Year of surprises ends on high note
January 2024
An almost complete U-turn in interest rate predictions drove a Santa Claus rally that gifted investors bumper returns in the December quarter. Australian shares stormed to an 8.4% gain and global shares rose 5% as it became apparent interest rates may fall in 2024 and boost company profits1.
It was previously thought rates would remain high for some time yet – but economic data and subsequent comments by central bankers quashed those expectations.
Recession fears from earlier in the year also faded as major economies proved stronger than many people had thought.
Australian real estate investment trusts (REITs) – which do better when interest rates are falling – and information technology were among sectors that led the local gains. Energy stocks like Woodside Energy fell with the oil price.
Globally, gains from big tech companies linked to artificial intelligence might have won headlines but sectors like US small companies and, again, REITs gained ground too.
Bond markets ultimately met expectations after a see-saw year in which returns wavered alongside the outlook for rates. The 3.8% quarterly return from local fixed interest and 5.4% gain from global fixed interest helped steer the asset class to its first annual gain since 20201.
Cautious outlook
It’s wise to be more cautious about the months ahead as slowing economic growth and geopolitical tensions play out. There is still a roughly 50% probability of a global recession which could deflate the investment market optimism that marked the December quarter.
Australia, though, could avoid a recession even if its economic growth slows. Population growth and the fact its interest rates are lower than elsewhere means the domestic economy is better placed than other countries.
The upshot is that Aussie shares may prove better value than global peers in 2024. The likelihood that rate hikes are done for now also means Australian government bonds appear attractively priced.
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1 Bloomberg, 31 December 2023
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