From our last update - FY 2024/25 Outlook - as at 30 June 2024

This summary reviews the first quarter of the current financial year 2024/25 – ending 30 September 2024. 

From our last update - FY 2024/25 Outlook - as at 30 June 2024

In our Financial Year-end Portfolio Update, our Outlook for 2024/25 was summarised as follows:

• Equities appear expensive and may experience some volatility if any inflation / interest rate surprise arises.some text
  • On balance there appears to be more downside risk than upside risk.

• High credit quality floating interest rate securities may continue to deliver reasonable relative returns.
  • On balance there appears to be more upside risk than downside risk.

• High Credit Quality Fixed interest rate securities may deliver good, single digit returns – with the extent of these returns being negatively impacted by higher inflation / delayed interest rate reductions / a developing aversion to US Treasuries based on perceived risk.

• Unlisted assets are likely to continue to see valuations falling through the year - as this readjustment has yet to complete.

• We do not expect any return or liquidity surprises associated with the larger non-bank lenders– but keep an eye out on bank arrears as an indication of the arrears outlook for non-bank lenders. This point in the cycle is when lending books are under the most pressure.

Quarter 1 FY 2024/25 in Review

We reflect below on the first quarter – which is no indication of how the year itself may unfold.

In brief for the 3 month period from 30 June to 30 September 2024, asset class performance has been as follows:

Equities

• Australian Shares +7.8%
• Global Shares +2.7%
• US S&P 500 +1.9%
• Nasdaq100 (Fund NDQ) -3.9%

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Interest bearing Securities:‍

• Defensives (High Credit Quality):
  • Medium Duration Fixed Interest +4.1% approx.
  • Short Duration Fixed Interest +2.6% approx.
  • No Duration Fixed Interest +1.3% approx.
  • Hybrids (Fund - HBRD) +2.1%
  • Bank (3 month term deposit) +1.2% approx.

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• Risk (Lower credit quality / trading risk):some text
  • Private Credit (Fund – MXT) +1.5%
  • Long Short (Hedge) +1.9% approx.
  • loating Rate (Hedge) +1.8% approx.

We show a line graph below which shows clearly the different volatility associated with Shares (A,B,C,G) vs Risk orientated Interest securities (D,E,F). Note especially the behaviour over the August Flash Crash.

Market conviction that inflation is under control and that the next move in interest rates was likely downward was confirmed by Central Bank interest rate reductions in most countries - with the notable exceptions of Japan and Australia.

For a moment in early August, it appeared as if the US economy was slowing more rapidly than was expected (with a possibility of a recession), at the same time that Japan increased interest rates due to their concerns that inflation was not under control.

This combination led to the August flash-crash as previously communicated.

Inflation in Australia remains stubbornly high - albeit apparently declining because of certain short- term and temporary factors associated with State and Federal energy relief. Interest rates in Australia were never raised to the same extent experienced in the US, NZ, the UK or the EU - where rates have been as much as 0.5% to 1% higher than the RBA

Whereas inflation appears to have come down quickly in those economies, the Reserve Bank of Australia remains concerned about inflation (even if the economy appears to be slowing). By extension, Australia may be 5 – 6 months away from its first interest rate reductions.

Post September data suggests that the US economy is performing more strongly that thought – with the result being that the extent of further interest rate reductions may be more moderate than was recently expected. A strongly performing economy is generally good for shares (via strong company profits) as reflected in the graph above - with Australia performing particularly well because of economic stimulus announcements in China – which were expected to benefit Australian company profits looking forward. The Magnificent 7 on the Nasdaq and S&P 500 had run ahead of themselves to June 2024, with the developing sense that smaller companies offered better value. A move from large companies to small companies hurt the Nasdaq given the dominance of the large Tech companies. The rotation from Large to Small can be seen in the graph below.

Interestingly throughout the quarter the geopolitical outlook has darkened considerably. Immediately post the October 7 atrocity, fears of a wider regional war weighed heavily on markets. Arguably we are there now, and market appear to be unconcerned.

Our Outlook as at Financial Year end 30 June 2024 remains valid.

To the extent that shares have continued to run up it appears as if there remains more downside than
upside.

• An unexpected recession / a geopolitical risk event– including the US election – may trigger
  volatility.
  • This would contribute to USD strength and AUD weakness.
• All things being equal – a soft economic landing and good corporate profit growth appears to
  already be in the price.
  • A disappointment associated with indicative Chinese economic stimulus could trigger
    Australian share volatility and possible AUD weakness.

Portfolio returns

For broadly diversified portfolios, the mix of Growth and Defensive assets will be the primary determinant of the returns for the Quarter.

Higher allocations to Australian shares, small companies and Fixed Interest securities would elevate achieved returns, whereas higher allocations to the Nasdaq, US or Global Shares would suppress achieved returns.

We show in the graph below proxy returns - before administration and adviser costs, and taxes - for the following portfolio types:

Equities:

• Australian Shares +7.8%
• Global Shares +2.7%
• US S&P 500 +1.9%
• Nasdaq100 (Fund NDQ) -3.9%

Interest bearing Securities:

• Defensives (High Credit Quality):
  • Medium Duration Fixed Interest +4.1% approx.
  • Short Duration Fixed Interest +2.6% approx.
  • No Duration Fixed Interest +1.3% approx.
  • Hybrids (Fund - HBRD) +2.1%
  • Bank (3 month term deposit) +1.2% approx.
• Risk (Lower credit quality / trading risk):
  • Private Credit (Fund – MXT) +1.5%
  • Long Short (Hedge) +1.9% approx.
  • Floating Rate (Hedge) +1.8% approx.

We show a line graph below which shows clearly the different volatility associated with Shares (A,B,C,G) vs Risk orientated Interest securities (D,E,F). Note especially the behaviour over the August Flash Crash.

Warnings:

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The information provided in this communication is of a general nature only and does not take into account your personal objectives, financial situation, or needs. Before acting on any information, you should consider its appropriateness having regard to your own circumstances and seek independent financial advice from a qualified professional. Past performance cannot be relied upon as a predictor of future performance. Our outlooks are not a prediction. Actual outcomes may be different from those suggested in this commentary.