CFS Market Insights: July 2024

Welcome to CFS Market Insights. My name is Jonathan Armitage. I'm the Chief Investment Officer, and I'm joined by Al Clark.

So what we're going to talk about today is investment performance and we've seen some very strong numbers for the end of the financial year. Investors in our Growth and Balanced options will have seen good double-digit returns from their investments.

So what we might do is dive into what's been driving that. So first of all, Al, let's talk about what's been going on here in Australia. Yeah, a good place to start. For the first time in a while, we've got a good story to tell about Australian equities. They've lagged the last few years, but the last 12 months looks like around about that sort of 13 to 15% return.

So that's a good return for Australian equities. The main driver of that surprisingly was financials. So where everyone expected banks to really struggle the last 12 months, with the cost of living crisis and issues with mortgages et cetera, they actually did quite well as people have been able to sustain some of their spending, and at least pay off their mortgages, which have been great and also we've sort of seen other financials, so not just the banks, things like Hub and netwealth, the more tech side of the financials doing really well the last 12 months.

So what we might also focus on is what's been going on outside Australia, particularly in the US, and I think a lot of people will be aware that some very strong returns from information technology, but also communication services and some really quite extraordinary numbers from Nvidia is up well over 200% over the last 12 months or so.

To put it another way, it's gone up threefold. But we've also seen some of the other sort of technology ecosystem equally perform well. And so there have been some other names, perhaps less well known.

Supermicro is a very good example, up 230%. But it's also probably worth touching on some of the rest of the ecosystem, but also some of the other strong drivers to returns in the US as well.

I mean, we do focus on AI. Generative AI has been a really strong driver of returns the last couple of years, to be honest. But if it wasn't for that, I think we'd all be talking about what's going on in the health sector. So a company like Eli Lilly was up 100% over the year and it's all to do with these new, they call them GLP-1, they’re like appetite suppressant drugs. They've revolutionised healthcare really in the States and overseas, and in Europe as well with Novo Nordisk. So you are seeing some really strong performance in things like healthcare, particularly around that, and also, KKR. So the best performing financial in the US for the 12 months was our own KKR, who had a stellar year in an environment which was meant to be quite difficult for private equity so that was a really strong performance.

So I think one of the important things that we've seen, particularly over the last six months or so, has been this sort of broadening out of equity markets, and we think that is an important development. You're getting much greater diversification of returns, but it also plays into something that we think is important at CFS, which is active management.

And we do think that we're sort of entering a period where active management of equities, but also of other asset classes is going to become more critical and where it pays to be flexible and also agile, both from the way that we look at equities, but also the wider sort of makeup of our investment portfolios.

No, absolutely. I mean, you think about the job that our global equity managers have done over the last 12 months, in particular, we've had a certain number of stocks, Nvidia is one we've talked about, but a certain number of stocks have been the key drivers of return. Our global equity managers on the whole have outperformed their benchmarks.

So they've added value on top of what's been a really narrow benchmark. That's a really good job. And I think that's going to be absolutely critical as we go forward with inflation data continuing to be sort of volatile and also elevated. This idea that the resting heartbeat of inflation is going to be quite a bit higher than it has been for a while and therefore, to help sort of navigate through those sort of more challenging, investment environments, that ability to be flexible and agile is going to be evermore critical.

So Johnny, maybe the way to finish this is to consider what we think might happen going forward, given we’re staring into quite a bit going on the global landscape. So I think the first thing to start is that we've obviously seen another year of very strong returns for members, which is great.

But I think as we go through the rest of this year, we've talked in, previous meetings about just the number of elections that were taking place this year. And we've actually added two more, which were slightly unexpected. The first one was the UK, but perhaps, more importantly, has been this snap election in France, and that is obviously certainly as things stand at the moment looks of it's going to change the dynamics quite dramatically in France, which is obviously a significant economy in Europe. And I think it just sort of highlights that we continue to operate in an environment where you see unexpected events. And I think this very much sort of feeds into why we focus on diversification in our investment portfolios.

This need to be agile and flexible, to deal with what we think is going to be a continuing, evolving environment, that we need to navigate as investors as we go forward. We've got the US election coming up in the not too distant future and after last week's debate, that could be interesting as well. I think it will be, and it's sort of worth highlighting that for a country of 320 million people, it's likely that probably around about six counties and possibly 100, 150,000 individuals will actually decide the outcome of that election and that's obviously something that will be weighing on markets as we move towards the end of this year. Absolutely.

Thanks for joining us for CFS Market Insights. See you next time.