Markets – May 2024
The Australian share market retreated 3% in April. While disappointing, the decrease was relatively modest, given that the ASX200 index was up 16.5% over the previous five months, as markets recovered from their lows in late October 2023.
The primary influence on the direction of share markets in the short-term continues to be day-to-day sentiment around the movement in cash rates and their flow-on effects on company share price valuations.
This theme played out over April, as increased uncertainty around the timing of interest rate cuts in Australia and the US caused some investors to lower their weightings to equities.
2023-2024
Following stronger-than-expected US inflation and growth figures over the last three months, market interest rates jumped in April, and the expectation around the pace of future rate cuts changed dramatically.
During 2023, the market expected up to six interest rate cuts over 2024, starting in March. Over April, the consensus view on the timing of rate cuts changed, with the market now expecting only two cuts, beginning in October.
But at the end of the day, this is speculation that drives day-to-day market direction. As long-term investors, our focus remains on the broader economic environment – which influences corporate earnings, which in turn impacts dividend payments that are made to shareholders.
We remain in an environment where economies continue to expand and inflation is falling, albeit at a slower pace than expected in 2023.
One of the major concerns for investors is that following the 13% rally in the ASX200 since late October 2023, the higher valuations on Australian shares may already reflect company earnings growth for the next 18 months. As a result, returns from shares may be a little muted over the next six months.
In Australia, there is clear evidence of a slowdown in some sectors of the economy, as cost-of-living pressures weigh on consumer spending.
Post-pandemic travel and other services spending is declining, and housing activity is constrained by higher interest rates, along with materials and labour shortages. But these issues are slowly being addressed.
Consumption is likely to gain momentum in the second half of 2024, given rising real incomes (ongoing high wage growth) and personal income tax cuts from July.
Further support is coming in early 2025, when the first interest rate cuts in Australia are likely to commence, feeding directly into lower mortgage repayments for households.
Two years ago, the RBA had very little ammunition to support an economy when interest rates were at historical lows. With the current cash rate at 4.35% considered to be at a level that is mildly restrictive to the economy, the RBA now has core monetary policy tools available to encourage growth.
Tonight’s budget will support the economy, with most of the focus on cost-of-living relief via tax cuts, support for housing construction and assistance for local manufacturing and critical minerals.
We’ll have a detailed update on the budget later this week.
Sources: ASX, The Australian, Bloomberg, CBA, Morningstar, AMP Capital, Westpac, The AFR & AssureInvest.
Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.
I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.
Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
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