Double factor delivers win for investors
April 2024
The artificial intelligence (AI) boom and hopes of avoiding a recession, drove share markets to record highs in the March quarter.
These twin factors were sufficient to convince markets that economic headwinds – such as inflation and higher interest rates – will have less impact on company profits than previously anticipated and thus sparked a wave of buying.
US AI giants such as chipmaker Nvidia led the record-breaking run, pushing unhedged global shares to a 27.1% gain in the year to March 31. Global shares which are hedged to protect against changes in the Australian dollar posted a 23% return over 12 months as the Australian dollar dropped slightly.
Nvidia’s AI peers didn’t necessarily do as well. As the quarter progressed, a divergence in their fortunes occurred with Tesla’s share price, for example, weakening due to competition from Chinese electric vehicle manufacturers.
Back home, Australian shares had a good quarter by rising more than 5% and by more than 14% for the year to March 31. The local gains were led by big banking stocks and a continued recovery in the value of Australian real estate investment trusts – a sector that was previously hit hard by rising interest rates and COVID-19.
Fixed interest also delivered for investors in the home market, returning 1% over the quarter and 1.47% for the year to March 31. Globally returns were down 0.31% for the quarter, but have delivered 4.7% over the 12 months to March end, capping off an all-round impressive start to 2024 for investors.
Buyer beware
Such heady gains, of course, may not continue. History shows that bull share markets do not last forever and that it’s prudent to manage share portfolios with a long-term view.
Famed US fund manager John Templeton once described the traditional reactions of investors neatly when he said: “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
This current bull market was perhaps borne from the economic pessimism that abounded when interest rates shot higher, alongside inflation. Now those fears have somewhat subsided, it appears global stock markets have moved to the optimistic stage and are bordering on the euphoric.
In the near term, stocks could rise higher but a 35% chance of a global recession means any gains may not be linear – but instead prove quite volatile over the medium term. The risk of recession in Australia remains lower than the US. so there is potential for the local share market to maintain a steadier course than its international peers.
Government bonds also remain a worthwhile investment due to their capacity to cushion any drop in shares if an economic slowdown does occur. Beyond the potential capital growth if growth slows down more aggressively, US government bonds are yielding 4.5% which we deem to be attractive even if economic growth remains robust.
Source: Russell Investments
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