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Economic and market update
- Effective Date
- 2024-08-15 13:09
Key events in global markets
Global share prices have continued to climb the wall of worries this year. High inflation, rising interest rates, banking stress and the Ukraine conflict have not curbed investors’ enthusiasm. Global shares (unhedged) delivered a very strong 6.8% return for the three months to June. The weaker Australian dollar also added to this gain. By comparison the hedged global shares provided a strong 6.3% return.
Wall Street’s benchmark S&P 500 Index delivered a remarkable 8.6% return, in local currency terms. These strong gains came despite the US central bank continuing to raise interest rates. Investors appear to have gained solace from milder consumer inflation with May’s 4% annual result being the lowest in the past two years. US economic activity remains mixed with robust jobs growth being in sharp contrast to slower retail spending and weaker housing construction.
European shares (EURO STOXX 50) made a solid quarterly gain of 1.9%, in local currency terms, despite the Russia-Ukraine conflict on their doorstep.
The performance of Asian share markets has been mixed. The MSCI China Index returned -9.0%, in local currency terms, given concerns over China’s economy. By contrast, Japan’s Nikkei 225 Index delivered an exceptionally strong return of 18.5%, in local currency terms, with the central bank maintaining their low interest rate and bond yield targets.
Key events in local markets
Australian shares delivered a positive 1.0% return with a mixed performance across industry sectors. Information Technology led the market gains in line with the global mania for AI. There were also strong gains for Energy and Industrials. However, there was sharp weakness in the Health Care sector. Resources also disappointed as iron ore and coal prices corrected on China’s growth concerns.
Australia’s economy is struggling judging by sedate retail spending and weak housing construction activity. Consumers are understandably reluctant to spend given the budget challenges of high inflation and interest rates. The RBA’s surprise 0.25% interest rate hike in both May and June to a 4.1% cash interest rate has only added to the worry list. Housing provides a complex profile with a rebound in house and apartment prices over recent months, but a dramatic slide in new housing approvals and rise in insolvencies amongst builders.
There are some positive signs amidst this gloom. The labour market remains strong with May recording a 75,900 surge in jobs and the unemployment rate is close to 50-year lows at 3.6%. Inflation pressures have moderated with May’s 5.6% annual rise being materially lower than April’s 6.8% result.
What's next for markets?
Global share prices have positively surprised this year by making strong gains. However, investors appear to be precariously treading between optimism that inflation is moderating and pessimism that a recession may be looming. The rapid interest rate increases and tighter credit conditions after a sequence of financial shocks – sudden US bank collapses such as Silicon Valley Bank in March as well as Credit Suisse takeover - have materially increased the downside risks to the global economy and share prices.
Assessing these considerable risks is very challenging. Given that there are multiple positive and negative outcomes possible over coming months, we maintain a disciplined and diversified strategy.
Australian shares - S&P/ASX 200 Total Return Index; Global shares (hedged) - MSCI All Countries World (A$ hedged, Net);
Global shares (unhedged) - MSCI All Countries World in A$ (Net); Emerging markets - MSCI Emerging Markets in A$ (Net).