20 June 2024

Market Update – June 2024

June Quarter Market Summary & Market Outlook

Strong gains were posted during the June quarter, spurred on by buoyant equity markets (both Australian and International), solid performance from International Fixed Income and relative outperformance within the direct stock allocations.

Interest Rates

Inflation continues to remain a key driver of the outlook for interest rates across the globe, with central banks primarily focused on attempting to bring it under control.

Exhibit 1 above shows how inflation has moderated in the US since its peak in mid-2022, falling from a high of 9.1% in June 2022 to 3.3% in May 2024. However, it remains well above the Federal Reserve’s target of 2% and high compared to historic levels.

Whilst inflation prints around the world are beginning to moderate, we still think the 2% CPI target in the US will be difficult for the Fed to achieve. Primarily because of sticky government spending heading into the US election and resilient wage growth. The persistence of higher than target inflation is a key driver of interest rates globally as central banks must maintain high interest rates in an attempt to slow consumption and reduce demand imbalances that cause inflation.

The net effect of the above, combined with stubborn inflation domestically, is that rates are likely to remain higher for longer globally. We have the portfolios positioned accordingly. We are somewhat cautious on the outlook for government bonds, particularly in the US. While yields are indeed higher, we see some risk to capital values if rate cuts do not materialise in line with current market expectations, which we believe in the US appear overly optimistic. The outlook is more positive in Australia though, where the RBA has more room to cut relative to expectations, meaning potential upside to bonds in the event of an economic slowdown. Hence our current positioning in fixed income remains firmly tilted towards domestic exposure.

Searching for Sources of Return

Given the less attractive risk and return profile of US fixed income, we have a preference towards “alternative” investments, that have differentiated sources of return outside of traditional equity and bond markets. These strategies are uncorrelated with equity and bond returns, providing greater diversification in the portfolios.

A preferred investment in our “alternative” investment bucket is the Colchester Emerging Markets Bond Fund. Many emerging markets are more advanced in their battles with inflation compared to their developed market counterparts.

Exhibit 2 above shows the current and expected central bank policy rates in select large emerging markets. Rates in many of these countries have begun to fall or are forecasted to remain relatively high. This provides opportunity for bond managers to generate returns which is are not related to the drivers of returns in other portfolio positions. The return generated by this fund helps to diversify multi-asset portfolios, reducing overall portfolio risk.


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