The final months of 2023 provided clearer evidence that the global economy is slowing and labour demand is peaking as the impact of prior monetary tightening continues to flow through the system. That said, labour markets (particularly in the US) remained resilient, while moderating inflation may boost real household incomes, potentially supporting a fabled ‘soft landing’.
There has been further substantial progress on bringing inflation back towards central bank targets, with Q4 confirming a downward trend in both headline and core inflation outcomes. Indeed, core inflation in the US has moderated from an annualised pace of around 4.5% in H1 2023 to below 2.5% towards the end of 2023.
Encouraging progress on moderating inflation and growth saw a dovish pivot by major central banks, led by the US Federal Reserve (Fed), which signalled that it was beginning to consider when to cut rates. This messaging supported a momentous rally in financial markets over Q4 2023, with global bond yields compressing from their mid-October highs and global equity markets re-approaching their 2021 peaks.
A devastating terrorist attack by Palestinian group Hamas sparked ongoing conflict with Israel in the Gaza Strip. This adds another potential flashpoint to the continuing Russia-Ukraine conflict, as the world enters a politically significant 2024 (headlined by the US presidential elections).
Global equity markets rallied 11.1% in Q4 2023, bouncing back from Q3’s strong 3.7% fall. The recovery was propelled by an historic rally lower in interest rates after touching 15-year highs in October, and had the greatest impact on longer-duration regions, such as the US, which outperformed.
The US S&P 500 index surged 11.2% (after a 3.4% fall in Q3), though high valuations are likely to act as a headwind in the absence of accelerated earnings growth.
Ongoing concerns about recession risk and twin wars on its doorstep saw Europe’s STOXX 600 index underperform, rising 6.4% after Q3’s 2.9% fall. For China, concerns about domestic growth and internal debt dynamics led the Shanghai Composite index 3.9% lower, extending Q3’s decline.
The S&P/ASX 200 index outperformed most non-US markets in Q4, rising 8.4% after falling 0.7% in Q3. Domestic markets took part in the global equity rally, while strong commodity prices (particularly iron ore) provided further support to the local market. Energy (weighed on by lower oil prices) and utilities were the only sectors to post a negative return over the quarter.
We continue to favour an overweight to domestic equities, with relatively attractive valuations, resilient economic activity and consumption growth, and the potential for earnings upgrades, particularly in the resources sector.
| Equity Indices | Closing Value | Q4 2023 Change (%) | FY 2024 Change (%) |
| MSCI World | 3,169 | 11.1 | 6.8 |
| S&P / ASX 200 Accum. | 94,484 | 8.4 | 7.6 |
| US S&P 500 | 4,770 | 11.2 | 7.2 |
| UK FTSE 100 | 7,733 | 1.6 | 2.7 |
| Europe STOXX 600 | 479 | 6.4 | 3.7 |
| Shanghai Composite | 2,975 | -3.9 | -7.1 |
Source: Bloomberg.
We expect interest rates to start falling over the course of 2024, as moderating growth and inflation allow central banks to commence trimming rates. Thus, 2024 holds the prospect of being more supportive for markets as a path toward lower rates comes into view. However, we are cognisant of the risk for renewed volatility, spurred by twin wars in Europe and an historic year for elections, where half the world’s population will be going to the polls, headlined by the US.
Australia’s economy appears on track to continue expanding at a sub-trend pace as we close out 2023. However, the bulk of this growth will come from rising population growth and stubborn inflation, while weak sentiment and a hawkish central bank persist. The Reserve Bank of Australia’s (RBA) latest rate hike is likely to further slow consumer and housing activity in the year ahead. However, strong population growth and signs of stabilisation in China’s growth outlook continue to suggest a low likelihood of recession and the potential for outperformance against other key economies through 2024.
| Fixed Income | Closing Value | Q4 2023 Change | Q4 FY 2024 Change |
| Bloomberg AusBond Comp | 9,857 | 3.8 | 3.5 |
| Barclays Global Aggregate | 561 | 6.0 | 4.1 |
| Australian 90-day T-bill | 4.35% | 21bps | -1bps |
| Australian 10-year bond | 3.96% | -52bps | -7bps |
| US 10-year bond | 3.88% | -71bps | 7bps |
| UK 10-year bond | 3.60% | -83bps | -77bps |
| German 10-year Bund | 2.02% | -81bps | -36bps |
| Japanese 10-year bond | 0.62% | -15bps | 21bps |
| Currencies | Closing Value | Q4 2023 Change (%) | FY 2024 Change (%) |
| AUD: USD | 0.6824 | 5.7 | 2.5 |
| EUR: USD | 1.105 | 4.3 | 1.3 |
| GBP: USD | 1.27 | 4.4 | 0.3 |
| USD: JPY | 141.0 | -5.5 | -2.5 |
| AUD: EUR | 0.62 | 1.3 | 1.2 |
| AUD: GBP | 0.54 | 1.2 | 2.2 |
Source: Bloomberg
Encouraged by strong progress to bring inflation back towards target, the Fed embarked on a significant dovish pivot in Q4 2023, which included raising the possibility of multiple rate cuts in 2024. This saw an historic rally lower in global yields from post-GFC highs, sparking a broader financial market rally. The Barclays Global Aggregate index rose 6.0% in Q4, registering a strong recovery from its 2.0% decline in Q3.In the US, the Fed’s dovish pivot saw US 10-year Treasuries fall 71 basis points (bps) to 3.88% over the quarter, and 114 bps from its intra-quarter high of 5.02%. This drove a broader rally across global bond markets, supporting strong returns across most regions, barring Japan. Australia was another underperformer, and was unable to fully participate in the global bond rally, with stubborn local inflation compelling the RBA to lift rates in November and flag the possibility of a further hike in February.
The US dollar weakened against most major currencies in Q4, with lower US yields and improved risk sentiment weighing on the reserve currency.
The Australian dollar was a key outperformer, rising 5.7% against the US dollar in Q4. The currency was supported by strong iron ore prices and higher interest rates. The Australian dollar is expected to stabilise from here, though CBA believes it is unlikely to rise to USD mid-70s before mid-2024.
We expect macro data and inflation to continue moderating in H1 2024, leading central banks to start trimming policy rates around mid-2024 as they calibrate their policy settings to maintain a consistent level of real interest rates.
While we expect a slowdown in global growth, this is more likely to look like a ‘muddle through’ scenario versus a global recession. That said, we are cognisant of risks to our outlook: particularly with twin wars in Europe joined by major elections in the US and Taiwan, and the evolving structural forces of artificial intelligence and the energy transition.
We remain relatively optimistic on the outlook for the Australian economy, with strong population growth and fiscal flexibility likely to support activity relative to developed market peers.
We remain broadly constructive on the investment outlook, and continue to favour fixed income over cash, though we took the opportunity of the recent market rally to trim this position slightly in December. Within fixed income, we prefer the higher quality areas of government bonds and investment grade credit, and within alternatives we favour hedge funds and real assets, particularly infrastructure. For equities, we are broadly neutral, focusing on quality. We favour defensive sectors and non-US regions, including Australia and emerging markets.
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