Developed Market equities were moderately positive over the December quarter, with the MSCI World ex-Australia Index (Hedged into AUD) returning 2%. US election results in November saw equity markets move higher, and more than offset weaker returns in October (when uncertainty around the election outcome was evident). However, in December equity markets were weaker, as the US Federal Reserve’s interest rate decision and associated statement meant that sentiment declined. The statement suggested that the extent of additional rate cuts may be more limited than previously expected.
USA
In the US, the S&P 500 marginally outperformed broader Developed Markets (2.4% for the quarter). The quarter saw markets focussed on both the outcome of the election and expectations for further cuts from the Federal Reserve. The US economy remains quite strong; and business activity and employment data both point to ongoing resilience in economic activity.
Europe
The MSCI Europe Index underperformed broader equity markets (-3%) over the December quarter. Concerns about the outcome of the US election and the economic outlook for the Eurozone were likely the key drivers for this. There has been ongoing weakness in some economic data and business indicators continue to point to private sector manufacturing activity shrinking. The European Central Bank announced its fourth rate cut of 2024 in December, and expectations for the inflation outlook were reduced; along with confirmation that “the disinflation process is well on track”.
Asia
In Asia, Chinese equities were weaker (MSCI China Index returned -7% (in local currency)). Despite significant stimulus measures announced in the September quarter, sentiment appeared to decline in October, with concerns around the property sector and economic growth continuing to weigh on equity market performance. Concerns around the impact of tariffs following the US election also appeared to weigh on equity market sentiment.
Australia
Australian equities were marginally weaker over the quarter (returned -0.8%). Materials was the weakest sector (returned -11.8%). Listed property was also weaker (-6.1% for the quarter). At both Reserve Bank of Australia (RBA) meetings during the quarter, the RBA left interest rates unchanged.
At the December meeting, the RBA noted that they have increasing confidence that inflation is moving sustainably towards target.
Currency and bonds
Both Australian and Global bonds delivered negative returns for the quarter, returning -0.3% and -1.2% respectively. The rise in US bond yields over the quarter likely reflected a range of positive economic data earlier in the quarter, leading to expectations of a slower series of rate cuts by the US Fed. Over the quarter, the 10-year Australian bond yield rose by 39 basis points to 4.37%, while the US 10-year yield rose by 79 basis points to 4.57%.
In currency markets, the AUD weakened materially against the USD, returning -10.8% over the quarter. In October, the Australian dollar was much weaker relative to the US dollar, with rising US bond yields and expectations for the outcome of the US election likely supporting US Dollar strength. Economic strength in the USA relative to Australia is also a likely driver, along with potential weakness in the Chinese economy and expected rate cuts by the RBA over 2025.