Latest Financial News from 
'Money Management'

 

Boyce Pty Ltd (AFSL 544077) ABN: 45 660 258 524

RSS

Market Update - August Summary

18 August 2023

Your Market Update - August Summary

Bonds vs Equities – what are the capital markets trying to tell us?

Bond markets across a number of developed countries including the US, UK and Germany are currently pricing in a recession. Global stock indices are close to, if not at, all-time highs. What exactly are the capital markets trying to tell us about the state of the economy?

Stock prices are a well-known leading indicator of the business cycle and future economic growth.  They are among a handful of leading economic indicators (LEI) that analysts typically follow when trying to get an overall view of economic activity. Stock prices have been on a winning streak this year, with global equities as measured by the MSCI World TR Index AUD up 16% over the 6 months to 31 July 2023. The rally has been led by the US where the launch of artificial intelligence technologies such as ChatGPT, have created enormous buzz and excitement around potential productivity gains.

Bond markets are taking a much more negative view. Taking the 10-year to two-year Treasury spread, yield curves in the US, UK and Germany are currently inverted.  In Australia, the yield curve, while not yet inverted, is flat by historical standards.  Inverted yield curves are typically good indicators that recession looms.  Inverted yield curves reflect the expectation from bond investors that longer-term interest rates will fall; a situation typically associated with recessions.

So are bond or equity investors right?  Inverted yield curves, while pretty reliable indicators, can and do give false signals from time to time. Equity markets too, can be prone to over-optimism, often overshooting fundamentals based on sentiment. Weighing the conflicting signals, our view is that we are headed for a period of weaker growth. The equity market rally to date has been narrow and centred around US mega tech stocks.  Should we see greater breadth and participation in this rally, we may have cause to reconsider.  Putting stock prices aside, most other leading indicators are pointing to a further slowdown in the business cycle. Consumer sentiment is extremely low, housing starts are weak, money supply is tightening and Purchasing Manager Indices remain in contractionary territory. These data points lead us to believe that the second half of 2023 continues to present some headwinds for the economy and risk assets in general.

 

Market Developments during July 2023

Australian Equities

The S&P/ASX 200 Accumulation Index finished July up 2.9%, the second-best monthly performance for the index this year. Commodity price rises aided the gains, while consumer sentiment has improved with positive inflation and employment data releases. In all, 9 of the 11 Sectors in the Index finished positively, with Health Care (-1.5%) and Consumer Staples (-1.0%) the only laggards.

The driving factor in the Energy sector (+8.8%) was rising commodity prices, particularly oil. This was particularly evident in Woodside (ASX: WDS), which also benefitted from a quarterly update that was received positively by investors.

 
 

Meanwhile, the other monthly leader, Financials ex-Property, (+4.9%) saw investors pile into the “Big 4” banks all having strong months in July. While the RBA has left rates on hold, the banks have continued to increase their rates for home loan borrowers. Investors expect the rate rises from the lenders to ease competition and lead to higher net interest margins.

 

Global Equities 

Global equities ended with a predominantly positive month with stabilising economic data. Emerging markets outperformed developed market counterparts returning 4.9% (MSCI Emerging Markets Index (AUD)) versus a 2.1% gain according to the MSCI World Ex Australia Index (AUD).

The U.S. markets had mixed results again, with inflation data falling in line with another expected rate hike. Most sectors were positive with standouts in Technology and Energy rising largely due to increased strength in suppliers. The S&P500 Index posted a gain of 3.2% (in local currency terms).

Emerging markets rallied strongest for the month, as China’s economic growth recovery plan continues, with new stimulus having positive effects across sectors; specifically manufacturing and real estate as indicated by development data. The CSI 300 Index returned 5.3% for the month (in local currency terms).

 

Fixed Interest

The RBA has left the cash rate on hold at its July meeting at 4.1%, pausing what has been an aggressive rate hiking cycle. The market responded with Australian 2-Year and 10-Year bond yields remaining elevated and rising by 4bps and 5bps respectively. Fixed income markets started to see some gains, with the Bloomberg AusBond Composite 0+ Yr Index returning 0.5% over the month.

In the US, bond markets continue to price the possibility of a recession and the US yield curve is inverted. The Federal Reserve raised rates in July by 25bps, lifting the benchmark rate to 5.25-5.5%, which is the highest this range has been in 22 years. The market responded with US 10-Year and 2-Year Treasury yields rising by 15bps and 9bps, respectively. Globally, higher yields led to losses in fixed income markets, with the Bloomberg Barclays Global Aggregate Index (AUD) returning -0.5% over July.

 

REIT’s (listed property securities)

 
 

The S&P/ASX 200 A-REIT Accumulation index advanced during July, with the index finishing the month 3.8% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also finished strongly, advancing 3.2% for the month. Australian infrastructure performed well during July, with the S&P/ASX Infrastructure Index TR advancing 4.1% for the month and up 13.2% YTD.

The Australian residential property market experienced an increase of +0.9% Month on Month (as represented by CoreLogic’s five capital city aggregate). Brisbane and Adelaide were the biggest movers (both +1.4%) with Perth (+1%) also performing strongly. All five capital cities performed positively for the third consecutive month.

Read more >

Market Update - August Summary

18 August 2023

Your Market Update - August Summary

Bonds vs Equities – what are the capital markets trying to tell us?

Bond markets across a number of developed countries including the US, UK and Germany are currently pricing in a recession. Global stock indices are close to, if not at, all-time highs. What exactly are the capital markets trying to tell us about the state of the economy?

Stock prices are a well-known leading indicator of the business cycle and future economic growth.  They are among a handful of leading economic indicators (LEI) that analysts typically follow when trying to get an overall view of economic activity. Stock prices have been on a winning streak this year, with global equities as measured by the MSCI World TR Index AUD up 16% over the 6 months to 31 July 2023. The rally has been led by the US where the launch of artificial intelligence technologies such as ChatGPT, have created enormous buzz and excitement around potential productivity gains.

Bond markets are taking a much more negative view. Taking the 10-year to two-year Treasury spread, yield curves in the US, UK and Germany are currently inverted.  In Australia, the yield curve, while not yet inverted, is flat by historical standards.  Inverted yield curves are typically good indicators that recession looms.  Inverted yield curves reflect the expectation from bond investors that longer-term interest rates will fall; a situation typically associated with recessions.

So are bond or equity investors right?  Inverted yield curves, while pretty reliable indicators, can and do give false signals from time to time. Equity markets too, can be prone to over-optimism, often overshooting fundamentals based on sentiment. Weighing the conflicting signals, our view is that we are headed for a period of weaker growth. The equity market rally to date has been narrow and centred around US mega tech stocks.  Should we see greater breadth and participation in this rally, we may have cause to reconsider.  Putting stock prices aside, most other leading indicators are pointing to a further slowdown in the business cycle. Consumer sentiment is extremely low, housing starts are weak, money supply is tightening and Purchasing Manager Indices remain in contractionary territory. These data points lead us to believe that the second half of 2023 continues to present some headwinds for the economy and risk assets in general.

 

Market Developments during July 2023

Australian Equities

The S&P/ASX 200 Accumulation Index finished July up 2.9%, the second-best monthly performance for the index this year. Commodity price rises aided the gains, while consumer sentiment has improved with positive inflation and employment data releases. In all, 9 of the 11 Sectors in the Index finished positively, with Health Care (-1.5%) and Consumer Staples (-1.0%) the only laggards.

The driving factor in the Energy sector (+8.8%) was rising commodity prices, particularly oil. This was particularly evident in Woodside (ASX: WDS), which also benefitted from a quarterly update that was received positively by investors.

 
 

Meanwhile, the other monthly leader, Financials ex-Property, (+4.9%) saw investors pile into the “Big 4” banks all having strong months in July. While the RBA has left rates on hold, the banks have continued to increase their rates for home loan borrowers. Investors expect the rate rises from the lenders to ease competition and lead to higher net interest margins.

 

Global Equities 

Global equities ended with a predominantly positive month with stabilising economic data. Emerging markets outperformed developed market counterparts returning 4.9% (MSCI Emerging Markets Index (AUD)) versus a 2.1% gain according to the MSCI World Ex Australia Index (AUD).

The U.S. markets had mixed results again, with inflation data falling in line with another expected rate hike. Most sectors were positive with standouts in Technology and Energy rising largely due to increased strength in suppliers. The S&P500 Index posted a gain of 3.2% (in local currency terms).

Emerging markets rallied strongest for the month, as China’s economic growth recovery plan continues, with new stimulus having positive effects across sectors; specifically manufacturing and real estate as indicated by development data. The CSI 300 Index returned 5.3% for the month (in local currency terms).

 

Fixed Interest

The RBA has left the cash rate on hold at its July meeting at 4.1%, pausing what has been an aggressive rate hiking cycle. The market responded with Australian 2-Year and 10-Year bond yields remaining elevated and rising by 4bps and 5bps respectively. Fixed income markets started to see some gains, with the Bloomberg AusBond Composite 0+ Yr Index returning 0.5% over the month.

In the US, bond markets continue to price the possibility of a recession and the US yield curve is inverted. The Federal Reserve raised rates in July by 25bps, lifting the benchmark rate to 5.25-5.5%, which is the highest this range has been in 22 years. The market responded with US 10-Year and 2-Year Treasury yields rising by 15bps and 9bps, respectively. Globally, higher yields led to losses in fixed income markets, with the Bloomberg Barclays Global Aggregate Index (AUD) returning -0.5% over July.

 

REIT’s (listed property securities)

 
 

The S&P/ASX 200 A-REIT Accumulation index advanced during July, with the index finishing the month 3.8% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also finished strongly, advancing 3.2% for the month. Australian infrastructure performed well during July, with the S&P/ASX Infrastructure Index TR advancing 4.1% for the month and up 13.2% YTD.

The Australian residential property market experienced an increase of +0.9% Month on Month (as represented by CoreLogic’s five capital city aggregate). Brisbane and Adelaide were the biggest movers (both +1.4%) with Perth (+1%) also performing strongly. All five capital cities performed positively for the third consecutive month.

Read more >

Your Finance Update- March Summary

22 March 2023

Is this a bear market rally or are we off to the races?

The start of 2023 has been generally positive for markets. While the rally has been a welcome relief from the tumultuous market environment in 2022, the key question is whether the recent rally has legs or whether it is simply a bear market rally with more volatility to follow as we progress into 2023.

The market has been skittish over the past 12 months with any positive news on the inflation front, such as any sign that inflation is moderating, resulting in the market rallying. While the most recent rally has partially been driven by some evidence that we are closer to reaching peak inflation, we have also seen liquidity pumped into the market which has no doubt supported market returns. Central banks have been generally decreasing their balance sheets with key central banks such as the US Federal Reserve moving from a quantitative easing policy to a quantitative tightening policy.  This has reduced the overall liquidity that’s supporting markets. However, we have also seen some central banks, notably the Bank of Japan (BoJ) and the People’s Bank of China (PBOC), add liquidity to markets in recent months, which markets have liked. We do not believe that this trend is structural and that the direction of inflation and potential impact on economic growth will be the key driver of markets as we progress throughout 2023.

Our base case remains that the third quarter of 2023 will be ‘d-day’ for markets as the direction which company earnings will take, due to the impact of higher interest rates, will be clearer. The most recent company reporting season suggests that there is evidence of slowing in demand, however this is not consistent across all sectors and companies.

Overall, we believe that market returns may trend sideways for the full year with a possible downturn later in the year. In such an environment being able to pick out the ‘winners’ from the ‘losers’ will be increasingly important as simply riding the broader market to generate returns will be more challenging.

 

Market Developments during February 2023

Australian Equities

February saw the S&P/ASX 200 Accumulation Index finish negatively after its strongest month on record in January. The main driver of the negative performance was the persistently high CPI figures in the US and the evaluation of earnings season in the Australian market. Utilities (+3.4%) and Information Technology (+2.7%) were the top performers, whilst the Materials (-6.6%) and Financials (-3.1%) sectors were the biggest laggards in the month.

 
 

The Utilities and Information Technology sectors led all sectors as several companies reported robust earnings or positive corporate actions (i.e., Origin Energy). In contrast, the Materials and Financials sectors were the worst performers as concerns around the global macroeconomic outlook and policy response, coupled with the evaluation of earnings reports resulted in selloffs within these sectors.

Investors continued to grapple with the inflation-driven interest rate outlook facing central banks globally and the implications that this may have on the future economic outlook.

 

Global Equities 

 

Resilient economic data in February resulted in a rise in bond yields and a decrease in equity markets. With renewed inflation concerns, US equities stumbled with the S&P500 declining 2.4% during the month.

The European Central Bank, Bank of England, and Federal Reserve announced rate hikes at the beginning of the month. The overall message from their accompanying statements was that inflation remains excessively high despite recent declines and that central banks must continue their efforts.

Economic data suggesting a postponed recession prompted investors to adjust their forecasts for the peak in interest rates and future rate cuts, given the potential lengthier route to target inflation.

Despite the typical positive correlation between robust economic data and stock market performance, equity markets had priced in anticipated rate cuts and were more dismayed by the possibility of reduced monetary easing than they were encouraged by the delayed recession.

Across the globe, a rebound of consumer confidence helped the Eurozone stay positive with the FTSE 100 returning 1.8% and the DAX 30 returning 1.6%, while the Hang Seng Index fell 9.9% driven by escalating geopolitical tensions.

 

Fixed Interest

 

In a continued bid to reduce inflation to target levels, the Reserve Bank of Australia has raised the cash rate for a ninth month in a row, with a 25 bps increase announced in February. This brings the current February cash rate to 3.35%. Meeting minutes noted uncertain global outlook, upward surprises on inflation and wages, and the substantial increases in rates so far. The bond market reflected the rate rise with yields rising over the course of the month. Australian 2Yr and 10Yr Govt Bond yields rose by 49 bps and 30bps, respectively, leading to the Bloomberg AusBond Composite 0+ Yr Index to return -1.3% over the month. The Australian CPI inflation over the year to December 2022 was 7.8%.

 
 

Globally, fixed income markets were much the same. The US. Federal Reserve announced another 25bps rate rise on February 1, bringing the target cash rate to 4.5%-4.75%. US 2Yr and 10Yr Bond yields rose by 41bps and 69bps respectively. Similarly, U.K. 2Yr and 10Yrs Gilt yields rose by 61bps and 37bps, respectively, following the BoE decision to raise the Bank Rate by 50bps.

 

REIT’s (listed property securities)

The S&P/ASX 200 A-REIT Accumulation index sold off in February after a strong start to the calendar year in January, with the index finishing the month -0.4% lower. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also regressed, returning -3.6% for the month. Australian infrastructure performed well during February, with the S&P/ASX Infrastructure Index TR advancing 1.9% for the month.

The Australian residential property market experienced no change (0%) month on month in January represented by Core Logic’s five capital city aggregate. Melbourne (-0.4%) and Brisbane (-0.4%) were the worst performers whilst Sydney (+0.3%) advanced during the month for the first time in twelve months.

 

Read more >

Your Finance Update- February Summary

20 February 2023

Your Finance Update - February Summary

Positive start to the year - what more is to come? 

Over the course of 2022 our message to investors has been simple. Markets are in a period of transition and with transition comes some pain. The rapid shift from record-low interest rates and liquidity-fuelled markets, to one of higher interest rates and central banks shrinking their balance sheets has impacted markets. This has been coupled with the ongoing effects of Covid on economies, notably China and the unexpected conflict in Ukraine. Both events contributing to rising inflation which has been the topic du jour for all of 2022.

What can we expect from markets in 2023?

We should hit peak inflation in 2023. Central banks around the globe have been aggressively raising rates to curb inflation. In Australia, the December CPI figure hit 7.8% with the cash rate target reaching 3.10%. Cyclical indicators have been broadly trending down and we are yet to see the full impact of rate rises on households. We believe that demand will show more material signs of slowing in the second and third quarter of 2023, which should see inflation stabilise.

Mild recession is a possibility

The inverted yield curve is suggesting that a recession is on the cards. Historically, recessions have occurred 12 to 18 months after the yield curve has inverted. While the likelihood of a recession is elevated, the relatively strong labour market is expected to reduce the risk of a deep prolonged recession. We do however expect segments of the economy to be hit harder than others, such as the construction industry, which has already experienced a downturn following rises in interest rates. Conversely Australia’s exposure to materials and the reopening of China from strict Covid lockdowns is expected to benefit things such as iron ore exports.

Company earnings to slow second half of 2023

We are yet to see the full impact on demand of interest rate rises. While the savings ratio has been declining as households increasingly dip into their savings, households are still spending, with travel spending being the big winner. However, our expectation is that we will observe a slowdown in demand in the second half of the year as many household budgets get a jump in their mortgage repayments as their fixed rate loans roll-off and they move towards the higher variable rate. This should see a slowdown in discretionary spending which should show up in company earnings later in the year.

Range trading market

Markets have started 2023 on a positive note. Some of acute issues that adversely impacted markets in 2022 have subsided. Energy prices, which rose sharply following the Russian invasion of Ukraine have fallen with European gas prices falling by over 27% in January alone. Furthermore, the consumer is still buoyant despite higher interest rates.

As 2023 progresses and the impact of rising rates makes its way through the economy and company earnings come under increased pressure, we may see the market pull back. Net-net it is plausible that 2023 may be a relatively flat market characterised by spikes in volatility both to the upside and the downside.

Market Developments during January 2023

Australian Equities

 

The Australian market commenced the year convincingly, with the S&P/ASX 200 Accumulation Index rising by 6.2% and every sector finishing positively apart from the Utilities (-3.0%) sector. The gain represents the best start to the year since the inception of the Index. The Consumer Discretionary (+9.9%) and Materials (+8.9%) sectors led the market, as investor optimism around the future cash rate and inflation trajectory in an Australian and global context buoyed the broader market.

The Utilities sector was the biggest laggard as investors pivoted away from more defensive sectors in favour of more cyclical exposures. The Consumer Discretionary sector performed robustly as companies reported earnings. The Materials sector performed strongly as several commodities continued their recent rally on the back of the China re-opening demand. Further, the volatility in the Australian market was relatively subdued. Broadly speaking, the more ‘growth’ oriented and interest-rate sensitive sectors exhibited solid performance as investors weighed up the potential for central bank policy rate cuts in Australia and other global economies.

Global Equities 

Global equities started on a positive note as optimistic views around inflation fed through to possibilities around a reduction in central bank tightening. Emerging markets outperformed developed market counterparts returning 3.8% (MSCI Emerging Markets Index (AUD)) versus a 3.0% gain according to the MSCI World Ex Australia Index (AUD).

Investor confidence was elevated during the month as global macro data surprised to the upside combined with China reopening earlier than expected.  This was reflected by the Hang Seng Index and the CSI 300 Index, returning 10.4% and 7.4% respectively (in local currency terms) for the month. In the US, over a third of companies have reported, with earnings in aggregate being 0.6% above consensus and the S&P500 Index posting a monthly return of 6.3% (in local currency terms).

In Germany, the DAX 30 Index reported a gain of 8.7% for the month (in local currency terms) as it continued to benefit from the easing of supply disruptions, a decline in the risk of gas rationing and further fiscal support.

Fixed Interest

 

With no RBA meeting in January, there has been a pause on rate hikes, with rates expected to rise once again in February. This led to Australian 2- and 10- year Government bond yields falling by 23bps and 50bps, respectively. The fall in bond yields resulted in almost every fixed income sector being in the green, resulting in the Bloomberg AusBond Composite 0+ Yr Index to return 2.7% over the course of the month. Inflation has now risen to 7.8%, over the past 12 months to December, and CPI rose 1.9% this December quarter according to ABS data.

Subsequently the RBA increased rates at their 7 February meeting by 25 basis points to 3.35 per cent.  The December inflation figures were cited as a factor in this increase and the RBA observed that GDP growth, a tight labour market and wages growth are also factors being taken into consideration when making interest rate decisions. 

Globally, fixed income markets showed a mixed story, with US markets bracing for another rate hike in the next Federal Reserve Meeting on February 1. US 10-year Bond yields rose 37bps and US 90 Day T-Bill yields rose 30bps. In the United Kingdom, markets also await the return of the BoE meetings in February, with the current January bank rate sitting at 3.50%. Over January, U.K. 2 Year Gilt yields fell 11bps and U.K. 10 Year Gilt yields by 34bps.

REIT’s (listed property securities)

 

The S&P/ASX 200 A-REIT Accumulation index had a strong start to the calendar year advancing during January, with the index finishing the month 8.1% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also finished strongly, advancing 8.2% for the month. Australian infrastructure performed well during January, with the S&P/ASX Infrastructure Index TR advancing 1.9% for the month.

The positive start to the year is a welcome sight for REIT investors, as the listed property sector suffered a material decline in 2022. 2022 was the worst-performing year for REITs since the global financial crisis. Capital raising is expected to be a prominent theme in Q1 this year with the significant change in debt markets and cost of capital. In the global REITs market, we have already seen eight capital offering instruments in January, raising a total of $4.1bn in capital, in contrast to the $250m raised in December.

The Australian residential property market experienced a –1.1% change month on month in January represented by Core Logic’s five capital city aggregate. Brisbane (-1.4%), Sydney (-1.2%), Melbourne (-1.1%) and Adelaide (-0.3%) all performed poorly whilst (0%) stayed relatively neutral.

Your Finance Update- February Summary

20 February 2023

Your Finance Update - February Summary

Positive start to the year - what more is to come? 

Over the course of 2022 our message to investors has been simple. Markets are in a period of transition and with transition comes some pain. The rapid shift from record-low interest rates and liquidity-fuelled markets, to one of higher interest rates and central banks shrinking their balance sheets has impacted markets. This has been coupled with the ongoing effects of Covid on economies, notably China and the unexpected conflict in Ukraine. Both events contributing to rising inflation which has been the topic du jour for all of 2022.

What can we expect from markets in 2023?

We should hit peak inflation in 2023. Central banks around the globe have been aggressively raising rates to curb inflation. In Australia, the December CPI figure hit 7.8% with the cash rate target reaching 3.10%. Cyclical indicators have been broadly trending down and we are yet to see the full impact of rate rises on households. We believe that demand will show more material signs of slowing in the second and third quarter of 2023, which should see inflation stabilise.

Mild recession is a possibility

The inverted yield curve is suggesting that a recession is on the cards. Historically, recessions have occurred 12 to 18 months after the yield curve has inverted. While the likelihood of a recession is elevated, the relatively strong labour market is expected to reduce the risk of a deep prolonged recession. We do however expect segments of the economy to be hit harder than others, such as the construction industry, which has already experienced a downturn following rises in interest rates. Conversely Australia’s exposure to materials and the reopening of China from strict Covid lockdowns is expected to benefit things such as iron ore exports.

Company earnings to slow second half of 2023

We are yet to see the full impact on demand of interest rate rises. While the savings ratio has been declining as households increasingly dip into their savings, households are still spending, with travel spending being the big winner. However, our expectation is that we will observe a slowdown in demand in the second half of the year as many household budgets get a jump in their mortgage repayments as their fixed rate loans roll-off and they move towards the higher variable rate. This should see a slowdown in discretionary spending which should show up in company earnings later in the year.

Range trading market

Markets have started 2023 on a positive note. Some of acute issues that adversely impacted markets in 2022 have subsided. Energy prices, which rose sharply following the Russian invasion of Ukraine have fallen with European gas prices falling by over 27% in January alone. Furthermore, the consumer is still buoyant despite higher interest rates.

As 2023 progresses and the impact of rising rates makes its way through the economy and company earnings come under increased pressure, we may see the market pull back. Net-net it is plausible that 2023 may be a relatively flat market characterised by spikes in volatility both to the upside and the downside.

Market Developments during January 2023

Australian Equities

 

The Australian market commenced the year convincingly, with the S&P/ASX 200 Accumulation Index rising by 6.2% and every sector finishing positively apart from the Utilities (-3.0%) sector. The gain represents the best start to the year since the inception of the Index. The Consumer Discretionary (+9.9%) and Materials (+8.9%) sectors led the market, as investor optimism around the future cash rate and inflation trajectory in an Australian and global context buoyed the broader market.

The Utilities sector was the biggest laggard as investors pivoted away from more defensive sectors in favour of more cyclical exposures. The Consumer Discretionary sector performed robustly as companies reported earnings. The Materials sector performed strongly as several commodities continued their recent rally on the back of the China re-opening demand. Further, the volatility in the Australian market was relatively subdued. Broadly speaking, the more ‘growth’ oriented and interest-rate sensitive sectors exhibited solid performance as investors weighed up the potential for central bank policy rate cuts in Australia and other global economies.

Global Equities 

Global equities started on a positive note as optimistic views around inflation fed through to possibilities around a reduction in central bank tightening. Emerging markets outperformed developed market counterparts returning 3.8% (MSCI Emerging Markets Index (AUD)) versus a 3.0% gain according to the MSCI World Ex Australia Index (AUD).

Investor confidence was elevated during the month as global macro data surprised to the upside combined with China reopening earlier than expected.  This was reflected by the Hang Seng Index and the CSI 300 Index, returning 10.4% and 7.4% respectively (in local currency terms) for the month. In the US, over a third of companies have reported, with earnings in aggregate being 0.6% above consensus and the S&P500 Index posting a monthly return of 6.3% (in local currency terms).

In Germany, the DAX 30 Index reported a gain of 8.7% for the month (in local currency terms) as it continued to benefit from the easing of supply disruptions, a decline in the risk of gas rationing and further fiscal support.

Fixed Interest

 

With no RBA meeting in January, there has been a pause on rate hikes, with rates expected to rise once again in February. This led to Australian 2- and 10- year Government bond yields falling by 23bps and 50bps, respectively. The fall in bond yields resulted in almost every fixed income sector being in the green, resulting in the Bloomberg AusBond Composite 0+ Yr Index to return 2.7% over the course of the month. Inflation has now risen to 7.8%, over the past 12 months to December, and CPI rose 1.9% this December quarter according to ABS data.

Subsequently the RBA increased rates at their 7 February meeting by 25 basis points to 3.35 per cent.  The December inflation figures were cited as a factor in this increase and the RBA observed that GDP growth, a tight labour market and wages growth are also factors being taken into consideration when making interest rate decisions. 

Globally, fixed income markets showed a mixed story, with US markets bracing for another rate hike in the next Federal Reserve Meeting on February 1. US 10-year Bond yields rose 37bps and US 90 Day T-Bill yields rose 30bps. In the United Kingdom, markets also await the return of the BoE meetings in February, with the current January bank rate sitting at 3.50%. Over January, U.K. 2 Year Gilt yields fell 11bps and U.K. 10 Year Gilt yields by 34bps.

REIT’s (listed property securities)

 

The S&P/ASX 200 A-REIT Accumulation index had a strong start to the calendar year advancing during January, with the index finishing the month 8.1% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also finished strongly, advancing 8.2% for the month. Australian infrastructure performed well during January, with the S&P/ASX Infrastructure Index TR advancing 1.9% for the month.

The positive start to the year is a welcome sight for REIT investors, as the listed property sector suffered a material decline in 2022. 2022 was the worst-performing year for REITs since the global financial crisis. Capital raising is expected to be a prominent theme in Q1 this year with the significant change in debt markets and cost of capital. In the global REITs market, we have already seen eight capital offering instruments in January, raising a total of $4.1bn in capital, in contrast to the $250m raised in December.

The Australian residential property market experienced a –1.1% change month on month in January represented by Core Logic’s five capital city aggregate. Brisbane (-1.4%), Sydney (-1.2%), Melbourne (-1.1%) and Adelaide (-0.3%) all performed poorly whilst (0%) stayed relatively neutral.