October
2024
Market Update

EXECUTIVE SUMMARY

  • All major asset classes gained in September as the US Fed cut interest rates and China announced a significant stimulus package.
  • Chinese equities and Australian resource equities outperformed.
  • Sustainably higher commodity prices would benefit the Australian equity market and economy.
  • The RBA is still talking about persistent inflation while other central banks focus on jobs and growth.
  • Investor attention will soon shift to the November 5th US Presidential elections.
  • The significant policy differences between Harris and Trump, make the outcome important for markets.

MARKET SUMMARY

September was another eventful month for investors, highlighted by the US Federal Reserve’s first interest rate cut in over four years.

The other big news was the Chinese government’s announcement of a comprehensive stimulus package to stabilise the property market and bolster the economy. The barrage of easing measures covered many areas, including rate cuts, further relaxation of housing regulations (mortgages and downpayments), allowing companies to use the central bank’s funding to buy back shares and more support for buying unsold homes.
This is China’s largest stimulus since the pandemic and authorities have flagged that further stimulus would be forthcoming if necessary.
Such strong actions and messaging have us thinking back to 2012 when European Central Bank (ECB) President Mario Draghi promised to do “whatever it takes” to preserve the euro. This marked the turning point in the European sovereign debt crisis. Does Beijing share the same determination to support a full economic recovery?

Investors seem to think so, driving Chinese equities +23% higher in September. Chinese equities have been trading on a low valuation of about 10x forward earnings compared to their global developed market counterparts (18x). This gap is now being narrowed as confidence in China’s economic outlook improves.

These developments once again highlight the advantages of portfolio diversification. Chinese equities typically have an approximate 25% weighting in Emerging Market ETFs such as the Vanguard FTSE Emerging Markets ETF (ASX: VGE).

The actions taken by the US Fed and China support the global growth outlook and have provided a welcome boost to commodity prices. Australian resource equities are back in favor, while expensive banks have sold off.

We all know of the kicker to BHP, Rio Tinto and FMG’s profits from higher iron ore prices. Sustainably higher commodity prices would have broader positive implications for the Australian equity market and economy.

We note the recent comments made by ALS Limited (ASX: ALQ), a leading Australian analytical testing provider. The company has observed decreased activity in its geochemistry (assays) and metallurgy business. Lower assay demand reflects reduced exploration spending, stemming from challenges in raising capital due to negative investor sentiment.

Not even a sky-high gold price has been enough to revive the IPO market. In the first nine months of 2024, just 12 new resource/energy companies have hit the boards, well down from 25 in 2023 and 70 in 2022.

Gold continues to perform strongly, surpassing the US$2,600/oz mark for the first time in September. A lower US interest rate outlook (and a softer US dollar), escalating Middle Eastern conflict and uncertainty over the upcoming US Election have provided support.

Gold equities have yet to really take off, simply mirroring the movement in the price of the yellow metal.

Central Banks are cutting rates…but not Australia.
  • Global central banks have commenced the interest rate-cutting cycle as they become increasingly confident in the inflation outlook and wary of the economic risks from holding rates too high for too long.
  • Nowhere is this more evident than in the US, where the Federal Reserve has a dual mandate of maintaining price stability with a 2% long-term target and achieving full employment.
  • As the inflation rate nears target, the Fed has shifted its focus to the labour market.
  • At the recent Jackson Hole Symposium, US Fed Chair Powell acknowledged the significant slowdown in the jobs market, adding the Fed did not “seek or welcome further cooling.”
  • Powell has declared, “The time has come for policy to adjust.”
  • On September 18th, these words were made a reality as the Fed cut US rates by 0.50% and flagged further easing in the months ahead.
  • The Fed is not the first major central bank to cut rates:
    • The European Central Bank has cut rates by 0.50%.
    • The Bank of Canada has cut rates by 0.50%
    • The Bank of England has cut rates by 0.25%.
    • The Reserve Bank of New Zealand has cut rates by 0.25%.
  • The Reserve Bank of Australia (RBA) is an outlier insisting “it is premature to be thinking about rate cuts” and has signalled that interest rates will not be cut this year.
  • We need to remember that the RBA did not raise rates as high as many of its peers and today faces a more stubborn inflation problem.
  • The good news is that global central banks have plenty of ammunition to manage an economic slowdown.
  • The challenge is finding the right balance between too little (risking recession) and too much (risking an inflation resurgence) policy support.
  • Policymakers are remaining flexible and as ‘data-dependent’ as ever.

 

Countdown to the November 5th US elections!
  • Investors often ask, how much do politics affect the markets?
  • The answer is politics do have an impact, but the extent to which can vary widely.
  • An extreme example is Argentina, where its stock market has more than doubled since President Javier Milei took office in December 2023 and initiated vast economic reform.
  • As the Harris-Trump showdown approaches, we look at some key policies each candidate has put forward.
  • Ultimately, it is the policies that are enacted into law in 2025 that are most important. These will reflect the election outcome (Senate and House composition).
  • Proposed policies have many moving parts – some tend to be inflationary and others deflationary – which will feed into the economy, corporate earnings and Central Bank policy.
  • Significantly different proposed tax policies have caught our attention. All else equal, a Trump victory would appear more equity market-friendly.
  • Personal taxes
    • Harris proposes to cut taxes for lower and middle-class households.
    • Harris proposes to raise taxes on capital gains for higher-income individuals and impose a tax on unrealised capital gains on the ultra-wealthy.
    • The latter could encourage these investors to sell stocks before the end of the year to avoid this potential new tax.
    • Trump proposes to extend the 2017 tax cuts (set to expire at the end of 2025).
  • Corporate taxes
    • Harris proposes to raise the corporate tax rate to 28% (from 21% currently). This would have a direct impact on valuations because it reduces future earnings.
    • Trump proposes to cut the corporate tax rate to 15% for companies that “make their products in America”.
  • Tariffs/Trade
    • Harris may seek to expand tariffs on Chinese imports. Although allies in Europe, Asia and North Ameri- ca may be spared.
    • Trump has proposed expanding tariffs on nearly all imported foreign goods with significantly higher tariffs on Chinese goods. Significantly higher tariffs would feed into higher prices, risking higher inflation.
  • Energy Policy
    • Harris is likely more supportive of renewables and EVs (and less friendly to oil/gas/coal).
    • Trump may seek to wind back some renewable energy and EV incentives.
    • Trump proposes to expand drilling for oil and gas, provide tax breaks and speed up the approval of associate infrastructure (e.g. pipelines). Trump says a more abundant energy supply will lower inflation/cost of living pressures. Cheaper energy costs are deflationary.
  • Immigration Policy
    • Harris proposes “immigration reform”, adding to the labour supply. More labour supply is deflationary.
    • Trump proposes to curb immigration.
  • Government Debt/Deficits
    • Ultimately, it depends on the mix of policies implemented in 2025.
    • Neither candidate is campaigning to rein in spending or government debt (which will be an issue for markets to absorb down the track).
  • Finally, we remind investors that markets prefer a clear-cut result that provides certainty on election night or in the days following.
  • A contested result and drawn-out ballot counting would raise the risk of domestic political violence (in addition to an already challenged geopolitical backdrop), potentially unsettling markets.

ASSET CLASS PERFORMANCE

Australian Equities
  • The S&P/ASX200 Index returned +2.97% in September, marking the fifth consecutive month of gains (total return).
  • At a sector level, Materials +11.01% performed best as mining stocks rallied strongly to China’s stimulus and higher commodity prices. BHP gained +12.73% and Rio Tinto (ASX: RIO) +15.76% for the month.
  • Information Technology +7.36% and A-REITs +6.47% were the next best-performing sectors.
  • Defensive sectors performed worst. Health Care and Consumer Staples declined by -3.82% and -2.98% respectively. Consumer Staples’ weakness was partly due to the ACCC’s court action against Woolworths (ASX: WOW) and Coles (ASX: COL) for allegedly ‘price gouging’.
 
International Equities
  • The MSCI All-World Index gained +1.93% in September and has returned an impressive +32.55% in the past 12 months.
  • US markets performed well in September. The Nasdaq advanced +2.76%, the S&P 500 Index +2.14% and the Dow Jones Industrials Average +1.96%.
  • European equity market returns were more muted. The S&P Europe 350 Index gained +0.40%. Economic data reinforced the sluggish nature of the eurozone recovery so far this year. The German manufacturing sector is a notable weak spot amid both weak demand from China and rising competition from cheaper Chinese exports.
  • After an eventful August, the S&P Japan 500 Index stabilised adding +0.55%.
  • Emerging market equities outperformed. The Dow Jones Emerging Market Index gained +7.87% in September thanks to a massive +22.85% rally in the S&P China500 Index.
Property and Infrastructure
  • Interest rate-sensitive asset classes continued to perform well as investors became more confident in future rate cuts.
  • Australian Property surged +6.58% as Goodman Group (ASX: GMG, 39% of the Index) rallied +10.75%.
  • International Property and International Infrastructure gained +3.91% and +3.39%, respectively.
 
Fixed Income
  • The Bloomberg Australian Bond Index gained +0.31% in September.
  • The 10-year Australian government bond yield eased slightly to 3.96% from 3.97% in August.
  • Despite no urgency from the RBA to commence the easing cycle, markets are pricing in 1% of Australian rate cuts over the next 12 months (moving in sync with other major developed market central banks).