Quarter in Review: December 2023
The December-23 quarter turned out to be the strongest quarter for Australian equity markets for 2023. The ASX300 Accumulation Index surged 8.4% largely driven by the Fed pivot during the quarter – with the Committee responding to success with inflation by removing an additional hike and adding a cut to its 2024 view. Investors risk tolerance re-emerged as seen by the rise in stocks with high volatility and leverage, and P/E multiples expanded across the ASX200.
- Global Markets: The ASX300 Accumulation Index catapulted 8.4% over the quarter, with the Small Ordinaries index rallying 8.5%. On a global basis the US market was the key standout performer, with the S&P500 rising 11.7% and NASDAQ by 13.8% largely led by the Magnificent Seven stocks. Conversely, Chinese equities continued their underperformance with the Shanghai Composite down 4.4%, stymied by continued weak economic news coming out of China.
- Sector Performance: December posted a strong quarter with all but 2 sectors rallying. The best performing sectors were REITS (+15.8%), Healthcare (+13.3%) and Materials (+13.2%). REITS outperformed on the aggressive reversal in bond yields and Healthcare on a combination of the move in yields and stock specific news (reduced concerns around the impact of GLP-1s). Materials were largely driven higher by the move in Iron Ore and a rotation back into cyclicals as recessionary fears waned.
Consumer Staples, often seen as a safe place to hide in risk off environments, underperformed as investors reallocated to higher risk areas of the market. - Rate and Yields: The quarter saw an end to hawkish monetary expectations largely driven by a tapering of inflation and soft to no landing in terms of US economic growth, leading the Federal Reserve adopting a wait and see approach, causing bonds to rally as the US 10-Yr fell 60bps to 388bps. Softening yields were also driven by the announcement on 1st November on details for the next Treasury refunding which showed less longer-dated paper to be sold than previously expected. While inflation remains above a 5 handle in Australia, the fading direction of travel led the growing expectation the RBA is done hiking, with the AUS 10-Yr falling 53bps to 3.96% over the quarter. The view that rates cuts in the US will outpace Australia has caused the AUD to recoup some of its losses over the year as it gained 5.9% over the quarter.
The Bloomberg US Long (10Y+) Treasury Index has risen by 19% on a total-return basis since bottoming on 19 October, after declining by 17% since the start of 3Q23. The trigger for the rally was the announcement on 1 November of the details of the next quarterly Treasury refunding, which showed less longer-dated paper to be sold than previously expected. - Commodities: Commodity trends were mixed over the quarter with Brent Oil sharply down by 19.2% as initial concerns over tight supply reversed – the US has returned to record production and OPEC spare production capacity swelled. On the other hand, Iron Ore rose for a second consecutive quarter, posting a 17.0% gain and ending the year as one of the best performing commodities. Despite a weak Chinese construction backdrop and negative steelmaker profitability, steel production has remained robust which combined with a stronger Yuan, has supported iron ore demand.
- Corporate News: The quarter featured AGM season which had fewer negative surprises against last year, with the few downgrades featuring companies with high labour costs and lack of pricing power in Healius and Integral Diagnostics. Corporate activity featured TWE’s US$1bn (A$1.6bn) acquisition of US winemaker DAOU in October. This picked up into the end of the year, as seen in talks of a potential Santos & Woodside merger, as well as Chemist Warehouse’s backdoor listing via Sigma Healthcare in December, which is expected to create a ~$9bn entity. Deal flow was particularly hectic in the last week of December with Mitsubishi’s $1.2bn takeover of Link, and Irish cement maker CRH bidding $2.1bn for Adbri. On the flip side, the Brookfield and EIG bid for Origin Energy was blocked by majority shareholder AustralianSuper, and Albermarle pulled their offer for Liontown Resources post Gina Reinhart acquiring a 19.9% stake in the target.
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