Global equities continued mostly higher in July with the MSCI World up 1.27%, while Australian equities surged over 4% as expectations for RBA rate hikes fell (Chart 1). The ASX200 hit new highs last month, reaching over the 8000 significance level, on the back of renewed optimism about interest rate cuts from the US Federal Reserve (Fed). The Federal Open Market Committee (FOMC) members unanimously voted in favour of keeping rates on hold in July but signalled that a September cut is on the table. Lower interest rates offer the prospect of stronger global economic growth in 2025 and higher share market valuations which further boosted local stocks. There have also been signs of a rotation from technology shares to value and small cap stocks which was evident in the US where the Russell 2000 small cap index gained over 7% last month.
Australian mortgage holders have another nervous wait ahead of them tomorrow when the RBA will decide on whether to hold or hike the cash rate. While headline inflation increased from 3.6% in the March quarter to 3.8% in the June quarter, core inflation slightly fell. Economists had anticipated the increase in headline inflation which includes the volatile food and energy components, however, core inflation slowing from an annual rate of 4% to 3.9% bodes well for the outlook (Chart 2). This release has not changed the forecast that the RBA will begin cutting rates in early 2025 though the ongoing cost of living pressures for many Australians is likely to continue until next year. Several market economists believe a rate rise at the August meeting is unlikely now, particularly given the Australian Dollar dropped immediately once the numbers were released – suggesting currency traders aren’t expecting a rate hike either. With a stronger case for rate cuts, the banking sector saw a solid 6% gain in July, its best month of the year, while the mining sector also rebounded. It is important to note however, that the Treasurer highlighted the need to moderate inflation further and faster given it remains sticky and stubborn in the local economy as it has been in other economies earlier in the year.
The US Continues to Cool
Turning to the United States, the business activity in the manufacturing sector disappointed in July, with the ISM Manufacturing PMI (Purchasing Managers Index) extending a four-month contraction streak. It declined to a low 46.8 last month, falling short of the market expectation of 48.8 (Chart 3). Demand was weak again and the US Dollar came under renewed selling pressure following the data release. Falls in new orders, production and inventories contributed to the decline in PMI, while a reduced rate of employment growth also acted as a drag.
The weakness was broad-based as notably, Sweden’s manufacturing PMI also sharply contracted in July on the back of input price increases with global shipping costs continuing to rise throughout 2024. This geopolitically driven increase is likely to be transitory and expected to have little effect on global goods inflation. Additional signs indicated the slowing of the US economy as the unemployment rate unexpectedly edged 0.2% higher to 4.3% in July, rising for the fourth consecutive month. Wage growth also decelerated at a faster-than-anticipated pace partially due to an increase in labour supply as the participation rate ticked up 0.1% to 62.7% over the month. Aggregate labour market indicators, including slowing demand for workers point to a clear deterioration in the market, cementing the case for a September Fed rate cut.
Portfolio Positioning
LBP’s June monthly report had a notably hawkish tone given the increase in monthly CPI that led investors to believing the RBA may increase rates at the August meeting. In July however, that tone shifted to a more dovish one as core quarterly inflation slowed. This highlights the fickle nature of markets and how irrational investors respond quickly to new data and sentiment changes.
As such, we must focus on our long-term wealth goals of capital preservation and income generation. We do this by remaining invested through the cycle, with a well-thought multi-asset class portfolio that generates its return via several key levers. These levers include equities, debt (both private and public), real assets and alternatives. This helps diversify factor exposure and insulates your portfolio from equity market shocks, enabling it to perform more robustly during periods of economic recession and heightened volatility.
Monitoring key economic data like GDP, inflation and employment growth can be beneficial to understand what economists expect and how other investors might behave. However, we should not make drastic portfolio changes in response to these given how quickly sentiment can change. Ultimately, the relationship between GDP, inflation and asset performance is not always clear, and investors have experienced stronger share market growth in economies with lower GDP growth (such as the US, vs China).
LBP therefore continues to stress that a robust investment framework, and remaining invested through the cycle is integral to preserving wealth, and that investors should emphasise long-term goals over short-term market movements. Evidence has shown that attempting to ‘time’ the market rarely results in superior outcomes, and focusing on diversification of factor-based returns will create a more robust portfolio.
We encourage you to contact us should you wish to discuss this further or if you have any questions about how these trends are impacting your portfolio.
This article has been prepared by Lipman Burgon & Partners AFSL No. 234972 for information purposes only; is not a recommendation or endorsement to acquire any interest in a financial product and, does not otherwise constitute advice. By its nature, it does not take your personal objectives, financial situation or needs into account. While we use all reasonable attempts to ensure its accuracy and completeness, to the extent permitted by law, we make no warranty regarding this information. The information is subject to change without notice and all content is subject to the website terms of use.