Quarter in Review: June 2024

The June-24 quarter saw Australian indices falling modestly following two consecutive quarters of strong gains. Overall this marked the end of a strong FY24 especially following similarly solid returns in FY23. Consistent with the trend over FY24, the bulk of returns were generated through price-earnings ratio (PER) multiple expansion.

1. Global Markets: The ASX300 Accumulation Index fell 1.2%, with small caps relatively underperforming as the Small Ordinaries index fell 4.5% (similar thematic to the US). US indices continued outperformance with the S&P500 up 4.3% and NASDAQ up 8.5% lifted by mega cap tech. It is interesting to observe where we currently are in US markets – a 35 year high in momentum, 60 year high in stock concentration and market cap to GDP near a 70 year high. However this is also being backed by large positive earnings per share (EPS) upgrades across the large caps.
2. Sector Performance: There was a large disparity in sector performance during the quarter with half of sectors up and the other half down. Moreover the spread between the best and worst performing sector was nearly 20%, with sharp divergence between the two largest sectors in Banks and Resources. The Banks outperformed due to benign bad debts, upweighting of share buyback programmes and offshore buying. Resources dragged as a reaction to poor China data as well as Iron Ore and Lithium prices. The best performing sectors included Utilities (+13.3%), Financials (+4.5%) and IT (+2.4%). The worst performing sectors were Energy (-6.6%), REITS (-6.0%) and Materials (-5.9%).
3. Rate and Yields: The quarter saw marked increases in yield expectations with the US-10 Yr up 0.2% to 4.4% and the AUS 10-Yr up 0.35% to 4.31%. The quarter showed a divergence in the rates expectations between the US and Australia. While delayed relative to previous expectations, US rates appears to be on the glide path lower driven by sequential moderation in inflation prints and more dovish Federal Reserve commentary. Two price cuts are being priced in by year end. By contrast, local CPI consistently surprised to the upside, with the April print ticking up to 3.6% yoy and May further increasing to 4.0%yoy above expectations – being the highest since Nov-23. Paired with a still low 4.0% unemployment rate, this has effectively swung the narrative on rates, with participants debating whether the RBA should hike this upcoming August.
4. Commodities: Iron Ore prices rose 8.9% over the quarter to US$106.72/tonne, albeit marking only a partial recovery from the US$140.55/tonne levels at the end of 2023 (down ~15.0% YTD). April started strong but has since reversed off the back of weaker steel production, elevated port inventories at ~150mt (+19.0% yoy) and increasing shorts on the Dalian. Brent Oil was down 1.2% reflective of softer demand outlook and easing geopolitical concerns.
5. Corporate News: Corporate news featured BHP’s proposed $75bn takeover offer of Anglo American in a play to upweight copper exposure, albeit ultimately rejected by the target. From Anglo’s standpoint the complication came not in price but structure with the execution risk involved in divesting the Kumba and Amplat assets. There was also much fanfare in the listing of Guzman Y Gomez which opened 30% above its issue price of $22 per share. A successful IPO after a few years of sluggish activity have participants speculating if this is enough to open the market to new listings. Finally, the quarter ended with Treasurer Chalmers giving the seal of approval for ANZ’s takeover of Suncorp bank around 2 years after the initial deal announcement.