Global equity markets have continued their march higher since the start of the calendar year, supported by a robust US company reporting season, with the global MSCI World Index (in AUD) finishing up +4.3% for the month of February. The gains were supported by figures showing that US companies are generally managing cost inflation better than expected. In fact, approximately 70% of the US S&P500 companies that reported beat analyst consensus earnings expectations.
Domestically, Australian reporting season was relatively benign overall, adding support to the market’s long-held view that the ‘consumer is still slowing, but not collapsing’. Earnings downgrades averaged approximately -0.5%, not a hugely concerning figure. This was reflected in domestic share market returns, which were relatively flat for the month of February, the ASX200 Accumulation index finishing up +0.8%.
However, we saw quite a degree of disparity within sectors. Examples include Woolworths and Coles/Wesfarmers which seemed to have very different experiences, whilst still subject to the same macro forces. Overall, though it has been a respectable start to the calendar year for the local bourse, currently up +4.2% at the time of writing.
Cost management appeared to separate most of the winners from the losers in terms of individual company results over reporting season. This is somewhat unsurprising given the current inflation environment. It is an acute challenge for companies to manage costs when wages are growing at growing at over 4%, and one not faced by many management teams in recent times. Those that can do it successfully gain a clear advantage.
Bond yields in the U.S and Australia have continued to rise since the start of the calendar year, as both the Fed and the RBA have adopted a more hawkish tone on the timing and pace of potential interest rate cuts. This represents a considerable walk back of market expectations from the hope of faster rate cuts we saw in late calendar 2023.
The DPW portfolios have continued to do well since the start of the calendar year. The tactical rebalance we did in December proving to be the correct positioning so far for calendar year 2024.
While the portfolio overall has indeed benefited from the strong equity markets of late, the shift from bonds into Alternatives has also delivered pleasing comparative gains. All funds within this sleeve have contributed positively to performance over the past three months, including the Colchester Emerging Market Bonds fund (+3.9%), VanEck Short Term US Treasury Bills (+3.4%), Aspect Futures (+10%) and the Perpetual Pure Equity Alpha fund (+6.4%).
Looking ahead, we expect that US and global rate cuts will likely be pushed out, given ongoing sticky inflation and strong spending by the US government, now in an election year. This will likely continue to impact bonds and rate sensitive sectors. We remain relatively positive on equities, but continue to watch the data closely, for any sign of rates impacting economic demand.
Regards
Greg Davis
Director
Greg Davis Authorised Representative 1245528 and Davis Private Wealth Pty Ltd Corporate Authorised Representative 1299449 are authorised representatives of Sentry Advice Pty Ltd (ABN 77 103 642 888, AFSL 227748.
