September 2024 Market Summary and SMA Update

Market & Portfolio Update

The SMA’s delivered robust performance this month, driven by strong gains in both the Australian and International Equities subsectors.

Over the past few months, inflationary pressures in the US cooled somewhat, and the market has begun to focus on the impact of high interest rates on employment. Unemployment rates globally have begun to tick up, with the US unemployment rate reaching 4.3%, 0.5% above its low post pandemic. US history suggests that once it rises 0.5% above the low from the previous 12 months, the economy is already in the early stages of a recession (this is the basis for the Sahm rule) – though interestingly this is not a pattern repeated in other regions, including Australia.

In Australia, employment markets are much tighter. With the unemployment rate at a near all-time low of 4.2% and a participation rate that has continued to climb since the pandemic. Wage growth also remains at historically high levels of over 4%, maintaining inflation above the RBA’s target band.

Globally, yield curves have been falling as market participants have begun to price in interest rate cuts that would only be necessary if a recession were to occur. We view the current quantity and timing of projected rate cuts as an overreaction to a labour market that is normalising rather than collapsing post pandemic. We continue to see strong GDP growth data in the US, with no consistent sign of weakness.

We see selective pockets of value in places such as Emerging Markets. The global economy is projected to grow at 3.2% in 2024 and 2025, matching 2023’s growth rate, with global inflation expected to decline as major central banks, including the Fed, loosen monetary policy. This trend is likely to reaccelerate global economic growth and support equity returns in Emerging Markets which are trading on much cheaper relative valuations vs developed market equities.

Portfolio Changes 

We have made a number of changes to the TWD SMA’s: 

Increased the allocation to the direct equity sleeve. This sleeve has delivered exceptional performance and allow us to maintain greater control over the portfolio’s overall exposure.
Within the equity sleeve, we made some minor adjustments to individual stock weightings, aligning with the strong performers identified during the latest reporting season.
Reduced our exposure to international fixed interest. Credit spreads have narrowed considerably, and rate cuts are now largely priced in, thus both income and duration strategies in this asset class have become less attractive.
Increased our allocation to Australian duration. The risk of a local economic slowdown appears elevated, particularly with the decline in iron ore prices. This will likely strain the federal budget and lead to reduced fiscal stimulus, which could dampen growth. It is important to note that recent GDP data showed only modest growth, driven largely by government expenditure.
Removed the Ardea Real Outcome Fund, Western Asset Australian Bond Fund and Schroder Real Return Fund all of which have failed to meet expectations since inception.

Disclaimer:

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