, however, was heavily distorted by temporary energy subsidies, which subtracted 60bps, and volatile fuels another 40bps. Core inflation (the measure the RBA acts on) is making slower progress with an easing to 3.4% year on year, and is still a long way from the RBA’s 2.5% target. The first RBA cuts is expected to occur in the 2025 calendar year.

The September quarter also included the ASX’s FY24 company reporting season. FY24 earnings came in slightly better than expectations with marginally more beats than misses. Margins were the key driver of the better results. The issue was that guidance was cautious with 41% of FY25 outlook statements below consensus while only 9% were above expectations.

A major positive theme to come through was that the Australian consumer has remained resilient. On the negative side, wages and energy costs are squeezing margins for many companies. The impact of higher rates on more leveraged firms was also apparent, particularly in resources. While the consensus outlook is for modest growth in the market’s earnings over the next three years, the dispersion in growth expectations is widening.

Market returns for major indices

Below is a table showing the percentage returns of the major market indices to 30th September 2024.

Source: Bloomberg, Lonsec

The outlook for the year ahead 

The US economic outlook remains solid and there is hope that China’s economic momentum may improve. Despite the positive outlook, many investors remain concerned about the impact of the US election. There have been many studies regarding the impact on markets of events such as elections and rate cuts. The key conclusion is that following events such as rate cuts or elections, the market direction actually tends to be driven by the underlying direction of the economy, rather than the event itself. The stock market generally performs better over the short to medium term when the outcome of an election is to elect a president from one party while a different party secures a majority in congress. The logic is that this outcome tends to lead to less legislative change, which provides companies and households greater certainty to invest and spend.

The announcements regarding fiscal policy by various arms of the Chinese government have so far been vague and have emphasised the quality of the growth that the government is looking to deliver. This stands in contrast to some previous stimulus programmes which emphasised the quantity of growth by repeated investment in traditional manufacturing and infrastructure. There will likely be some infrastructure spend on urban redevelopment, however, the focus may be on more modern projects such as electric vehicle infrastructure and data centres. This may deliver more of a boost to copper demand than the traditional infrastructure and basic industries investment, which was steel and iron ore intensive. It’s therefore unclear how much the ASX resource sector, which is comprised largely of iron ore, will stand to benefit.

The geopolitical risks in the Middle East pose a greater threat to the stock market. Hopefully the conflict reduces at some point.

The outlook for the Australian economy is for growth to remain subdued in the coming months due to weak household spending (due to interest rates). However, growth is expected to increase in the 2025 calendar year due to stronger government spending and higher household consumption on the back of a reduction in the cash rate. The below chart shows the essential and discretionary spending by households in the past year. The younger age groups (areas 1 & 3 below) have increased spending through eating into their savings while the older age groups (area 2) have increased discretionary spending while also managing to increase their savings (thanks to higher interest rates on term deposits and positive investment returns from shares and property).

Source: Pendal Group

Did you know?

The latest rankings of how banks are adopting A.I., compiled by the data start-up Evident Insights, shows more institutions making strides in key areas, including hiring and research.

How Evident ranked the banks. The company rated them in four main areas — talent, innovation, leadership and transparency — using publicly available data. It looked at 50 lenders across North America, Europe, Asia and Australia.

Below are the top 10 banks:

  1. JPMorgan Chase (U.S.)

  2. Capital One (U.S.)

  3. Royal Bank of Canada (Canada)

  4. Wells Fargo (U.S.)

  5. Commonwealth Bank of Australia (Australia)

  6. UBS (Switzerland)

  7. HSBC (Britain)

  8. Citigroup (U.S.)

  9. TD Bank (Canada)

  10. Morgan Stanley (U.S.)

Final reMarc

The potential market impacts from the US election, the candidates in the US election are actually very similar in many policy areas. The key differences are regulation and taxes, where Trump is pro de-regulation, small government and reduced taxes. A Trump election would likely have a positive impact on small business confidence, US domestic investment and lower energy prices. It would also likely lead to higher tariffs, which would be inflationary in the US (and deflationary in China), however this impact would likely take time to come through. A Democratic Party candidate election would boost union membership and companies in the renewables space requiring subsidies.

While economic growth is slowing, it remains at a reasonable level, particularly in the US. Inflation is also moderating, which provides ample room for central banks to reduce interest rates. Fiscal policy should remain supportive, with elections approaching in the US and Australia. This provides an economic backdrop for well-run companies that have reinvested in their business to continue to grow earnings and deliver solid returns.

" Be stubborn on vision, but flexible on details. "

Jeff Bezos

Key Facts & Figures

  1. The Australian Cash Rate was kept on hold in July at 4.35%.

  2. The RBA Cash Rate is likely (90% chance) to remain on hold in November when the RBA next meet (10% chance of a rate cut).

  3. Our annualised inflation rate is 3.8%. This is well above the upper end of the RBA’s target band of 2 - 3%.

  4. Australia’s unemployment rate is 4.1%.

  5. The US Federal Reserve cash rate band is 4.75% and 5.00%.