Investors have been faced with a volatile start to the year in both the share and bond markets. Earlier hopes for interest rate cuts have recently faded as inflation has remained stubbornly high though the outlook is volatile and almost changes week to week on data.
Australian and Global equities continue to produce positive returns in 2024, though Australian shares have continued to lag global shares, particularly the US. Global Property has experienced a material decline so far in 2024 whilst bonds have had modest negative returns as yields have risen.
Looking back over the 2023 calendar year, the Empire Managed Portfolios achieved returns of between 8.6% and 12%, depending on the risk profile of client selected portfolios. Reflecting the volatile conditions of 2024, returns so far this year to the end of April have been between 2 and 3%, in line with the returns from Australian shares, however rolling 12 month returns have been very pleasing.
Asset Class Performance:
Source: Vanguard Index funds
Australian and Global equities continue to produce positive returns for the year-to-date with hedged global shares (led by the US) +6.5% in 2024 and up around 19% over the past 12 months. Australian shares have lagged in 2024 and over the past year recording +2.4% in 2024 and approximately 9% over the past year.
Global Real Estate stocks are coming off their worst pullback in nearly two years, a slump that came as Treasury yields rose to the year’s highest levels. Global property is interest rate sensitive, and hence the changing rate-cut sentiment has hurt the sector, falling approximately 7% year-to-date.
Bonds have remained weak in 2024 as the market adjusts to the idea that rates will be ‘high-for-longer’, but not ‘higher’. Government bond yields underwent large moves during the first few months of the year. The Australian 10-year government bond yield rose half a percent (50 basis points) to 4.42%. Meanwhile the U.S. 10-year Treasury was up around 0.8 of a percent up (80 basis points) to 4.68% since the beginning of the year. Increases in yield provide short term losses on bond values, but increase the reinvestment rate for future returns to flow through with higher yields.
Commodities remain mixed with Gold, which is held in Empire’s Balanced Growth and Growth portfolios the standout, up 11%, off the back of rising geopolitical tensions and inflation uncertainty.
Looking Forward:
The global economic and policy outlook is increasingly uneven. While the U.S. remains resilient, European economic activity remains soft, with potential for recovery. Asia’s export performance is picking up and central banks in the region may have more flexibility to relax monetary policy later in the year, however, China is looking ‘wobbly’ as reflected in China’s equity market performance in recent years.
Economic data has showed surprising resilience in consumer spending, leading central banks to adopt a more cautious approach to lowering rates. The US Federal Reserve, for example, went from anticipating three cuts this year to just one. This shift in sentiment has led to volatility in both stocks and bonds. Steady growth in the U.S. and rate cuts by the Federal Reserve (Fed) in 2024 could add to the positive backdrop for both stocks and bonds.
2023 was a strong year for returns overall and although 2024 has been a bit more muted, starting yields on bonds and opportunities we are seeing in the market following performance divergence gives us cause to be cautiously optimistic about the future.
The relative valuation gaps emerging between different sectors of the market has led us to take advantage of some of these potential opportunities emerging such as in quality global small and mid-size companies which have been trading at historically ‘cheap’ levels compared to their larger counterparts.
The Empire investment committee is actively reviewing these opportunities on a regular basis and adjusting portfolios to take advantage of future growth areas, and protecting downside risk.
