In terms of GDP growth, the US was the strongest performing developed market economy in Q1 2024. However, it has started to show signs of peaking momentum, with some softness in consumer activity beginning to emerge. There are also signs of further moderation or outright contraction in Europe, the UK, Japan and China, though overall risks of a global ‘hard landing’ appear to have receded.
The encouraging disinflationary trends of late 2023 broadly continued in Q1, though sticky services inflation and fading goods deflation have resulted in headline outcomes fluctuating at or just above the top end of central bank targets. The
near-term outlook for inflation appears broadly balanced.
Despite these near-term hiccups, most major central banks have signalled that this interest rate cycle has peaked, and they are increasingly comfortable with modest cuts from mid-2024. Resilient economic data has supported equity markets, though bond yields have given up some of their Q4 2023 rally and are stabilising at the 4.1–4.3% range.
Donald Trump and President Biden have confirmed a rematch of the 2020 election this November. With over 70 elections worldwide this year, politics will likely drive geo-politics and be a source of market volatility.
Global equity markets continued their rally, up 8.5% in Q1 2024,extending Q4’s strong 11.1% rise. While interest rates rose, the bulk of the rally was driven by strong corporate earnings and investor exuberance around generative artificial intelligence (AI).
The US S&P 500 index surged 10.2% (after an 11.2% rally in Q4), with ever more extreme valuations likely to act as a headwind in the absence of accelerated earnings growth.
Signs that Eurozone economic momentum may be bottoming saw Europe’s STOXX 600 index also perform strongly, rising 7.0% after Q4’s 6.4% bounce. For China, ongoing concerns about domestic growth and internal debt dynamics saw the Shanghai Composite index continue to underperform, despite rising 2.2% and rebounding from Q4’s 3.9% decline.
The S&P/ASX 200 index lagged most overseas markets in Q1, rising 5.3% after a 8.4% gain in Q4. Nevertheless, the domestic market (along with most overseas indices) still posted a fresh record high. The market was supported by a reasonably constructive reporting season, easier financial conditions, and more dovish expectations for Reserve Bank of Australia (RBA) rate cuts.
We continue to favour an overweight to domestic equities, with relatively attractive valuations, earnings which appear to be stabilising and moving higher, the federal budget which is likely to be electorate-friendly, stage-three tax cuts, which should provide income relief to households, and expectations that the RBA will begin easing policy from mid-year.
Recent data have broadly supported expectations for a relatively mild global growth slowdown through 2024. This ‘soft-ish’ landing for the world economy should embody a period of below-trend growth (particularly in H1 2024) and support modest easing by central banks in H2 2024. Consensus expects global growth to slow in 2024 to a pace modestly below long-term averages. The International Monetary Fund recently upgraded its 2024 growth outlook, noting that a ‘soft landing’ was in sight.
We continue to have a positive outlook for the Australian economy, with strong population growth and the upcoming stage-three tax cuts likely to support activity relative to developed market peers. However, we are cognisant that stubborn inflation and poor productivity may limit the RBA’s ability to cut rates (particularly in 2025), which may moderate the extent of economic performance beyond this year.
Optimism around central bank rate cuts peaked late last year, and bond yields generally rose over the quarter as markets adjusted to stubborn inflation and cautious central bank guidance. The Barclays Global Aggregate index was broadly flat in Q1, after its strong 6.0% rally in Q4.
In the US, 10-year Treasuries rose 32 basis points to 4.20% over the quarter, giving back about half of their Q4 rally. Australia was a relative outperformer, with the RBA’s pivot to a neutral stance, alongside weaker macro data, supporting a broadly unchanged Australian 10-year Commonwealth Government bond yield.
The US dollar strengthened against most major currencies in Q1, with higher US yields and relative US economic outperformance supporting the reserve currency.
The Australian dollar was a key underperformer, falling 4.3% against the US dollar in Q1, with poor Chinese economic data and a weaker Australian consumer generally weighing on 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 over the course of the year, which should allow central banks to start trimming policy rates from June as they attempt the challenging balance of bringing inflation back towards target without triggering a recession.
That said, risks of an economic hard landing appear to be moderating, with robust labour markets and disinflation supporting consumer earnings and economic activity. At the same time, central banks retain ample ammunition to ease financial conditions should the situation call for it. We do remain wary of risks to our outlook. In particular, the twin wars on Europe’s doorstep, the evolving structural forces of AI and the energy transition, and political factors as the ‘year of the election’ rolls on.
We continue to have a positive outlook for the Australian economy, with strong population growth and the upcoming stage-three tax cuts likely to support activity.
With moderating left-tail risks and a supportive macro backdrop, we maintain a prudently constructive outlook. While we believe investors should remain invested, we are cognisant of the risks, which include increasingly expensive equity markets. We favour fixed income, with current yields continuing to offer a favourable risk-return outlook. Within fixed income we prefer the higher quality areas of investment grade and high yield credit. For equities we are broadly neutral, focusing on quality.
This document has been authorised for distribution to ‘wholesale clients’ and ‘professional investors’ (within the meaning of the Corporations Act 2001 (Cth)) in Australia only.
This document has been prepared by LGT Crestone Wealth Management Limited (ABN 50 005 311 937, AFS Licence No. 231127) (LGT Crestone Wealth Management). The information contained in this document is provided for information purposes only and is not intended to constitute, nor to be construed as, a solicitation or an offer to buy or sell any financial product. To the extent that advice is provided in this document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your ‘Personal Circumstances’). Before acting on any such general advice, LGT Crestone Wealth Management recommends that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of a financial product, you should obtain and consider a Product Disclosure Statement (PDS) or other disclosure document relating to the product before making any decision about whether to acquire the product.
Although the information and opinions contained in this document are based on sources we believe to be reliable, to the extent permitted by law, LGT Crestone Wealth Management and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances.
LGT Crestone Wealth Management, its associated entities, and any of its or their officers, employees and agents (LGT Crestone Group) may receive commissions and distribution fees relating to any financial products referred to in this document. The LGT Crestone Group may also hold, or have held, interests in any such financial products and may at any time make purchases or sales in them as principal or agent. The LGT Crestone Group may have, or may have had in the past, a relationship with the issuers of financial products referred to in this document. To the extent possible, the LGT Crestone Group accepts no liability for any loss or damage relating to any use or reliance on the information in this document. This document has been authorised for distribution in Australia only. It is intended for the use of LGT Crestone Wealth Management clients and may not be distributed or reproduced without consent. © LGT Crestone Wealth Management Limited 2024.
