Bond yields fell sharply in the December quarter, in response to a lowering of inflationary pressure. The fall in bond yields triggered a significant rally on equity markets. Being interest rate sensitive, listed property was the best performing asset class last quarter.
International Equities
There was a sharp turnaround in sentiment on both bond and equity markets during the December quarter.
Central to this turnaround was an improvement in the outlook for inflation, with global data continuing to highlight a downward trajectory in price growth. Data was released in the United States showing the annual rate of inflation had fallen to 3.1%. The favourable view on inflation was further reinforced by global oil prices, which fell by 18.6% over the quarter.
Despite the ongoing conflict in the Middle East and cuts to supply by OPEC nations, oil demand has been insufficient to support prices at the elevated levels reached mid-year. With the fight against inflation seemingly being won without the global economy being forced into recession, global equity markets rallied strongly over November and December. An increase of 9.2% in the global average for the quarter resulted in the annual gain for 2023 being a very healthy 21.7%.
Global equities were led higher by the U.S. market, where the S&P500 Index jumped 11.7%. Growth styled equities performed exceptionally well in response to the lower bond yields, with the Information Technology sector contributing strongly. Large U.S. I.T. stocks rallied 17.0% in the quarter to be a remarkable 63.2% higher for the year.
Although finishing the quarter in positive territory, emerging markets underperformed developed markets, with the gain in the MSCI Emerging Markets Index (unhedged) being 2.0%. Once again, China (down 9.7%) detracted from returns, despite some evidence that consumer spending within the Chinese economy may be starting to improve. Outside of China, results from other emerging markets were more impressive, with India (up 11.9%), South Korea (up 9.5%) and Brazil (up 12.4%) offsetting the weakness in China.
After being sold down heavily in the preceding quarter in response to higher bond yields, listed property and infrastructure responded to lower yields in the December quarter with strong price increases. Global infrastructure finished 7.8% higher, with Australian and global property rising by 16.5% and 12.7% respectively.
Australian Equities
The Australian market rose by a similar magnitude to the global average over the December quarter, with the S&P ASX 200 Index rising 8.4%. However, not all sectors
produced positive results.
Weaker oil and gas prices impacted negatively on the energy sector. Returns were also negative in the Utilities sector, with the failure of the Origin Energy takeover bid being a major contributor to this weakness.
In addition, consumer staple stocks were flat, with increasing scrutiny of pricing policies and margins likely to result from the recently announced Commonwealth Senate Enquiry into supermarkets.
The majority of sectors, though, tended to follow the global trend higher over the quarter. Resource stocks continued to be buoyed by the ongoing strength in the iron price. Iron ore prices rose by 15.8% in the quarter to be 19.4% higher for the year, which has defied many expectations and provided support to the large Australian iron ore miners.
Fixed Interest & Currencies
Interest rate movements at the longer end of the yield curve were very significant last quarter. Ten year government bond yields in Australia fell by 0.5% during the quarter with United States yields 0.7% lower.
This decline in yields follows a sharp increase earlier in the year. The U.S. 10-year Treasury Bond is now yielding 3.88%, with the corresponding Australian yield marginally higher at 3.96%. Improvements in the outlook for global inflation have changed the tone of bond markets, with consensus now firmly behind the view that additional cash rate increases will not be required.
The Australian Reserve Bank has been one of the few central banks to raise rates in recent months, with Australia’s cash interest rate being lifted to by 0.25% to 4.35% at the start of November - before being held steady in December.
Also moving against the general trend from earlier in the year was the Australian dollar, which gained U.S. 3.8 cents against a weaker $US to close the quarter at U.S. 68.4 cents. The rise in cash interest rates early in November was supportive for the $A, which also appreciated against the Yen (up 0.5%) and the Euro (up 1.2%).
Important Information
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged), CSI China Securities 300 TR in CN, Deutsche Borse DAX 30 Performance TR in EU. Hang Seng TR in HK, MSCI United Kingdom TR, Nikkei 225 in JP,S&P 500 TR in US.
General Advice Disclaimer
This document has been prepared by Sage Financial Advice. Sage Financial Advice is a Corporate Authorized Representative of N/A (AFSL N/A). Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Should the reader wish to avail of using the above investment philosophy they should only do so firstly seeking personal financial advice through a financial planner. Past performance is not a reliable indicator of future performance.
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