Global Market Review – March 2024

Global share markets delivered another month of solid returns as economic data remained strong but moderating inflation is expected to permit interest rate cuts later this year. However, elevated share prices could be vulnerable if rate cuts are put back or geo-political risks flare up.

Major equity markets reached new all-time highs in March as major central banks hinted that interest rates will begin to fall by the middle of the year. Global share markets rose 3.2% in US dollar terms and 2.9% in AUD terms; over the quarter they increased 8.9% in USD and 14.0% in AUD terms.

Equities keep surging on rate cut hopes

The US Federal Reserve (Fed) kept interest rates at their 23-year high of 5.25% – 5.50%, in line with market expectations. Its commentary suggested it remains on course to deliver three 0.25% interest rate cuts later this year, but now expects three rather than four in 2025. This reflects its upgraded economic growth forecast, which markets view as consistent with a soft landing. This broadened the recovery in equities, with value stocks outperforming growth.

Central banks in the Eurozone, UK, Sweden and China also kept interest rates on hold, making investors more confident rates will start to fall by the middle of the year.

US bond yields saw some volatility in March, but finished little changed, reflecting mixed economic data. February inflation edged up to 3.2%, while the core reading nudged down to 3.8%. The economy created more new jobs than expected, but unemployment edged up to a still very low 3.9%, helping wage inflation moderate to 4.3%.

Japan’s share markets continued to perform well, as weak industrial production was offset by stronger retail sales, helping keep inflation comfortably above its 2.0% inflation target.

Chinese equities were little changed but government stimulus helped manufacturing activity expand for the first time in six months. Such support for exporters risks a trade backlash as China builds market dominance in key sectors such as electric vehicles and clean energy. Any trade war would be negative for corporate earnings and share prices.

But share markets are not a one-way bet

Global equities have made strong gains over the last six months, bringing elevated risk of a market pullback, especially if expected interest rate cuts don’t materialise.

Rate cuts are expected mid-year in Europe where inflation is now close to its 2.0% target, reflecting weak industrial production, retail sales, and consumer confidence. This environment is constraining aggregate corporate earnings growth, as global goods demand remains subdued and China exports output it cannot absorb domestically.

Supply chain risk remains elevated, as the conflict in Gaza rumbles on, spilling over to disrupt Red Sea shipping.

Australia shows signs of slowing

Australian shares returned 3.1% in March as positive global sentiment was somewhat offset by weaker iron ore and natural gas prices. Over the March quarter, Australian equities gained 5.5%, underperforming global markets due to the smaller technology sector.

Australia’s high exposure to short-term mortgage debt is ensuring higher interest rates are now slowing the economy. This is reflected in weak retail sales and consumer confidence. However, the ongoing labour shortage saw unemployment fall to just 3.7% in February, helping keep monthly inflation above target at 3.4%, delaying the first intertest rate cut, now expected at the end of 2024.

Poor affordability and the prospect of later rate cuts are now slowing the residential housing market. March’s 0.3% month-on-month increase was the weakest since the start of the current rebound 12 months ago.

Outlook

• ‘Higher for longer’ interest rates are slowing the global economy but inflation remains sticky
• Interest rates are expected to fall in most major economies this year, but the timing remains uncertain
• 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