With another financial year behind us, it is an opportune time to review the past year’s returns.
All asset classes initially faced headwinds as long-term US interest rates reached 5%, the highest level since 2006.
Their October 2023 peak coincided with the market lows.
Global equities surged in the second half, largely on the back of the US technology sector. Gains were led by NVIDIA +192%, Meta (Facebook) +76%, Alphabet (Google) +52%, Amazon +48% and Microsoft +31%.
Strong demand for cloud services and a significant rebound in online advertising are driving current big tech earnings. Investors are also becoming increasingly optimistic about future earnings as big tech invests heavily in disruptive technologies such as Artificial Intelligence.
Encouragingly, after a period of stagnation, global corporate earnings are now on an upward trajectory.
It’s a different situation in Australia. Corporate earnings have decreased due to lower commodity prices impacting the
materials and energy sectors. Big bank earnings have also remained stagnant despite surging share prices.
The chart below shows this disconnect between higher prices and lower earnings. There is clearly a lot of optimism that Australian earnings will soon recover.
International property, infrastructure, and fixed-income index funds have languished, delivering low single-digit returns over the past 12 months.
The protracted period of elevated interest rates has weighed on these asset classes.
The question now is what lies ahead.
We believe equity markets have already priced in the expectation that interest rates will move lower and earnings will accelerate higher over the next 12 months.
Therefore, allocating funds to equities at current levels needs to be done with a level of caution.
We are bullish on selected actively managed global funds that have more defensive strategies and pay high levels of predictable income.
We also favour global infrastructure because of its appealing valuation, resilient earnings, inflation-linked pricing and long-term growth potential.
The Australian economic outlook is more challenging due to persistently high inflation and the likelihood of delayed interest rate relief. This may limit short-term earnings and could result in negative outcomes such as a credit default cycle or recession.
High-quality fixed-income funds remain an important portfolio diversifier, providing some protection in the event of a global economic slowdown or shock.
Above all, we believe investors should continue to focus on quality, liquidity and diversification and avoid relying on a single economic outcome or market theme to drive returns.
Good news on the global economic front.
Have equity markets priced in all the good news?
What looks cheap:
What looks fair value:
What looks expensive:
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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