Investment Market Review and Outlook
30 June 2024
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Summary
- Three themes dominated global investment markets this financial year:
- Global economic growth was stronger than expected.
- The path of Inflation remains the key topic of debate for investors and policy makers.
- Technology and AI took centre stage as it becomes immersed in our daily lives.
- Share markets performed particularly well. The ASX300 returned 7.8% for the year, and globally the S&P500 returned 22.7% due in large part to returns from technology stocks.
- Returns from fixed income investments (bonds) were weaker but also positive.
- Returns from cash were stronger due to higher interest rates.
- In Australia, the story is less positive - growth has slowed and household spending is weak as the effects of higher interest rates and higher cost of living impact budgets.
Key takeaways explained
Three themes dominated global investment markets this financial year. Here we explain each in turn and look at what it all meant for investment returns from your super.
1. Stronger than expected global economic growth
The overarching story this year has been one of better-than-expected economic growth. The global economy proved to be surprisingly resilient, not only to higher interest rates, but to additional challenges, including geopolitical tensions - which can unsettle and negatively impact markets. Investor sentiment improved as the year progressed, as fears that a recession, or ‘hard landing’ might be avoided. This positively impacted markets.
It wasn’t all good news though, and economic growth did slow in some countries, including Australia. Overall, however, global activity continued growing even as inflation fell. The jobs market also stayed relatively robust (and unemployment low) and this helped support household spending. At the same time COVID-disrupted supply chains continued to improve.
In Australia, the story hasn’t been quite so positive. Growth has slowed and household consumption, or spending, remains weak. Australian households are struggling with the effects on their budgets of higher cost of living, combined with higher interest rates making many mortgage payments higher. Rents have also been rising. On the positive side, unemployment remains low.
2. Inflation still top-of-mind
Inflation remained the number one topic of debate for central bankers, markets and investors this year.
Global inflation had spiked post pandemic due in large part to the stimulus (injection of money) that many governments poured into their economies to counteract the negative effects of the pandemic. In Australia, for example, the Reserve Bank of Australia (RBA) lowered interest rates and spent billions on measures designed to boost demand and support businesses.
As inflation rose central banks were faced with the challenge of bringing it back down and lifted interest rates aggressively to slow economic growth.
Their measures have worked, and inflation has fallen – albeit not smoothly, and in some places not as quickly as hoped. However, while it is much lower than it was, inflation remains above central banks’ targets in many countries (including Australia). It’s a challenging tightrope central banks have to walk – to raise rates just enough to slow the economy and reduce inflation, but not so much that they trigger a recession. It appears that they’ve managed the balance successfully.
As we’ve already mentioned, the picture in Australia is not as rosy as in some other parts of the world. Inflation is higher than the RBA’s target of between 2-3%, and is proving stickier, or more difficult to shift, than some of our international peers. The RBA remains confident that inflation will return to target in coming years, but is very unwilling to accept any uptick, even in the short term. This could mean rate rises if inflation goes up at all.
From an investment market perspective, the combination of better growth and falling inflation has been positive for markets, and some central banks are cautiously starting to move towards easing their monetary policy stance, or in other words cutting rates. We’ve already seen this in four of the G10 countries– Canada, Europe, Sweden and Switzerland.
On the other side of the coin, there are global forces at play which are potentially inflationary (likely to cause inflation to rise), for example, deglobalisation and potential for higher tariffs.
3. Technology and AI take centre stage
Over the past year we’ve seen a significant shift in the mainstream zeitgeist. While by no means a new theme, technology and artificial intelligence (AI) have taken centre stage and are now becoming immersed in our everyday lives in a way we haven’t seen before. Generative AI, which can create original content in response to a prompt or question, has become part of everyday work tools, and the acceleration in its adoption and use has been unprecedented.
In the US, the so-called Magnificent Seven technology stocks – Nvidia, Meta, Amazon, Microsoft, Alphabet, Apple and Tesla have performed very strongly. Nvidia in particular had a spectacular run on the back of strong demand for its AI chips and related technology. This is an extraordinary result for one company, but the implications of its success are much wider. It’s becoming clear that these technologies are now at a stage where they have the real potential to boost productivity – something which is likely to be positive for economic growth.
Data and technology is a sector we’ve been focused on at Aware, because we believe that the surge in demand for AI and data will continue to increase as it becomes more and more immersed in day-to-day life. We are invested in the Magnificent Seven in our international shares portfolio, but have also invested in large infrastructure assets, including data centres which we believe will benefit from this trend.
What does it all mean?
As we always say, it is impossible to predict with accuracy or consistency how markets are likely to perform going forward. Markets move up and down as investors react to different factors and pieces of news – and we can’t predict with certainty what the factors will be or how they will influence returns. Geopolitical risks will always exist, and world events will also impact investment returns.
We believe, as ever, that the best response is to take a long-term view and to maintain a diversified portfolio of quality investments. We take current market conditions, events and themes into account and assess how they might impact future returns, but we know that sticking to our long-term strategy when we invest your super is the best way to help you achieve your retirement goals.
