In Q3 2024, the global economy witnessed mixed outcomes, influenced by factors such as inflation moderation, monetary policy adjustments, and fluctuating commodity prices. Global growth decelerated as central banks in developed economies, like the Federal Reserve and European Central Bank (ECB), maintained high interest rates to curb inflation. This led to reduced consumer spending and business investments. While inflation has eased in most regions, it remains above target levels, especially in the services sector. Energy markets, particularly oil, experienced volatility, but weaker global demand kept prices within moderate ranges.
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Australia’s economy displayed resilience, though growth remained moderate due to challenges with inflation, weakened household consumption, and fluctuating external demand. GDP growth was estimated at 1.8%, a slight slowdown from Q2, largely driven by weaker household spending and subdued demand from key trading partner China. While export volumes of key commodities like iron ore remained stable, lower prices hampered revenue. Inflation eased, with the Consumer Price Index increasing by 0.2% for the quarter, notably core inflation, particularly in housing and services, remained elevated. The Reserve Bank of Australia (RBA) maintained its cash rate at 4.35%, implying a cautious approach towards further rate hikes depending on inflation trends, particularly in housing.
Australia’s labour market remained strong, with the unemployment rate increasingly marginally to 4.2%, although job growth softened amid higher input costs. Labor shortages persisted in sectors like healthcare, construction, and IT, contributing to upward wage pressure. The housing market saw price growth stall, with higher interest rates and elevated home prices dampening demand, particularly for first-time buyers. However, the rental market tightened due to a supply-demand imbalance, exacerbated by increased immigration. The export sector experienced mixed results, with lower prices for iron ore and LNG, but a boost in the services sector, particularly in tourism and education, as international travel rebounded strongly.
The charts below highlight the current state of play for Australia’s employment rates, wage growth, vacancies and participation rates. While the unemployment rate has ticked up and wages growth seems to have peaked, vacancies are dropping off and the participation rate has increased. This echoes the strength of the Australian labour market and provides some insights into the RBA’s reticence to cut interest rates quickly.
At the September 2024 Federal Open Market Committee (FOMC) meeting, the Federal Reserve cut interest rates by 50 basis points, lowering the target range to 4.75%-5%. This marks the first monetary policy easing in four years, driven by the Fed’s shift in focus towards supporting growth and stabilizing a slowing labour market. While inflation has moved closer to the 2% target, with August inflation at 2.5%, labour market data showed a quicker-than-expected slowdown. The Fed now views labour market risks as greater than inflation risks. The Summary of Economic Projections (SEP) indicated expectations of further rate cuts in 2024, with additional reductions projected through 2026 to support continued economic expansion. Chair Jerome Powell emphasized that future decisions would be data-dependent and made on a meeting-by-meeting basis.
Europe, particularly the Eurozone and the UK, faced stagnation and persistent inflation. The ECB maintained high interest rates, which dampened consumer spending and industrial output. Germany’s manufacturing sector continued to struggle, although services provided some resilience. In the UK, the economy barely avoided recession, and business sentiment remained weak as inflation, although moderating, stayed elevated.
In Asia, China and India presented contrasting economic pictures. China’s economic recovery was slower than expected, with GDP growth below forecasts at around 4.4%, hindered by a weak real estate sector and exports. Despite government stimulus efforts, challenges persisted. India, on the other hand, experienced robust growth, driven by strong domestic demand and a healthy services sector. Japan’s economic outlook improved due to higher consumer spending and business investment, supported by a weaker yen that boosted exports.
Emerging markets faced headwinds due to high global interest rates and weak external demand. Latin American economies, particularly Brazil and Mexico, saw slower growth, impacted by inflation and higher borrowing costs, although commodity exports provided some resilience. In Africa, countries like Nigeria and South Africa benefited from moderate energy prices, but political instability and infrastructure challenges weighed on growth prospects.
Investment Markets Commentary
Over the course of the quarter and the year to 30 September, 2024, market indices indicate there has been strong positive contributions across markets. Commodities is the exception and has varied from negative to marginally positive on a month-to-month basis through the quarter. This has caused volatility to increase.
USA
In Q3 2024, the U.S. investment market maintained its strong momentum, bolstered by both equity and bond markets. The Federal Reserve made a significant move by cutting interest rates by 0.50% in September, initiating an easing cycle to mitigate rising consumer financing costs and stabilise inflation, which had dropped to 2.2% by August. The U.S. economy managed to avoid a recession, with GDP growing at an annualised rate of 3% in Q2, highlighting resilience despite earlier concerns.
Equity markets saw gains across most sectors, with small-cap and value stocks outperforming larger counterparts. Sectors like utilities, which had struggled in 2023, rebounded strongly, while real estate also made a recovery after challenges earlier in the year. Technology stocks remained relatively flat during the quarter but posted a strong year-to-date gain of 17.9%. Bonds, benefiting from the Fed’s rate cuts, outperformed equities with a return of 5.8%. Overall, the market reflected cautious optimism, with sector leadership shifting and expectations of continued economic stability, despite the potential for inflation volatility.
Europe
In Q3 2024, European markets, including the UK, experienced mixed but overall positive performances. The European Central Bank (ECB) cut interest rates by 0.25%, while the Bank of England followed suit with a 0.25% cut to 5%. These moves helped bolster both equity and bond markets in the region, providing a much-needed lift after concerns about slowing economic growth earlier in the quarter. UK equities, particularly domestically focused shares, performed well, with the FTSE All Share Index rising by 2.2%. Additionally, the British pound strengthened by 5.8% against the U.S. dollar, signalling improved market sentiment. However, consumer confidence remained cautious, leading to higher savings rates despite solid wage growth.
Across Europe, market volatility was notable in August and early September, driven by weak U.S. economic data and rising concerns over inflation. Despite these fluctuations, European stocks recovered by the end of the quarter, supported by central bank easing and a late surge in emerging market equities, particularly in China. Real estate stocks also recovered after a difficult start to the year, while the financial and industrial sectors showed strength. As Europe heads into the final quarter, expectations remain cautiously optimistic, with continued focus on central bank policies and corporate earnings.
Japan
In Q3 2024, Japan’s financial markets experienced significant volatility, driven by both domestic and international factors. The Nikkei index suffered a sharp decline of over 12% in early August, marking its worst performance since Black Monday in 1987. This was largely due to a combination of the Bank of Japan’s (BoJ) rate hike to 0.25% in July, causing the yen to strengthen sharply, and concerns about the global economic outlook, particularly following weak U.S. labour market data. While the Nikkei eventually recovered some of these losses, it still closed the quarter down by around 4.9%.
Japan’s domestic economic indicators showed mixed results. While exports remained a bright spot, supported by global demand, private consumption and spending were weaker than anticipated, contributing to a decline in GDP during the quarter. Additionally, the BoJ’s decision to raise interest rates further affected markets, causing an unwinding of carry trades that had benefited from Japan’s historically low borrowing costs. Despite these challenges, there remains cautious optimism for long-term growth, driven by structural reforms and capital investment in key sectors like semiconductors and automotive
Emerging Markets
In Q3 2024, emerging markets showed mixed but generally positive performance, with equity and debt markets benefiting from global central bank actions. The Federal Reserve and other major central banks cut interest rates, which provided support for emerging market assets, especially in debt markets. Emerging market debt, particularly high-yield bonds, performed strongly, with a return of 6.1% for the quarter. Sectors such as real estate and telecommunications were among the best performers, while energy saw notable gains as well.
On the equity side, emerging markets saw some volatility, but overall, they benefitted from stimulus measures in key regions, particularly China. Chinese equities rallied strongly towards the end of the quarter following significant monetary and fiscal stimulus from the government. This boosted investor confidence and helped to lift other emerging market stocks, with Asia ex-Japan emerging as the top-performing region. Despite concerns about global economic health and muted commodity performance, emerging markets continued to show resilience and are expected to benefit from further policy easing and stabilising inflation.
Australia
In Q3 2024, the Australian investment market presented a mix of challenges and opportunities across various asset classes. Equities were generally fairly valued by the end of the quarter, with healthcare, real estate, and consumer cyclical sectors performing well, driven by the global trend of easing interest rates. However, sectors like basic materials and consumer defensives lagged. Despite the market rally from earlier quarters, many stocks traded at attractive prices, signalling a divergence in sector performance. In fixed income, Australian bonds mirrored global trends, posting strong returns as investors anticipated further rate cuts, though the Reserve Bank of Australia (RBA) adopted a cautious stance on future monetary policy decisions
Commodity markets saw muted performance, particularly in the energy sector, with Brent crude prices falling due to global economic slowdown concerns, while gold reached new highs as a safe-haven asset. Australia’s economy remained resilient overall, with inflation moderating and the labour market staying steady, although signs of consumer spending stress emerged. The RBA’s policies helped maintain economic stability, but the outlook for inflation remains uncertain. The quarter reflected stabilisation and gradual recovery, with the potential for volatility ahead as both global and domestic factors, including inflation and consumer demand, continue to shape the market.
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Regards,
Marshall Brentnall & the AAN Asset Management Investment Committee
