8 August 2024
JULY 2024 PORTFOLIO REPORT
The month of July saw an honest to goodness mini-bull market with all
major indices gaining between 3% and 4% together with most of the sub-indices
showing even stronger returns. The only
laggards to this rally were the Energy and Materials sectors which, whilst down
only 0.4% and 0.1% respectively, continued their negative trend for the year, down
5.9% and 13.5% respectively for the calendar year to date.
ASX Index |
Month of July |
Calendar Year 2024 |
|
Performance |
YTD Performance |
All
Ordinaries |
3.8% |
6.3% |
ASX 200 |
4.2% |
6.6% |
Small
Ordinaries |
3.4% |
4.9% |
Consumer
Discretionary |
9.1% |
18.2% |
Consumer
Staples |
3.8% |
4.4% |
Energy |
-0.4% |
-5.9% |
Financials |
6.3% |
21.1% |
Health
Care |
4.7% |
9.4% |
Materials |
-0.1% |
-13.5% |
Property
Trusts |
6.8% |
15.5% |
US Index |
|
|
Dow Jones |
4.4% |
8.4% |
Nasdaq |
-0.8% |
17.2% |
Table 1: Monthly and CY YTD 2024 performance of
selected ASX indices
A large part of this positive share market performance was fuelled by
the banks and listed property trusts as both sectors rallied hard in what now appears
to be a misplaced expectation of an Australian interest rate cut before
Christmas. CBA led the charge, touching
an all-time high of $138.24, while Westpac reached $29.94 (a six-year high),
NAB $38.85 (a nine-year high) and ANZ $30.23 (a seven-year high).
This strong rally in the banks was purely based on a Price to Earnings
ratio expansion (the earnings multiple that investors are willing to pay), as
the outlook for the four majors’ earnings growth into 2025 is minimal at best.
Across the listed property trust sector (REIT’s) Goodman was the standout, reaching an all-time high of $37.17. This placed the stock on a forward PE of 31 times and a yield of only 0.8%!
In our June newsletter, we wrote “that since the Australian and US markets finished close to their financial years’ highs (in June) this suggests that both bourses are relatively benign about perceived (economic) risks and once confidence of the timing of interest rate cuts is identified, we could see new highs through FY 2025”.
This statement was certainly prescient for the strong month we experienced in July, and that the bullish mood suggested the upcoming company reporting season commencing in August would be overwhelmingly positive.
A Touch Of Reality
At the back end of July, some clouds started to form. In the US, these clouds were seeded by several economic measures that suggested that the US economy was losing steam quickly and, with the US Federal Reserve reluctant to cut rates until at least September, could cause the US to tip into a recession.
In Australia, we had the June CPI come in at 3.8%. Whilst this flat result was better than what the share market had been predicting, it also demonstrated that inflation is proving hard to budge. Given that tax cuts would not be felt in economic data until July-August at the earliest and would likely fuel inflation rather than temper it, this has perhaps caused some belated market consternation as reality dawns that the earliest Australia can could hope for a reduction in official interest rates is now not likely until March – April 2025.
At the same time, local retail trade data indicates Australian consumers are pulling their heads in. This suggests that parts of the Australian economy are slowing quickly, and that the risk of a domestic recession continues to lurk around the corner.
Lastly, one of the best indicators for the Australian economic outlook is just how well China is doing and, by extension, how strong the major industrial commodities are.
The answer to both these questions is “not that great at the moment”. It could be argued that the weakness in commodities and the mixed performance year to date had been providing some early warning signs as to excessive market bullishness.
Commodity | July | Calendar Year to Date |
Copper ($US/lb) | -4.8% | 7.5% |
Nickel ($US/t) | -4.9% | 1.6% |
Aluminium ($US/t) | -9.1% | -4.0% |
Zinc ($US/t) | -8.4% | 1.5% |
Oil ($US/bbl) | -4.8% | 8.7% |
Lithium (spodumene) ($US/t) | -17.1% | -4.2% |
Iron Ore ($US/t) | -1.3% | -23.0% |
Table 2: Monthly and CY YTD 2024 performance of selected commodities
The Market Takes A Tumble
As you would be aware, this change in economic sentiment has caused significant market falls for the start of August, both within Australia and other major bourses, as markets adjust to a more negative economic outlook.
Already we have lost around 5% from recent highs. Whether this rapid retracement is a case of the market jumping at shadows or the start of a short bear market remains to be seen. We would not be surprised to see any rallies over the next few months short lived until confidence about the economic outlook returns.
Our view is that we need to see some price recovery in commodity prices to indicate a US, China and more broad global economic recovery. Together, with a bounce in confidence for the Australian economy, will likely be key catalysts.
This could occur late in the December quarter or early in 2025, as we would not be surprised if history repeats and there is weakness in the US share market ahead of the November presidential election.
Whilst that may sound overly bearish, particularly given our comments in last month’s letter that we could see the market close well above 8,000 points in FY2025, the reality is that pull backs in an overheated share market are necessary to allow fundamentals to be re-established.
In certain sectors, it does appear that the market has been getting ahead of itself.
In Summation
In last month’s letter we summarised a number of events which will likely direct how well share markets perform through to Christmas. It is worth repeating these with some additions and comments.
· RBA interest rate settings. The RBA appears determined to hold fast against the inflationary stimulus from both State and Federal governments. We think it is unlikely the RBA will raise rates again but equally, will also not cut rates until well into 2025. The RBA is playing a difficult deck with a tight monetary policy to squash inflation but not so tight that it destroys confidence.
· Will Australia enter an economic downturn/recession as appears could be the case for the US? While anecdotal data indicates parts of the economy is slowing, this appears to be countered by State and Federal government spending as well as broad based tax cuts. We think that a multiple speed economy is a more likely result and that, overall, a recession in Australia is much less likely than in the US.
· Will the Gaza war widen and potentally affect oil supplies?
So far this has not happened but the Middle East is a powder keg so it could go both ways. It doesn’t help that
at the time of writing Iran is promising retaliatory attacks on Israel over the death of a Hamas leader in Tehran.
· The US elections. History suggests that there will be a period of at least 6 to 8 weeks of poor market performance (lead by the Dow Jones Index) leading up to the US election (5th November) and then potentially a relief rally through to Christmas.
· Will the US see a cut in interest rates? At this stage there is almost a certainity of a rate cut at the US Fed’s September meeting. The question is now how big a rate cut given the latest economic data suggests the US economy is now slowing quicker than expected.
· How well will the September quarter stimulus in China work? Still the great unknown; but early in the December quarter we often see greater bulk commodity demand from Chinese buyers.
· Will commodity prices recover? – If only due to production cuts, on balance we think yes, but that it will be selective and positive price momentum may now not gain traction until the new year. Copper and iron ore are our preferred exposure for an economic recovery. The wildcard is nickel because of the significant production cuts occuring in Australia. If Trump gets elected, we would be concerned about the outlook for lithium.
Fe (prices in USD) |
BHP |
|||||||
Date |
Price |
Date |
Price |
Duration (days) |
Gain |
From |
To |
Gain |
4 Nov’19 |
$80.73 |
21 Jan’20 |
$94.33 |
79 |
16.8% |
$32.48 |
$36.68 |
12.9% |
2 Nov’20 |
$117.51 |
12 July’21 |
$222.29 |
216 |
89.2% |
$30.52 |
$46.19 |
51.3% |
15 Nov’21 |
$92.82 |
28 Mar’22 |
$160.33 |
135 |
72.7% |
$33.35 |
$43.13 |
29.3% |
7 Nov’22 |
$84.76 |
13 Mar’23 |
$130.10 |
127 |
53.5% |
$37.98 |
$49.68 |
30.8% |
23 Oct’23 |
$118.01 |
2 Jan’24 |
$141.18 |
71 |
19.6% |
$44.54 |
$50.84 |
14.1% |
Table 3: Cyclical performance of iron ore and resulting BHP share price performance
All of the above is certainly crystal ball gazing and the share market will always remain unpredictable. Nevertheless, history has shown that investors in quality shares will ultimately be fine. We will continue to use market weakness as an opportunity to chip away at quality investments while ensuring investors retain a level of defensive and more stable investments within portfolios.
As always, please do not hesitate to contact our office to discuss any of the themes or stocks mentioned in this monthly
letter. And we also always appreciative of feedback including if you are finding the monthly letters of interest or would like to see changes made on how it is presented or topics discussed.