CFS Market Insights: October 2024

Hello, and welcome to CFS Market Insights. So we're going to start off by having a bit of a review of what's happened in the last quarter. And Al, there was quite a lot of activity in markets. And quite a bit of volatility. So what was behind that?

 

You're right. For the first time we saw a correction in markets. We basically had an uninterrupted run for a while. So complacency might have set in. But we definitely saw a bit of a correction.

 

So, middle of the quarter a few things conspired to drive markets down. So there was, firstly Japan tightened interest rates and the Japan carry trade became a little bit of a problem. Also there was some concerns around data, particularly in the US. So the US labour market - people have been watching that quite closely. The numbers that came out for July were really poor.

 

And then finally there was also concerns around what was going on with the mega caps, their spending, whether they could actually monetise all the stuff that had been going on, as far as generative AI. So all those things conspired to drive markets down in the middle of the quarter. That then turned around really quickly. And the main catalyst for that was the Federal Reserve.

 

So the US Fed came riding into the party and basically eased more than people expected. So they reduced interest rates more than expected by 50 basis points. And that then restored confidence. And markets then turned around quite quickly.

 

And I think it's worth just sort of touching on that actually the Fed's attention seems to have shifted as well.

 

No. Absolutely. So where the battles has been against inflation, that battle has now shifted to be supporting employment. So where the Fed had been preemptively tightening trying to control inflation, they have now preemptively eased, so reduced interest rates, to try and restore confidence in markets, but also to support the labour market, which had been moving up quite quickly.

 

So the unemployment has been moving up quite quickly. So there was concerns by the Fed, which is why they went by 50 basis points.

 

So I think it's probably worth talking a little about things a little bit closer to home. And what you're seeing is that with the Fed cutting by more than I think people had expected, 2 or 3 months ago and continued easing by the ECB.

 

The Reserve Bank now looks, really as if it's going to sort of be an outlier in terms of the certainly the start of this interest rate easing cycle. One of the challenges the RBA is sort of facing at the moment is that inflation, certainly in Australia, remains stubbornly high, and it's certainly not coming down in the way that you've seen in other markets. Right now, the market sort of pricing in to almost a sort of half-hearted interest rate cut between now and the end of year, possibly more, earlier next year.

 

But for the first time in a very long time, the RBA looks to be operating on quite a different cycle than the other major central banks.

 

No, you're exactly right.

 

So with this focus on sort of interest rates and certainly a number of changes outside Australia, what do you think that sort of means for equity markets?

 

As we discussed, the equity markets were flying at altitude, things had been going quite well and then hit some turbulence.

 

And when we hit some turbulence, everyone got really nervous. Whether the Fed's main reason for easing was to try and restore that confidence and make people less, you know, concerned about the turbulence. There was a number of things going on. But as we're all aware, easing cycles do tend to be strong environments for equity returns. And we've started exactly that way.

 

So as soon as the Fed came out and eased more than expected, equity markets reacted in the way they have in the past, which is, “Okay. This is going to be a good environment for equities”. Time will tell whether they'll play out. The issue we've got, particularly the US, is that markets are quite expensive. So it may take, a bit more time for earnings to come through and for the markets to sort of, fully digest what's going on.

 

But definitely that shot to the arm of confidence was really well received by the markets.

 

So the other sort of major event that we saw, which is really towards the end of the quarter, was a number of announcements and a pretty significant stimulus package from China. And I think that's worth touching on, because that produced a significant reaction in Chinese equity markets.

 

But it's obviously got important implications for us here in Australia, given the trading relationship that we have with China.

 

And you're right. Significant is probably the way to describe it. Markets reacted incredibly. So Chinese markets haven't been depressed for a number of years now. So we're sort of into the fourth year almost of this property downturn in China.

 

Equity markets in China rallied, depending what index you choose, around 30 to 40% straight after. So at the end of the week, the end of the quarter, sorry. So the last week of September was when the stimulus announcements were made and equity markets just took off from there in China. That supported other markets around the world. So it's a really strong close to the quarter.

 

And as you just said, Australia had a strong close as well. So the Australian equity market was one of the strongest performing equity markets for the quarter, outside of China obviously.

 

So it's probably worth talking a little bit about some of the changes that we've made within the investment portfolios and how that sort of relates to what was going on in China.

 

As we've discussed before, we'd been keen to invest in emerging markets. So we felt that the real catalyst emerging markets needed was a turnaround in China. Given they was so cheap, it made sense to be stepping into that anyway, which is what we've been doing in the majority of funds at CFS. This catalyst now, I think, gives us an opportunity to think about adding to that position.

The stimulus measures, while lacking a little bit of detail from the volume side, the direction that they're going is slightly different for China. So they actually going to be giving handouts for the first time. They're talking about giving handouts to the poor [and] to students because unemployment's so high. So they've never gone in that sort of direction ideologically.

 

And they're also talking about propping up the equity market. Now, that's always been a sort of a Western ideology that they've steered clear of. They're supporting the equity market directly at the moment. So those sort of “expanding the arsenal of their toolkit” for stimulus, that's the bit that I think people have found most interesting.

 

And I think it is quite a significant shift.

 

There's a lot of detail in this and a lot of information and the sort of implications I think will take probably take a little bit of time to come through. But as you said, I think it's important to acknowledge there have been some fairly significant shifts in policy and some tools which haven't been used before.

 

The devil in the detail is still the volume. How much quantum of stimulus are they willing to do? And that should play out over the next few weeks to months, hopefully.

 

And the one final thing that we should mention as we move into November is, of course, the US election.

 

And I don't think either of us are going to make a prediction about who will be in the white House at the end of January next year. What I do think is worth reminding people about is that you've obviously got House and Senate elections as well. And it's very likely that you will see the Senate flip from the Democrats to the Republicans.

 

I think the House itself, that's probably still a little bit of a toss up, but it's going to be important that whilst the sort of focus is very much on the presidential election itself, the makeup of Congress is also going to be important because it will determine how easy it is for the new president to initiate and implement policy.

 

And if Congress remains divided, as it has been for quite some time, that is going to stymie the ability of the president to implement their policies, whoever actually is in the white House at the end of January.

 

Well, that's exactly right. The equity markets typically react well to the certainty. So irrespective of whether the Democrats or Republicans get in for the US election, equity markets tend to rally that next year because people like the certainty of what is in front of them.

 

So companies can invest and you can make decisions from a consumer perspective, all those sorts of things. This one feels a little bit different because of, as you just described, the range of potential outcomes. And we may still have quite a bit of uncertainty. So it will be interesting to see how it plays out.

 

And I think the one other thing that is worth sort of touching on is that we have definitely seen a widening of the conflict in the Middle East.

 

I think it's worth emphasising that, the human element of this continues to be tragic across a number of different geographies. What has been interesting is that so far, despite that expansion, oil prices have not really, materially change very much, but it's obviously something that we're going to be continue to be quite focused on, particularly because of the inflationary impacts that you might see across developed economies, if you see quite a sort of material move in energy prices over the next six months or so.

 

Thanks for watching CFS Market Insights. See you next time.