Summary

• Investment markets were generally positive, and all major share markets performed well in the first quarter of 2024, continuing the positive trends we saw at the end of 2023.
• Many global share markets hit record highs.
• Bond yields (interest rates on bonds) rose because investors don’t expect central banks to cut rates as much this year as they had earlier thought. This caused bond prices to fall, resulting in weaker performance.
• The main reason for the positive mood is a growing belief that inflation globally will continue to gradually fall. In addition, the US economy will not slip into recession, but rather experience a ‘soft landing’. In this scenario inflation will continue to fall, economic growth will be positive (albeit slow), and unemployment will not rise significantly.
• In Australia, conditions are less positive. Our economy has slowed, and households are feeling the pinch of the higher cost of living combined with higher interest rates and rising taxes. On the upside, unemployment has stayed very low.
• Inflation has been slower to fall than the Reserve Bank of Australia (RBA) would have liked, so Governor Bullock is not ruling anything in or out when it comes to the bank’s next move on interest rates.

A more detailed discussion

What’s happening in world economies?

The US economy remains the standout.

The US is the standout in terms of performance, but globally share markets did well over the quarter, with many hitting record highs. In the US, the so-called Magnificent 7 - Nvidia, Meta, Amazon, Microsoft, Alphabet, Apple and Tesla - performed particularly well. These companies are ‘mega-cap’ stocks, among the largest companies in the world and valued at over $200 billion each. Because they are so large, when they do well, the whole US share market is positively affected.

At the same time, even though the contribution of the Magnificent 7 to share market performance can’t be ignored, it’s the growing belief that the US will experience a soft landing rather than a recession which has most positively impacted investor confidence.

Globally, inflation remains a key debate for markets and investors. The good news is that it is continuing to gradually fall, but it isn’t coming down smoothly. This means the US Federal Reserve is keeping a close eye on the data as it comes in.

Having said that, many central banks (including the US Fed) appear to feel confident that inflation is coming down enough to allow for rate cuts later in the year. But perhaps not so many as investors previously thought. At the beginning of the year, markets were pricing in (expecting) six rate cuts in the US in 2024, but it now seems that closer to three is more likely.

Bond yields (interest rates on bonds) have gone up. The main reason is that if central banks don’t cut interest rates as much as investors had expected, interest rates will be higher than they expected. When bond yields go up, bond prices fall, and the performance of bonds is lower. This negatively affected performance from investment options with higher allocations to bonds.

In Australia, the story’s not quite so positive.

Economic growth locally has not been as positive as in the US. Australian households are spending less as they struggle to cope with the triple whammy of higher interest rates, higher inflation and rising taxes. Per-capita economic growth (growth per person) has actually fallen by 1% year-on-year.

In better news, unemployment is still very low, but it would not be unexpected for slower growth in the economy to translate into higher unemployment. This is a risk that the RBA is monitoring closely.

Even though growth is weak, and inflation has been coming down, it’s still higher than the RBA’s target of between 2-3%. Inflation is falling globally, and this means prices of the goods we import are not rising as quickly, which is positive for lowering inflation. On the other hand, it’s domestic inflation which has the RBA worried. A rise in the cost of insurance, rents and utilities are chief among the culprits, and until she sees how the numbers pan out, Governor Bullock is ruling nothing in or out when it comes to interest rates.

What might the future hold?

Looking forward, we expect markets, and investment performance to be dominated by investors’ and central banks’ views on inflation and interest rates.

Many analysts are expecting central banks to start cutting rates as inflation gradually comes downs as a result of previous rate hikes. At the same time, central banks want to be sure that they don’t cut too early and see inflation start to tick up again. They will be looking very carefully at the data.

The geopolitical backdrop remains uncertain, which can cause short-term volatility in markets. We would not be surprised if this uncertainty continues or even increases as we head towards the US election in November this year.

In Australia, the economic data is mixed when it comes to business activity going forward. It will be interesting to see whether the Government offers any tax cuts or other relief to Australians in their May budget. Good news on that front could be positive for markets.

Nonetheless, even if economic uncertainty continues, it’s not necessarily bad news for markets. We’ve seen markets climb the “wall of worry” in recent times, or in other words remain resilient (i.e. not fall) when confronted by stumbling blocks. We will have to wait and see.

What does it mean for performance?

As we always say, no one can predict with certainty what will happen in the world and how different events will affect performance. That’s why we will always take a long-term view when we invest your super. 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 and maintaining a diversified portfolio of quality investments is the best way to help you achieve your retirement goals.

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