Investment Market Review and Outlook
30 September 2024
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Key takeaways
- It was a relatively positive quarter for investment markets following some short-term volatility in early August.
- Australian interest rates have been held steady, but around the world rates are starting to come down. Seven of the G10 central banks have now cut rates, including the US Federal Reserve which cut by 0.5% in September.
- Lower interest rates can be positive for investment markets. Australian and international share markets rose during the quarter and the year.
- Bond yields (the interest rate on Government bonds) were lower, so bond prices were higher, and returns were positive for the quarter and the year.
- Inflation globally has also fallen, and some central banks have now switched their focus towards supporting growth and their labour markets
- In Australia though inflation is still too high. Economic growth has been weak but there is hope it may improve when tax cuts and income growth flow through to households, allowing them to spend more.
Key takeaways explained
The Reserve Bank of Australia (RBA) met in the last week of September and decided to keep interest rates on hold at 4.35%.
This was widely expected, although in her press conference, Governor Bullock said that the RBA did not “explicitly” consider raising rates this month, which was in contrast to previous meetings where the Board did weigh up the possibility of raising rates.
Many investors interpreted this statement as ‘dovish’ or in other words, they began to believe that Governor Bullock may not raise rates and could even cut rates sooner than expected.
In economics, doves are those who are less worried about inflation and may prioritise economic growth and reducing unemployment and support lower interest rates to achieve this. Hawks are more focused on controlling inflation, even if this means lower economic growth. They support higher interest rates to keep inflation down and prices under control. Neither theory is guaranteed to produce the desired results, and one of the jobs of central banks is to balance both views to make the right decisions for the economy.
Inflation in Australia is continuing to fall, although the reduction in August was in large part due to once-off government energy subsidies which kept energy prices from rising. Governor Bullock is aware of this, so looked through this month’s inflation number saying the RBA Board needs to see a “sustainable” return of inflation to target.
To put the effect of the subsidies in context, according to the Australian Bureau of Statistics (ABS)1 the price of electricity for Australians fell by almost 18% in the year to August 2024 – which is the largest fall on record. Since June 2023, the price households have paid for electricity has declined by approximately 14%. Without the government rebates, however, electricity prices would actually have increased by 16.6%.
House prices and the price of insurance continue to rise and this is causing an on-going issue for inflation. Rents were up 6.8% year-on-year in August – reflecting the shortage of properties to rent in most capital cities. Insurance rose even more, up 14% year-on-year due to higher reinsurance costs, more natural disasters and claim costs.
In the US, the Personal Consumption Expenditure (PCE) price index was on the soft side of expectations in August. The PCE measures inflation by measuring the average increase in prices for goods and services purchased by Americans and is one of the most important measures that the US Federal Reserve relies on to help inform its decisions on interest rates.
This result was widely expected, even as overall growth in the economy has remained resilient. The focus of policymakers is now turning to supporting growth and labour markets, which have shown some signs of weakness.
1 Source: All figures are from the Australian Bureau of Statistics, Monthly Consumer Price Index Indicator, August 2024
Outlook
It’s been a positive start to FY25, although global tensions are rising, in particular in the Middle East, and this combined with a closely contested presidential race in the US is feeding uncertainty and could result in increased market volatility in the coming months.
Many investors are expecting interest rates to come down globally, but the path in Australia is less clear - it’s a case of wait and see what the data reveals and how the RBA responds. As always, it’s impossible to predict with accuracy or consistency how markets are likely to perform or react to different pieces of news.
At Aware we keep a close eye on the factors which are likely to affect markets in the short-term, and consider how they might influence our outlook, and our returns going forward. However, we believe that the best response is to continue to focus on our long-term strategy, and focus on actively managing our diversified portfolio of quality assets to help deliver returns over the long term.
