WEEKLY E-MAIL

29 January 2024

EQUITY MARKETS CONTINUE THEIR STRONG RUN

By Sam Eley

Share markets have been recovering steadily over the past three months, with the S&P/ASX200 up almost 10% since the end of October 2023. Leading sectors over this period have been Healthcare (+21%), Australian Real Estate Investment Trusts (A-REIT) (+17%), Financials (+12%), Consumer Discretionary (+12%) and Information Technology (+12%). Only 2 of the 11 major sectors on the ASX are down over this period, being Utilities (-7%) and Energy (-5%).

The recovery has been led by investors’ optimism over the progressively reducing inflation rate, as well as expectations of potential interest rate cuts in 2024 that should ease the burden on corporates and increase profitability and a return to growth.

Healthcare businesses have been impacted over the last few years due to ongoing issues related to the pandemic, along with higher labor costs and margin pressure as a result of higher inflation. Cooling inflation numbers and an ease in supply chain constraints should see margins begin to improve, which will be a catalyst for earnings growth again. As a stand-out performer, CSL, the ASX’s largest Healthcare business, has recovered strongly from its lows at $230 per share in late October to be back at $291 (+26%) as of close on the 24th of January. CSL’s share price was sold down on the back of concerns around GLP-1 diabetic and weight loss drugs such as Ozempic and Wegovy, and their potential impact on CSL’s recent acquisition of Vifor (Renal/Kidney treatment business) and their research and development pipeline. CSL believes the impact of the new drugs will be immaterial to their business, and the share price has rallied as a result.

In the beaten down A-REIT sector, the majority are trading at steep discounts to Net Tangible Assets (NTA) due to gearing levels and high-interest costs, as well as concerns around sectors such as office property. Potential rate cuts should be a catalyst for improved profitability and shareholder returns in this part of the market. Unlisted Property assets are starting to feel the pinch of interest rate rises as properties get revalued and capitalisation rates expand, with most unlisted property funds declining in value over the current cycle. These revaluations begin to reflect what is happening in the real estate market, leading to unit price falls across the board.

Looking globally, the NASDAQ is up 20% over this same time period, led mostly by the “Magnificent Seven” technology stocks Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla. The rally in share prices is largely due to the advancements of Artificial Intelligence (AI) and the expected additional revenue streams and opportunities this thematic will create for the biggest of the blue chips.

Markets continue to be volatile and react either positively or negatively depending on news flow and the data around inflation and potential interest rate movements. We expect the high volatility to continue and, in some ways, be “the new normal”. There remains plenty of risks in markets at present, given continued geopolitical tensions and armed conflicts, slowing economic growth, continued and persistent inflation, and elections in Taiwan and the US. The uncertainty these issues create translates to higher volatility in equity markets.

It remains paramount to ensure that our clients’ portfolios are well diversified across various asset classes to protect against high volatility and ensure “smoother” overall returns over time.

As we enter the February reporting season, all eyes will be on the ASX listed corporates to see how they are navigating the current tough economic environment, and if inflation impacts are beginning to subside.

Sam Eley
Senior Financial Planner
Authorised Representative No. 1234685

If you have any questions or comments, please email me at sam@gfmwealth.com.au

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