Latest quarterly data shows the US growing faster than its developed market peers in Q2 2024, although momentum has slowed. The Chinese economy faces cyclical and structural challenges, though the latest stimulus packages might support markets. Meanwhile, a north-south divide is emerging in Europe (in favour of southern economies), and Japan faces challenges on its journey to nominal recovery. Signs suggest growth slowing below trend in 2024.
Aside from Australia, inflation has been trending back towards central bank targets. With growth moderating, most major central banks have started cutting rates. The near-term outlook for inflation seems benign, so further cuts are likely into year-end.
Resilient corporate earnings and increased certainty of monetary support propelled equity markets higher, while also supporting a sharp compression in bond yields.
A myriad of political shocks, including two assassination attempts, up-ended the US presidential election contest, with Vice President Harris replacing President Biden as the Democratic nominee.
Following significant volatility through July and August on the back of shifting views around the outlook for the US, Japan, and China, developments in September proved more settled. The narrative has once again returned to one focused on a moderately slowing US economy that supports a start to a rate-cutting cycle.
For Australia, real economic activity has slowed significantly, led by a soft consumer, weaker housing activity, and softer external conditions, including in China. However, the outlook is combined with other indicators, which suggest some aspects of the economy are robust, including the jobs market, house price growth, and the demand for services. When put together with a much more stimulatory fiscal position than expected from mid-year, hoped-for year-end interest rate cuts are now expected to be delayed into 2025.
Global equities continued higher in Q3
Global equity markets continued their rally, up 6.0% in Q3 2024, extending Q2’s 2.2% rise. Markets were buoyed as global central banks started cutting rates, with broadening corporate earnings growth also supporting investor sentiment.
The US S&P 500 Index rose 5.5% (after a 3.9% rally in Q2), with earnings growth and interest rate relief supporting the market in the face of elevated valuations. Europe’s STOXX 600 Index underperformed on German economic concerns but still rose 2.2% after Q2’s 0.2% loss. In China, the Shanghai Composite Index staged a historic late September rally following authorities’ latest stimulus efforts, surging 12.4% after Q2’s 2.4% decline.
The S&P/ASX 200 Index outperformed most overseas markets in Q3, rising 7.8% after a 1.1% decline in Q2. The local bourse was supported by strong fiscal spending and Chinese stimulus.
We continue to favour an overweight to domestic equities. Our view is supported by relatively attractive valuations, earnings which appear to be stabilising and moving higher, supportive fiscal stimulus from federal and state budgets, and stage-three tax cuts, which should continue to provide income relief to households.
Bond yields performed strongly over the quarter as disinflationary trends allowed central banks to begin cutting rates. The Barclays Global Aggregate Index rose 4.2% in Q3 after being broadly flat in Q2.
The US dollar ground steadily lower over the quarter, as markets grew more confident about an aggressive easing cycle, as economic activity moderated.
The Australian dollar is trading at one-year highs amid US rate cuts and optimism around China’s latest stimulus package. Current levels have moved towards longer-term fair value estimates, though we expect the US elections to spur increased volatility across currency markets in coming months.
We expect economic growth and inflation to continue moderating into year-end, allowing central banks to entrench a rate-cutting cycle, which may have come in time to achieve the fabled ‘soft landing’.
Labour markets remain broadly healthy, and disinflation should support real consumer earnings. At the same time, central banks retain ample ammunition to ease financial conditions, should the situation call for it. We do remain wary of risks to our outlook. In particular, the twin wars on Europe’s doorstep, the evolving structural forces of artificial intelligence and the energy transition, and the looming US election, as well as the potential for other geo-political shocks.
The Australian economic outlook remains challenged, with strong population growth and government spending the main supports for an economy, which has now entered its sixth consecutive quarter of negative per-capita growth.
With moderating left-tail risks and a supportive macro backdrop, we maintain a constructive outlook. We have increased our tactical overweight to equities to reflect this. Within fixed income, we favour quality areas of investment grade credit. Within alternatives, we favour hedge funds and real assets, particularly infrastructure. Within equities, we are overweight the US, Australia, and Japan, as the near-term macro and policy outlook grows more supportive for financial markets.
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