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Global Market Review – July 2024
Global equities were volatile in July but finished the month higher upon hopes that weaker inflation will allow central banks to reduce interest rates over the coming months. This would make a soft landing more likely, but geo-political risks continue to impact sentiment.
Volatile global share markets finish higher
Global equities edged up in July, gaining 1.8% in USD or 4.0% in AUD terms. However, share markets were volatile upon mixed technology earnings reports and rising political uncertainty in the US and Middle East.
Market sentiment was boosted by inflation which slowed in June to 3.3% in the US, 2.5% in the Eurozone, 2.7% in Canada, and remained at the 2.0% target in the UK.
The Bank of Canada reduced interest rates by a further 0.25% to 4.50%. The Fed kept rates on hold at 5.25% – 5.50% but indicated it would begin cutting at its September meeting if inflation continues to edge down. This pushed interest rate-sensitive two-year US Treasury yields down 0.50% to 4.27% in July.
Market volatility helped broaden the share market recovery, as investors rotated out of big tech into heavily discounted small caps. The Russell 2000 index of US smaller companies surged 11% in July.
But rising risks overshadow equities
US political uncertainty increased when President Biden’s reluctance to withdraw from the November election increased the chances of a Donald Trump victory. While Trump’s proposals to lower taxes and reduce regulation are viewed positively, his plans to raise tariffs, reduce immigration, increase the minimum wage, and borrow more would likely raise inflation. The Democrats’ switch to Vice-President Kamala Harris has made the election more competitive, boosting investor sentiment.
Tension remains high in the Middle East, with the killing of senior Palestinians in Iran and Lebanon, leading to fears the war in Gaza could escalate, potentially impacting energy supplies.
China’s economy remains subdued and its share markets fell in July after The Third Plenum of senior officials failed to announce any major new stimulus measures. The economy remains weak, with house prices falling 4.5% in June, retail sales growth slowing to 2.0% and consumer prices falling month-on-month. This led to interest rates being cut by 0.10% to 3.35%.
Some weaker than expected quarterly earnings amongst large tech groups – including Tesla and Alphabet – impacted the broader technology sector in mid-July.
Falling inflation boosts investor confidence in Australia
Australian equities made strong gains in July, returning 5.5%, upon rising expectations of lower interest rates. Its relatively low exposure to the technology sector brought some insulation from the turbulence seen in global markets.
Quarterly inflation increased to 3.8%, but the trimmed mean fell back to 3.9%, as unemployment edged up to 4.1% in June. This eased concerns the Reserve Bank of Australia (RBA) might have to resume raising interest rates.
Home sales fell for a second consecutive month in May as interest rates impact housing demand. July saw prices rise 0.5%, but the national picture was mixed, with prices now falling in Melbourne as affordability remains very stretched.
Weak demand in China continues to impact Australia’s key commodity prices. Natural gas, copper and iron ore prices all fell in July, slowing the resources sector and weakening the Australian dollar.
Outlook
- ‘Higher for longer’ interest rates are slowing the global economy but inflation remains somewhat sticky
- Interest rates are expected to fall this year across most developed economies, except Australia and Japan
- Slower consumer spending and weaker industrial output are impacting the earnings of some cyclical companies
- Geo-political risks remain elevated
- Stocks able to grow earnings through the business cycle should outperform as the economy slows
Where does this leave investors?
While economic activity and corporate earnings growth continue to slow gradually, there is little sign of a near-term recession. Pengana portfolios are firmly focussed on companies able to grow earnings during a period of elevated interest rates and subdued consumer spending.
These include businesses with a technological advantage especially in AI, groups engaged in factory automation and onshoring, pharmaceutical companies able to secure drug approvals, luxury goods houses with strong brand loyalty, and healthcare providers.
Companies with highly cyclical earnings, strong exposure to discretionary consumer spending, high borrowings, or unsustainable business plans should be viewed cautiously.
Stimulus measures in China should bring opportunities in well-managed businesses whose business models support China’s strategic priorities, but which don’t depend on exports or sensitive Western technology.
Tim Richardson CFA, Investment Specialist