Global Market Review – April 2024

Global share markets retreated from their all-time highs in April, driven down by persistent inflation which threatens to delay interest rate cuts. However, corporate earnings growth remains robust, which should provide some support to equity valuations.

April ended five consecutive months of stronger equities as investors expect later and fewer interest rate cuts. Global share markets fell 3.7% in USD and 3.2% in AUD terms.

Equity rally takes a pause

Global equities roared ahead over the March quarter, returning almost 9%, while US equities gained over 10%, leaving them vulnerable to a correction.

Most global share markets weakened in April, typically falling around 4 – 5% from their March peaks, before rebounding in the final week.

The retracement was primarily driven by concerns of persistent US inflation. US core personal consumption expenditure (PCE) – the Federal Reserve’s (Fed) preferred inflation measure – jumped from 2.5% in February to 2.7% in March, ahead of expectations. This raised fears interest rates will remain higher for longer to bring inflation back to the 2.0% target, pushing up bond yields.

Investor sentiment weakened after Israel killed a senior Iranian General at its consulate in Damascus during the first week of April. Fears the war could spiral out of control and interrupt oil supplies sent oil above US$90 per barrel and share prices lower.

The US economy slowed in the March quarter, expanding just 1.6%, down from the previous 3.4% and well below the 2.5% expected by markets. Manufacturing activity contracted, consumer sentiment weakened, retail sales growth eased and housing data slowed (fewer building permits and new housing starts).

The slowdown is especially impacting lower income consumers. This was reflected in McDonald’s weaker than expected first quarter earnings, indicating this cohort can no longer absorb price rises as cost increases are passed on.

Japan’s economy is slowing, with retail sales and industrial production falling in March, leading to the Bank of Japan keeping interest rates unchanged at 0%. Japan’s share market fell 4.4% in April.

But the global economy keeps moving

Investors shouldn’t get too negative. Around 80% of US companies that reported March quarter earnings in April exceeded expectations, including large tech groups such as Amazon and Google-owner Alphabet.

China’s recent stimulus measures helped its economy expand 5.3% year-on-year in the March quarter, exceeding expectations. Improved sentiment boosted China’s share markets despite global weakness.

Oil prices fell back later in the month as hostilities between Israel and Iran de-escalated and hopes rose of a ceasefire.

While expansionary fiscal policy keeps US inflation high, it continues to fall in the Eurozone, UK, Japan, Canada, New Zealand and China. This may allow interest rate cuts in these regions even if the Fed stays on hold for most of this year.

Australia’s road to low inflation gets bumpy

Headline inflation fell to 3.6% in the March quarter, while underlying inflation eased to 4.0% despite a tight labour market and steep rises in services prices. However, this was above expectations.

This led markets to price in no interest rate cuts this year and increasing chances of an interest rate hike. Ten-year Australian bond yields jumped 0.45% to 4.43% in April.

The economy was boosted by higher iron ore, copper, natural gas and coal prices, supporting earnings growth across the resources sector.

Fears of higher interest rates brought a further fall in consumer confidence. Momentum stalled across residential housing, with CoreLogic reporting prices rising just 0.2% month-on-month in April.

Outlook

• ‘Higher for longer’ interest rates are slowing the global economy but inflation remains sticky
• Interest rates are expected to remain elevated in the US and Australia for most of this year, but may fall in slower-growing economies
• Slower consumer spending and weaker industrial output are impacting the earnings of some cyclical companies
• Geo-political risks remain, but stocks able to grow earnings through the business cycle should outperform as the economy slows