CFS Market Insights: September 2024

Welcome to CFS Market Insights. I'm Jonathan Armitage. I'm going to talk about a couple of things in today's session. First one, talking about some of the volatility we've seen in equity markets over the last month or so, talk about US earnings and also some developments in the US election. And finally, a brief word on interest rate policy here in Australia.

So at the start of August, we saw some quite dramatic movements in global stock markets. And the trigger to this was a rise in Japanese interest rates and the end of their fixed income buying program that coincided with some weak employment numbers in the United States and some slightly disappointing earnings out of a couple of US technology companies.

However, within about 24 hours, the Japanese stock market had bounced back quite sharply. And some of those thoughts about a potential recession in the United States had actually dissipated. And some further earnings numbers in the US suggested that the economy there was not actually moving towards a recession.

And actually, as we progressed over August, we've seen some global financial markets back to record all-time highs.

So I think these events are an important reminder to avoid being reactive to short term market movements.

We are going to continue to see some periods of market equity market volatility. And those are inevitable as we move through an interest rate cycle and we see continued evolution in economic growth both in the US and also elsewhere. And that's why we are very focused on diversification in our investment portfolio, because that helps us move through those gyrations in equity markets that we see from time to time.

So turning to more recent events in the United States and particularly the reporting season.

The earnings season in the US has actually been pretty much in line with expectations with continued strong bottom-line growth from a lot of companies, particularly those in the technology area.

However, what we have seen for the first time is that investors are looking for more concrete examples of the financial benefit of artificial intelligence (AI) to a wide variety of companies.

We continue to see that there is significant investment being made by a lot of businesses in AI. But one of the things that investors are now starting to really focus on is, what are the financial benefits that investors are going to see from those very significant investments?

This is not something that's just a focus of the very large tech companies. We're seeing it across a broad range of industries, and those companies really focused on the potential benefits of artificial intelligence, but really making sure that you're seeing proper returns from the significant capital investment that's being made.

In terms of what we're doing within CFS portfolios, in response to some of these dynamics and changes, we are looking to diversify our equity exposure.

And one of the things that we've been doing is taking some money out of those large cap companies, particularly in the US, putting more money to work in smaller companies where we think valuations look a lot more attractive.

One of the other significant events we've seen in the last few weeks is the emergence of Vice President Harris as the Democratic candidate in the upcoming US election.

The investment team here at CFS is very focused on what we think might be the inflationary impacts from the domestic economic policies of both the major candidates in the US.

The market doesn't seem to be spending an awful lot of time focusing on this, and this is an area that we do think is going to get a lot more scrutiny as we move towards the election in November, but also into 2025.

One of the things that has been completely absent from the discussions and debates and the conventions has been any attempt to rein in the significant fiscal deficit in the US.

There's been a lot of media coverage around increased defence spending, for example. But we do think that markets will turn their attention to the deficit as we move through the rest of this year and also into 2025.

So the final thing I'd like to touch on is a bit more of a local lens on things here in Australia. And one of the more interesting developments in the last month or so has been the change in market expectations around the direction of interest rate policy in the US.

You’ve seen the European Central Bank cut rates already and we're expecting some further reductions this year. And it seems very likely from commentary out of Chairman Powell, that the US Federal Reserve will look to start reducing interest rates between now and the end of the year.

This is in contrast to the message that we've heard from the Reserve Bank of Australia (RBA), and particularly Governor Bullock in comments that she's made in the last sort of couple of weeks, which suggests that certainly in the near term, interest rates in Australia will continue to remain very steady.

The market is currently reading into these comments that interest rates will remain on hold, possibly for as long as six months here in Australia.

And one of the challenges is that inflation is remaining much more sticky than people would have hoped for.

And that's presenting real challenges in the way that the RBA thinks about forward-looking interest rate policy.

Historically, the Reserve Bank of Australia is aligned with the Fed and also the European Central Bank’s rate decisions.

But what we're seeing now is a real divergence, and it seems likely that that divergence is going to grow over the next six months or so.

So it does seem that right now you're going to see interest rates here in Australia higher for longer. And that's got impacts not just on corporate earnings, but also around the currency differential between Australia and its main trading partners. And that's something that we're spending quite a lot of time thinking about as we manage your investments here at CFS.

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