June Newsletter

The month of June saw increased Australian market volatility with resources hit particularly hard as expectations of an early global economic recovery waned as a result of persistently high inflation data.

Nevertheless, the All ordinaries and ASX 200 still finished in the black, largely due to stellar price performances from the banks – the CBA for example hit an all-time high of $128.68 on the 24th June and Macquarie, not to be outdone achieved its highest level ($207.57) since March 2022.

In reality however, despite these two banks attracting the most media attention, over the past 12 months their share price appreciation has been eclipsed by both NAB and Westpac with both banks returning to market favour as a result of significant re-structuring.

Consumer Staples, led by Woolworths which increased by 12.9% from its early May low of $30.12, gained 4.6% for June and Health Care, largely the result of better performances from CSL and Sonic Health Care, gained 5.1%. 

The major drags on the market during June were Materials and Consumer Discretionary as fears that both global and the Australian economy were not yet at that point where demand for commodities and discretionary spending would grow. 

The news late in the month that the monthly CPI indicator (our measure of inflation) rose to 4.0% for the 12 months to 31st May, up from the 3.6% rise recorded for the 12 months to 30th April, set alarm bells ringing and many economists who had been confidently predicting a rate cut of 0.25% in September were suddenly changing their tune to a rate rise of 0.25% when the RBA board meets in August.

Sector Performance June and for FY 2024

This late piece of news on inflation exacerbated the existing weakness in resources and consumer discretionary but also had the expected effect on acutely interest rate sensitive sectors such as the property trusts. As a consequence, all of these sectors experienced selling near the end of the month.

Interest Rate Outlook
We have never been strong believers that we would see a rate cut this calendar year because
inflation has proven to be quite sticky and generally takes longer than the few months everyone
was getting excited about, to confirm it is getting under control. 

And, as discussed in last month’s newsletter, the new RBA governor is playing a very cautious game and is unlikely to make any knee jerk decisions. 

For this reason, we don’t think the RBA will raise rates in August but will prefer to see how quickly the tax cuts and the other stimulatory spending by the federal and state governments wash through the economy in the September quarter.

That’s not to say we won’t see a rate rise in the December quarter – perhaps 0.25% to take it near the 4.75% high recorded in November 2010, but at this stage at least we don’t think it will be warranted.

Share Market – Financial Year Performance 

Back to the share market and as Table 1 shows for the 2024 financial year the broad market indicies of the All Ordinaries and ASX 200 recorded solid gains of 8.3% and 7.8% respectively and that is without including an additional 3.5% in estimated average dividend yields. 

Standout performances were seen from the Banks (+23.1%), Property Trusts (+19.9%) and
Consumer Discretionary (+19.3%) as all three sectors were bouyed by the (initial) expectations that inflation was under control. 

The banks were also helped through a low rate of mortgage defaults and the larger margins banks always make during times of elevated interest rates. 

Materials and Energy (-6.4% and -7.4% respectively) paid the price of a muddling economic outlook especially within China which is grappling with crashing property values putting a brake on economic growth. 

Commodity Price Performance 

This negative growth sentiment which manifested itself late in the financial year is amply illustrated by the performnace of our major industrial commodities, which, after a promising recovery in the March quarter and through to May, were, by and large, brought to earth with a thud in June. 

Consumer staple completed the trifecta of negative indicies, being down 6.9% for the financial year largely on the back of Woolworths which, despite showing a June rally still lost 16.1% for the full year.

Looking Ahead 

Looking ahead through to Christmas there are a number of global and domestic situations which will shape our markets performance. These include:
• The US elections
• How well the September quarter stimulus in China will work?
• Will the RBA raise, lower or keep steady cash rates?
• Will the Gaza war widen potentally affecting oil supplies?
• Will the Ukraine war reach a resolution prior to a new US President?
• Will the US see a cut in interest rates?
We don’t have a crystal ball and even Nostradamus would probably be saying barleese with so
many potential geopolitical catalysts on the table. 

Notwithstanding these ongoing events contributing to uncertainty, the share market to a certain
degree has already factored in many of these influences. 

For example, the fact that the Australian and US markets finished close to their financial year highs identifies that both bourses are relatively benign about the perceived risk of each event and once confidence as to the timing of interest rate cuts is identified, we could see new highs through FY 2025. 

Building on that possibility, we often discuss (possibly to the point of ad nauseam to some readers) that even during rising or falling markets, the various sectors perform differently and do not always follow the same direction. 

For FY2024 that is well illustrated in Table 1 for example with Materials and Energy underperforming because of the very good reason that the exact timing of a growth in industrial and energy commodities is not known. 

And therein creates the opportunity because at some stage commodity demand will grow as economies move into second gear and we do think that will be during FY2025. 

So that means that our resource stocks – both base metal and energy, could be set for a stronger coming 12 months as commodity prices increase and sentiment improves. 

Relative Performance of All Ordinaries and Materials indices.

One illustration of this dichotomy of performance is shown in the following chart 3 which plots the performance of the ASX 200 and the Materials sectors for the June and December six monthly periods over the past 10 years.

As can be seen from Chart 3 both sectors have quite a variance between their performance. 

Of special interest however is that the resources sector outperforms the broader ASX 200 index 72% of the time over the period measured and as Table 4 identifies, after a flat or down year never fails to return to a positive performance over the next 6 months. 

History does have a habit of repeating and whilst the share market certainly has a mind of its own we do feel comfortable in suggesting that an increased weighting in resource stocks over the coming few months could provide an out performance relative to the broader market through to 31 December. 

Our most favoured commodity is copper but we also see a strong chance for a bounce in nickel and further price strengthening in Alumium. 

Coming into September we also think iron ore prices could gather some forward price momentum.

For a diversified exposure where the commodity and company exposure is largely managed for you, the Tribeca Global LIC (TGF) is recommended. 

Business Expansion

That’s enough about the market so on a lighter note Horizon’s held its inagural strategy day in early June and it proved very productive and chalked up as a success. The success determination was also helped by another first, David buying everyone a baked good of their choice. 

With the expansion into our Perth office, the addition of expanded research personel and tools and our new admin assistant Sally Garnier, we are now in a strong postion to open our doors to new business, whilst continuing to service our existing clients. 

It is safe to say that client satisfaction is the lifeblood of our business and as such, we would appreciate any referrals to work colleagues, friends or famiy members that you feel could benefit from our services. 

Farewell For Now

On a closing note, we would like to say thank you and good luck to our SMSF Administrator Stef
who will be going on Maternity leave from mid July until December. 

We wish you all the best Stef and look forward to having you back on board at the end of the year. 

Please do not hesitate to contact your fincaial advisor to discuss any of the themes or stocks mentioned in this monthly letter. We also always appreciate feedback if you are finding the monthly letters of interest or would like to see changes made on how it is presented or topics discussed.

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