Markets End Financial Year on a Turbulent Note
The last week of June 2024 capped off a turbulent financial year for markets, with interest rates rising sharply, especially at the long end of the yield curve. Inflation concerns resurfaced in several countries, with Australia and Canada both reporting higher-than-expected inflation prints. This led markets to speculate that central banks like the RBA may need to hike rates further this year.
In the U.S., the PCE inflation measure followed by the Fed came in slightly softer, providing some encouragement. However, the first presidential debate between Donald Trump and Joe Biden rattled markets, as Trump's stronger performance raised the prospect of a populist shift back towards lower taxes, higher fiscal deficits, and increased spending. This weighed on bonds, with the 10-year U.S. Treasury yield spiking to 4.5%.
Looking at the financial year as a whole, markets were largely driven by interest rate movements earlier in the year before getting a bit more muddled in the last three months. Rates trended higher for the first two quarters until some market tremors in late 2023 brought them back down. This disinflationary dynamic then fuelled strong gains in tech and growth stocks in early 2024, with the Nasdaq surging 30% for the year led by semiconductor stocks like NVIDIA. Software underperformed slightly, while cyclicals and value lagged with global small caps, emerging markets, Australia and the UK rising only 5-10%. Europe landed somewhere in the middle with mid-teen returns.
For diversified funds, a typical 70/30 growth allocation gained around 10%, with passive funds potentially outperforming due to higher exposure to mega-cap U.S. tech stocks. Active managers appear to have leaned against this trade despite the gains. Industry super funds, which tend to have more aggressive 80/20 "balanced" allocations, struggled over the past 18 months as higher rates pressured the valuations of their private asset holdings.
Within global equities, growth and value performed similarly overall, a change from value's multi-year run of outperformance. But digging deeper, returns diverged sharply based on sector and regional allocations. Some semiconductor-heavy growth funds surged over 40%, while more software-focused funds gained a more modest 10% or were even flat for the year in the case of the hyper growth focused ARK Invest. On the value side, financials exposure boosted returns for some funds but most lagged teh index considerably, especially when ‘value’,meant emerging markets or smaller companies. Most value funds produced returns between 5% and 15%.
The bond market also saw significant dispersion. High yield credit gained around 8%, but with much higher volatility than investment grade floating rate funds which returned a similar amount. Government bonds rose 2-3% with volatility of 5-6%. The stand-out winners were Australian floating rate corporate bond funds, gaining 6-8% with minimal volatility.
In summary, it was an eventful end to a tumultuous financial year, with sharp divergences across and within asset classes which may present opportunities for asset allocators in what could become a more volatile environment.