Quarter in Review: March 2024

19 April 2024

The March-24 quarter continued a strong rally in equity markets following a record December-23 quarter as consensus priced in diminishing odds of a recession and helped by resilient corporate earnings. This saw growth and rate sensitive sectors dramatically outperform. This was despite meaningful upward movements in yield expectations being priced in by the bond markets.

  1. Global Markets: The ASX300 Accumulation Index rose 5.4%, with the Small Ordinaries Index rallying 7.6%. US indexes outperformed, with the S&P500 rising 10.6% and NASDAQ by 9.3% largely led by the “growth” biased Magnificent Seven stocks. This was despite disappointing first quarter results for 1 WaveStone Dynamic Australian Equity FundApple (-7.6%) and Tesla (-29.2%) as the Mag 7 was largely buoyed by Nvidia (+82.5%). Chinese equities continued to be sluggish with the Golden Dragon China Index down 2.1%. This reflected weak economic data and exclusions from APAC index flows – we have observed increased demand for Asia-ex China index products.
  2. Sector Performance: March posted a strong quarter with all sectors rallying with the exception of Materials, which was largely hurt by weakening Iron Ore prices. The best performing sectors were IT (+23.7%), REITS (+14.9%) and Consumer Discretionary (+14.0%). With these generally considered rate sensitive sectors, it is interesting to contrast sector outperformance in equity markets against the rise in yields being priced in the bond market. The worst performing sectorswere Materials (-5.6%), Communication Services (+1.8%) and Consumer Staples (+2.7%).
  3. Rate and Yields: Movements in the AUS 10-Yr was relatively modest, rising only 1bp to 396bps. However, this reflected a step up in yield expectations in January and February given persistent inflation readings notably in wages. March saw material retracements of 20bps, given softer than expected CPI print of 3.4% yoy (market: 3.5%), marking the equal slowest since November 2021 levels. The RBA remained on pause during the quarter as expected despite this bond markets pushed out the timing of rates cuts to the back half of 2024. In the US, 10-Yr yields rose 32bps to 420bps as bond markets are pricing in a more restrictive monetary outcome in the US driven by more robust inflation and jobs data – US unemployment remains at robust levels at 3.8%.
  4. Commodities: Iron Ore prices fell 26.3% over the quarter, reversing its 17.0% rise in the preceding quarter to
    US$140.55/tonne. This was largely driven by sluggish economic data coming out of China and build-up of port inventories on the supply side. Conversely, Brent Oil posted strong gains up 13.6% initially driven by concerns over supply tightness caused by the Red Sea conflicts back in January, and later on by market anticipation of a soft landing. Gold was also a notable outperformer commodity, up 8.1% driven through buying activity from global central banks and private Chinese investors seeking a store of value.
  5. Reporting Season: The Feb-24 reporting season looked robust on the headline with twice as many beats than misses, however we note that expectations were lower heading into reporting. We observe cost pressures remaining a topical focus for management teams, despite margins largely holding up given a generally strong demand environment and companies delivering cost rationalisation programs. Outlook sentiment from management teams remain cautious, especially surrounding positive, but slowing top line growth. Overall, FY24 estimates were slightly rebased down 0.6%, with consensus now expecting 5.8% decline in earnings for the year.
  6. Corporate News: Corporate takeovers were highly featured, largely from strategic than financial sponsors. This was especially the case in the Building Materials sector where CRH’s $2.1bn bid for Adbri finalised in February, France based Saint Gobain bid $4.3bn for CSR, and Seven Group bid $1.9bn to acquire their remaining 28.4% stake in Boral. Furthermore, software design vendor Altium also received a $9.1bn bid from Japanese buyer Renesas, which was a partial contributor behind the IT sector’s outperformance for the month. Finally, after 2 years since the initial announcement, ANZ received approval for the proposed merger with Suncorp following a successful appeal to the Australian Competition Tribunal.