Quarter 1, 2024, Market Overview and Asset Performance  

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Hello, this is James Kerr from Mercer Investment Management team providing you a short summary of the financial markets performance over the past quarter. Let's begin with a look at the Australian economy. Economic conditions in Australia have remained resilient over the past quarter. The housing market and current business conditions have shown strength, while the labor market has remained robust, with the unemployment rate remaining low at 3.7%. However, there have been softer signs in discretionary household spending, and company insolvencies have been rising, though mostly isolated to the construction sector.

Inflation is trending above the RBA's target, currently at 4.1%, though it has fallen down from 7% this time last year, allowing the RBA to hold interest rates steady at 4.35% over the period. Internationally, economic data released over the past quarter has pointed towards resilient growth conditions, albeit with regional differences. The US has continued to outperform with growth in services and manufacturing sectors. Europe, on the other hand, has experienced weaker activity, with the UK entering a technical recession and the Eurozone showing flat growth over the period. Inflation has broadly declined, and central banks like the US Federal Reserve and the European Central Bank have kept interest rates unchanged while signaling a potential for cuts.

In China, growth appears to be running below trend due to ongoing weaknesses in the property sector. However, there are signs for improving activity, particularly in services-related industries. And the Chinese government continues to target a 5% growth outcome for this year.

Japan has reported a poor GDP print but has shown positive signs such as the largest growth in wages since 1993. This was enough to see the Bank of Japan raise interest rates for the first time in 17 years to 0.1 of a percent, exiting its negative interest rate policy. With a relatively stable and positive economic environment over the quarter, financial asset returns were positive for the period.

The Australian equity market was up over 5% despite a decline in the materials sector following a fall in iron ore prices of around 28%. High inventory levels and weak sentiment towards China having the greatest impact on metal prices over the period. Australian government bond yields experienced mixed movements with the 10-year bond yield unchanged at 3.96%, while the Australian dollar has depreciated against most major currencies, finding support at around 65 US cents. Internationally, equity markets have delivered very strong returns supported by resilient economic conditions and better-than-expected earnings results from the US.

The Magnificent Seven had more mixed performance, though strong overall contribution to the market was evident, with the likes of NVIDIA up over 90% for the period as the company reported an increase of over 250% in revenues compared to this time last year. This follows strong demand from its artificial intelligence-supporting chips. Tesla and Apple were among the weaker performers of the US large-cap stocks for the period. Emerging market shares have lagged developed markets, with Chinese equity markets remaining a key laggard, though still a positive 7% return for the quarter.

In the real assets space, listed real assets have faced headwinds due to the rise in government bond yields. Australian listed property, though, has been one of the strongest asset classes over the period, gaining over 16%, driven by gains from Goodman Group. This contrasts with softer returns for direct property assets following several years of strong performance.

As we consider the potential outcomes for the rest of the year, a period of weakness or stability in equity markets should be expected after the strong start we've seen this year. Further delays in the expectation for interest rate cuts in the US and rising geopolitical and regional concerns, such as the current events in the Middle East, should limit any additional gains in equity markets as we move into the middle of the year. However, we do expect the US to begin normalizing interest rates later this year, and that should put downward pressure on the US dollar, helping to ease financial conditions and remaining supportive to positive investor sentiment as we head into the US elections later this year. Thank you.

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