Spurred on by New Year optimism and the election of Donald Trump as the new apparent economic messiah, the US markets lead global markets higher during January with the Dow Jones 4.7% stronger. Whilst the NASDAQ was the poor cousin, gaining only 1.6%, it too would have closed around 4.5% higher if not for the late January news of the Deep Seek Chinese AI App. In yet to be proven claims, this AI App is claimed to have cost only around $US6 million to train compared to the usual $US100+ million for Western AI Apps and purportedly uses around 90% less energy to run.
Following the US lead, and with limited listed technology shares, January was quite a stellar month for the Australian share market with all the major indices finishing in the “green” with the banks and consumer discretionary again leading the way.
Looking to the month ahead, a factor that will influence Australian market sentiment will be if the RBA determines a rate cut is appropriate when it meets on 17th February. Economists have now swung in favour of Australia’s first rate cut for this cycle happening immediately post that meeting, with over 50% now expecting a cut of 0.20-0.25% to be announced.
We are not so sure. Whilst the December quarter CPI for the 12 months to 31 December was only 2.4%, and well within the RBA’s target range of 2 to 3%, the trimmed mean CPI (the CPI where the sectors with the largest price changes have the extreme values “cut”) still came in at 3.2% and if energy and food prices are excluded our headline rate is still around 3.6%.
A falling CPI may not be the only factor that the RBA considers at its February meeting when determining if the time is right for a rate cut. For one, the US Fed has signalled that they will pause any further reductions in US rate cuts until they see whether the anticipated inflationary effects from the impending US tax cuts and tariffs eventuate. Should the US keep further rate cuts on hold and the US economy powers ahead, then the disparity between headline rates and GDP growth between Australia and the US could see our dollar come under additional selling pressure.
A weak Australian dollar increases our debt liability but is also inflationary as overseas goods cost more. It is an unsteady tightrope the RBA needs to traverse.
Commodity Markets
Commodity markets continued to struggle during January with mixed performances across the base metals and with the coal price continuing to trend down.
For the financial year to date, all major commodities apart from aluminium are down, and the sector is now entering its third year of price weakness.
Despite this price weakness, both BHP and RIO re-emphasised their commitment to increase copper production and RIO, through its current takeover of lithium producer Arcadium, has shown its belief that the electric vehicle and battery market in general has a strong future.
Evidence that our resource majors see value in the sector is mirrored by BHP’s bid for Anglo in early 2024, the rumoured merger of RIO and Glencore that came to light just before Christmas and Woodside’s purchase of significant LNG assets in the United States in the second half of last year.
S&P/ ASX 20 Index
Calendar 2024 was a good year for Australian equities and a significant contributing factor was the gains shown across our major banking shares. CBA and Macquarie made all-time highs and ANZ, WBC and NAB revisited levels last seen around ten years ago.
One argument presented is that the outperformance by bank shares masked an otherwise average year for equities.
To test this, we have prepared the following analysis of the ASX 20 Index, sometimes known as the 20 Leaders Index. This Index is comprised of the 20 largest companies – as measured by market capitalisation – listed on the ASX.
It can be argued that it represents the elite of the Australian businesses and provides investors with a good measure on just how well the Australian economy is performing.
The sector break-up of the index is shown in the following chart. The banking sector dominates the index, comprising 36% of total value.
To analyse the performance of each company in the ASX 20 for calendar 2024, we compared the closing price as at 31 December 2023 to 31 December 2024 and included the dividends paid over the year.
This number, calculated as a percentage against the 31 December 2023 closing price, provides the total return each company provided in 2024 and is shown in Table 3 below.
The total return by holding an equal weight of all the ASX 20 shares in 2024 was 14% and 18.5% with the inclusion of dividends.
However, when considering the impact of the weighting of the size of each Company in the market (market capitalisation), the return drops to 9.1% before dividends (and approximately 13.6% including dividends). Pre dividends, the banks contributed 10.76% to the overall share market return, miners detracted 5.24% and the remaining industrial shares contributed 3.58%.
As such, bank shares substantially supported the overall share market returns that were generated last year due to their substantial index weightings. Equally, resource shares substantially detracted from overall performance but that this was somewhat offset by the positive returns generated by industrial shares.
The Share Market – Looking Ahead
As we highlighted in previous newsletters, the period from November through to February is often the best performing period for the Australian share market with gains often extending into the month of April.
We have already experienced a very strong December and January so thus far the market is conforming. We would not be surprised for some profit taking in February, especially should Trump carry through with his threat of tariffs across the United States major trading partners.
Overall, while we consider pockets of the market overpriced (the banking sector for one), we do believe there are companies that offer value at current prices and continue to rotate into these companies.
If there are any matters you would like to discuss with regards to your portfolio, please do not hesitate to contact our office.
