Global rate cuts behind strong gains
October 2024
Jerome Powell might not be a familiar name to Australians, but he was responsible for perhaps the biggest news for financial markets in the September quarter. The head of the US central bank announced a big cut to US interest rates on September 18 to confirm the era of higher global rates is likely over.
It followed similar cuts in other major economies and helped generate all-round strong gains from major assets classes in the quarter.
Australian interest rates could follow suit early in 2025, which, along with stimulus measures out of China, could provide a tailwind for equity markets.
Global shares rose 4.7%1 in the September quarter – led by the sectors most impacted by interest rates. Global real estate investment trusts rose 14.4%2, global infrastructure jumped 13.1%3 and emerging share markets (or markets in developing nations) climbed 6.8 %4.
Falling rates can be a positive for shares for several reasons. Future corporate earnings generated by companies are discounted to today’s dollars at a lower rate (creating a higher present value for future cash flows), companies may pay less interest on loans, and consumers can spend more to boost companies’ revenue.
Aussie shares also rose by 7.8%5 in the quarter. Local IT stocks and listed property trusts were among the biggest winners. The energy sector, including companies like Santos and Woodside, did not fare as well. The sector fell -5.4%6as oil prices slipped.
Both global bonds (4.0%7) and local bonds (3.0%8) put in solid quarters – because the capital value of bonds typically rises as interest rates fall.
Looking ahead
The big question in the months ahead will be whether major global economies can avoid recession or continue to slow gradually. The likelihood of the latter now appears more likely, which would be good news for shares.
This is because the profits generated by companies fall less in a gradual slowdown than in a straight-out recession.
China may also prove a wild card that delivers positive news for investors after its authorities in late September announced measures to support the country’s share market and property market.
Any uptick in Chinese shares will boost the gains of the emerging share market investments which form part of many diversified portfolios.
Australian companies which do business with China may also benefit from the measures. For example, more construction in China would increase demand for iron ore produced by BHP, Rio Tinto and Fortescue Metals. Iron ore is essential for production of the steel used in building activities.
The economic boost to Australia from a stronger Chinese economy could also keep our dollar higher relative to other countries. That might mean overseas holidays become cheaper for Aussies in the near term.
1 On a Australian Dollar Hedged basis, index: MSCI ACWI hedged into AUD (with net dividends reinvested)
2 FTSE EPRA/NAREIT developed ex Australia rental index Hedged into AUD (with net dividends reinvested)
3 FTSE Developed Core Infrastructure NR Index (AUD Hedged)
4 MSCI Emerging Markets (USD unhedged)
5 S&P/ASX300
6 S&P/ASX300 Energy GICS Sector return
7 Bloomberg Global Aggregate Bond Index AUD Hedged
8 Bloomberg AusBond Composite Index
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