Market Summary and Outlook – July 2024

Equities

In June, Australian markets were slightly up (+1.0%) and US Markets performed strongly (+3.6%), as big tech continued to buoy stocks. Of note, NVIDIA rallied 23.7% into the middle of June, before giving back -8.9% to end June with a +13% gain for the month and a +149.5% gain for the first half of the year. Exhibit 1 demonstrates the meteoric rise of NVIDIA, where $10,000 AUD invested on the 29th of December 2023 would be worth $25,581 on the 22nd of July.

This level of growth is rarely seen in such a large company, towards the end of the month, NVIDIA briefly became the world’s most valuable company with a market capitalisation of US $3.34 trillion. The rapid growth of such a large constituent of major indices has dragged the global share market performance upwards in aggregate, with NVIDIA accounting for a significant chunk of the S&P 500’s impressive 17.75% year-to-date return. The strength of US markets is stark compared to Australian equities, the S&P/ASX 200 returned 4.14% over the half as the index lacks exposure to the technology and AI thematic currently driving the US market.

However, high exposure to market segments with high valuations, does not come without risks, as July’s performance has demonstrated, with those large capitalisation technology stocks that have benefitted from the recent upswing coming down slightly from their peaks.

Interest Rates

Recently released US inflation data came in softer than expected, indicating that the combination of restrictive monetary policy and the lingering economic impacts of the COVID-19 virus are having an impact on cooling price growth. This has led to expectations that US rate cuts may now commence in September 2024. It should be noted however that inflation, at 3%, is still sitting above the Federal reserve’s target of 2%, as illustrated in the chart below.

Whilst we foresee the possibility of a small number of rate cuts in late 2024 and early 2025, we remain cautious on the US Fed’s ability to deliver the magnitude and speed of cuts priced in by the market. We therefore remain underweight US bonds in the TWD SMAs.

Domestically, June saw weaker-than-expected GDP data combined with stronger-than-expected inflation data, presenting a tricky problem for the RBA. Whilst there are signs of a slowdown in economic growth, housing nonetheless continues to be a significant contributor to inflation. As a result, rate cuts this year are looking increasingly unlikely.

US Politics & Outlook

Equity valuations continue to remain stretched, with the dispersion of returns between stocks increasing which suggests that there is no longer a single thematic driving equity returns. This makes for a challenging environment where skills in risk management and selection have become paramount.

While labour markets appear to have weakened slightly, the outlook for global growth remains relatively robust. In the US, Donald Trump, riding a wave of support following his assassination attempt, appears to be leading in all recent polls against the likely nominee Kamala Harris. Regardless of who wins office in November, we view the current spending and post-election policies proposed by both political candidates as inflationary. More specifically, Trump’s purported policy agenda of mass deportation and high tariffs on imported goods could further upset supply and demand dynamics in the US and reignite inflation.

The Democratic party is also running on an agenda of high government spending in the form of tax credits and spending on strategic initiatives. The Congressional Budget Office’s (CBO) latest estimates show the US running near +6% real fiscal deficits into the foreseeable future. In the past, deficits generally occurred during times when GDP growth fell because of a recession, not when an economy was growing strongly.

Markets have been mixed over the last two weeks as the political race has unfolded. Small caps and tariff benefactors have rallied as Trump’s likelihood of returning to office increases. However, we question the sustainability of these moves considering the timeframe for implementation and magnitude of Trump’s proposed policies is so far unknown. We still see the key to achieving return outcomes as investment in unloved and undervalued pockets of global financial markets and areas of strong fundamentals where earnings look to continue to climb over the next few years.

Disclaimer

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