All major asset classes recorded a positive performance in July as expectations of US interest rate cuts grew.
There was a notable shift in equity market leadership from mega-cap technology stocks to smaller companies
trading on cheaper valuations. These companies are expected to benefit more from declining rates.
Despite their name, “US small caps” are still meaningful companies. Equivalent Australian-sized companies include Computershare, ASX, Sonic Healthcare, Qantas, Amcor and South32.
Sustained positive sentiment towards small caps is contingent upon the US/global economy remaining resilient.
July also marked the start of the US Q2 earnings season.
As always, big tech was the main focus. There is a lot of hype surrounding artificial intelligence (AI), which has driven up the valuations of technology companies. Investors are now asking when they will start reaping the benefits of their substantial investments in AI.
The short answer is not for another year or two, as most companies are still in the piloting phase. But sooner or later, big tech will have to show that AI can make real money.
In the meantime, investment in AI-related infrastructure (e.g. data centres and servers) continues at pace. Figures from recent quarterlies show that tens of billions of dollars are spent each quarter.
The fear of missing out or losing market share appears to be a big driver of their decisions. Tactically, this makes some sense.
Alphabet CEO Sundar Pichai sums it up neatly, “not investing to be at the front” of the AI race “definitely has much more significant downsides” for Alphabet.
Meta CEO Mark Zuckerburg concurs, “I’d rather build capacity before it is needed rather than too late”.
After rallying strongly into reporting season, big tech results did not generate much excitement.
Outside of tech, US banks benefited from a surge in investment banking income.
According to Dealogic, global merger and acquisition volumes increased by 20% to US$1.6 trillion in the first half of 2024. This is a significant tailwind for investment banks such as Goldman Sachs and JP Morgan, who earn substantial fees from advising on M&A transactions (and debt and stock underwriting).
This boost helped offset lower net interest income, as banks paid more on customer deposits (higher interest rates).
Banks warned of stress amongst the lower-income consumer segment and set aside more funds for future loan losses.
Global banks have performed strongly on the stock market over the past 10 months. They trade on much cheaper valuations (9x forward earnings) than their Australian counterparts (average 17x).
Many consumer-facing businesses commented similarly that higher prices and slowing wage growth are curtailing spending, particularly among lower-income consumers.
Kraft Heinz noted “consumer sentiment remains cautious” after reporting lower-than-expected sales growth. Consumer goods leader Procter & Gamble is seeing a more discerning US shopper.
McDonald’s reported its first drop in global sales since the pandemic. It suggested that in many cases, the lower- income consumer was “dropping out of the market, eating at home, and finding other ways to economise.”
Starbucks said the “challenging consumer environment” is weighing on cafe sales.
PepsiCo trimmed its full-year revenue outlook, stating it was “related specifically to the consumer in the US”.
The early August sell-off on the equity markets reflects renewed concerns about US economic growth and the possibility that the Fed may be too late in cutting interest rates. Expensive valuations provide a good excuse for investors to reduce risk until the outlook becomes clearer.
We note with interest Warren Buffett-led Berkshire Hathaway’s recent financial report, which showed it had sold almost half of its Apple stake and boosted its cash (and short-term US Treasury holdings) to a record US$277 billion.
Berkshire’s equity holdings represented about 52% of the total porfolio value as of 30 June 2024, down from about 67% on 31 December 2023.
Investor confidence is all that matters.
So, what got investors so excited?
Where to from here is the big question.
Volatility is not your friend.
ASSET CLASS PERFORMANCE
Australian Equities
International Equities
Property and Infrastructure
Fixed Income
As always if you require more information please don’ hesitate to contact me.
Philip Connor-Stead AFP® Adv. Dip. FP
Principal
New Horizon Wealth
Authorised Representatives of Lifespan Financial Planning Pty Ltd ANB 23 065 921 735 AFSL 229892
With a deep understanding of our client’s objectives, we provide tailored solutions to assist clients in achieving their financial goals.
New Horizon Wealth PTY Ltd ACN 632 726 222 is a Corporate Authorised Representative of Lifespan Financial Planning Pty Ltd
AFSL No. 229892
ABN 23 065 921 735
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