The US economy showed signs of slowing, with softness in consumer activity and a moderating labour market. The Chinese economy has faced cyclical and structural challenges amid ongoing property market woes, with authorities attempting to shore up real estate activity. Meanwhile, the European and UK economies showed signs of improvement, prior to snap elections being called in the UK and France. Our outlook points to growth slowing below trend in 2024.
While sticky services inflation has made the ‘last mile’ for global central banks challenging, disinflationary trends have largely remained intact overseas, giving central banks in Europe and Canada room to begin easing rates. Conversely, stubborn domestic inflation may compel the Reserve Bank of Australia to hike in August.
Cooling but still-resilient US economic activity and corporate earnings supported US equities. The 10-year US Treasury yield was volatile but stabilised in the 4.2–4.4% range.
Electoral tensions continue to rise, with snap elections being called in France and the UK. We expect politics to drive geo-politics and to be a source of market volatility.
The UK and European economies are emerging from their mild H2 2023 recessions, revealing tepid growth in H1 2024, while US data flags further easing in activity through H2 2024 as the consumer and jobs market weakens. Japan’s growth has disappointed, while China’s property sector remains weak.
For Australia, recent data confirm a sharp slowing in growth in H1, with Q1 output flat and annual growth just 1%, well below trend. While the jobs market remains resilient, vacancies have fallen, and consumer spending has weakened. Despite this, signs of inflation reaccelerating in Q2 have renewed concerns that interest rates may still rise further, with expectations for rate cuts shifting to 2025. Additional and significant fiscal easing at federal and state levels is likely to be making the task of containing inflation more difficult, as are structural issues in the housing sector.
Global equity markets continued their rally, up 2.2% in Q2 2024, extending Q1’s strong 8.5% rise. While interest rates were volatile, the bulk of the rally continued to be driven by strong corporate earnings and investor exuberance around generative artificial intelligence.
The US S&P 500 index rose 3.9% (after a 10.2% rally in Q1), with strong earnings growth supporting the market in the face of elevated valuations. Political volatility from two snap elections saw Europe’s STOXX 600 index fall 0.2% after Q1’s 7.0% gain. For China, ongoing concerns about domestic growth and internal debt dynamics saw the Shanghai Composite index continue to underperform, falling 2.4% and giving back Q1’s 2.4% rise.
The S&P/ASX 200 index lagged most overseas markets in Q2, falling 1.1% after a 5.3% gain in Q1. Fears over increasingly stagflationary local macro conditions weighed on the market.
We continue to favour an overweight to domestic equities. Our view is supported by relatively attractive valuations, earnings which appear to be stabilising and moving higher, supportive fiscal stimulus from federal and state budgets, and stage-three tax cuts, which should provide income relief to households.
Bond yields were generally volatile over the quarter as markets adjusted to resilient economies and cautious central bank guidance. The Barclays Global Aggregate index was broadly flat in Q2, printing similar performance to Q1.
In the US, 10-year Treasuries rose 20 basis points to 4.40% over the quarter, as markets continued to wind back overly aggressive hopes for easing from the Federal Reserve. Australia was a relative underperformer, with stubborn local inflation and fears of a potential rate hike driving a 35 basis point rise in the Australian 10-year Commonwealth Government bond yield.
The US dollar strengthened against most major currencies in Q2, with ongoing US economic resilience and rising yields supporting the reserve currency.
The Australian dollar was a key outperformer, rising 2.3% against a strong US dollar in Q2, with stubborn inflation prompting a repricing of Reserve Bank of Australia rate expectations to incorporate the risk of a hike supporting the currency. The Australian dollar is expected to stabilise from here, with most forecasters expecting a rise to USD 0.70 over the course of 2024.
We expect economic growth and inflation to moderate this year. This should allow global central banks to modestly trim policy rates, as they balance bringing inflation towards target without triggering a recession.
We see a low risk of an economic ‘hard’ landing in the near term, with the backdrop of easing rates globally likely to support momentum at the margin. In addition, central banks retain ample ammunition to ease financial conditions, should the situation call for it. We remain wary of risks to our outlook. In particular, the twin wars on Europe’s doorstep, and political factors as the ‘Year of the election’ rolls on, evidenced by snap elections in France and the UK. The domestic economy faces significant challenges. Strong population growth and imminent fiscal stimulus (including Stage 3 tax cuts) are likely to support aggregate activity near term but also worsen domestic inflation challenges.
We are adding risk to portfolios by moving modestly overweight equities. As global inflation pressures ease, this should set the scene for lower rates, supporting broader financial conditions. That said, we are cognisant of the risks to the outlook, including relatively expensive equity valuations. We favour fixed income, with current yields continuing to offer a favourable risk-return outlook. Within alternatives, we favour hedge funds and real assets, particularly infrastructure. We lean overweight equities, favouring quality and domestic equities.
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