Market Data December 2023
Market Commentary
In 2023, global markets experienced a significant recovery, led by a strong performance in the US economy and a rebound in technology stocks, notably the "Magnificent 7" mega-cap tech giants. Despite some volatility and a late-year pullback, optimism was buoyed by cooling inflation, aligning with Federal Reserve expectations.
Global equities ended the year up around 23%, with notable gains in the tech sector. The Nasdaq index surged by over 50%, contrasting with declines in Asian markets, especially China and Hong Kong. The Eurozone showed resilience, while UK markets lagged due to political and economic uncertainties.
In Australia, the market delivered a solid 12.1% return, led by materials and financials, with the banking sector showing resilience despite global challenges. Larger cap stocks outperformed smaller ones in a year marked by market polarization and volatility.
Fixed interest markets saw varied performances, with Australian fixed interest lagging behind global returns. The US Federal Reserve's fight against inflation suggested potential rate cuts by mid-2024, aiming to avoid economic overtightening. The year's market trends also hinted at the influence of liquidity and credit availability, suggesting that these factors might have driven the market rally as much as, or more than, economic performance. This perspective implies that while the recovery was robust, it also carried potential risks for future market stability.
Market Returns - 1 Month to 31 December 2023 (in AUD)
Australian Equities
The rally observed in November across global equity markets sustained its momentum into December, marking a persistent global upswing, notably pronounced in Australia. The ASX 200 displayed remarkable strength for the second consecutive month, posting a monthly return of 7.3%. This is against the backdrop of shifting in sentiment as market anticipating lower rates and a monetary easing in 1HCY24. Notably, both November and December proved to be stellar months for price returns across major equity markets worldwide, with the ASX 200 outperforming other indices.
The US 10-year treasury yield, ending 2023 at 3.8%, experienced a further decline of 48 basis points in December. Similarly, the Australian 10-year bond fell 45 basis points, concluding the year at 3.96%, demonstrated a notable decrease from its peak of 4.99% on November 1st.
Closing 2023 with a total return of 12.4%, the ASX 200 exhibited a robust gain of +7.3% in December. Noteworthy performers in Australia during the month were the yield-sensitive/growth sectors of Real Estate and Health Care sectors, while the Insurance sector encountered a decline in performance.
On a 12 month horizon, Technology and Discretionary were the best performers in 2023. Conversely, the defensive Staples, Utilities, Health, and Telecom sectors were the worst performers in 2023, with low single-digit returns.
Our positioning in defensive quality business with long term growth and sustainable dividend yields saw a valuation benefit from falling rates, albeit not to the same extent as lower-quality, cyclical businesses, which benefited from an improved economic outlook.
The conclusion of 2023 witnessed a common theme for global equity markets, wherein the path of higher interest rates exerted a deleterious impact on equity valuations. However, the shift in market sentiment, now pricing in a meaningful monetary easing in 1HCY24, offered support for Price to Earnings ratios. Investors are embracing the evidence from a more stable momentum in moderating inflation trend and showing increasing appetite for risk asset.
As we look ahead to 2024, market is now pricing minimal likelihood of a rate rise decision from the RBA in February. In Australia, approaching the February results season prompts us to exercise caution, considering the potential for persistent inflation, which may prolong higher interest rates beyond current market expectations.
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Defensive Income
Yields again fell in December 2023 both locally and across the Atlantic as markets continued to reprice lower interest rates based on dovish forward guidance from the Fed combined with positive US economic data. The US 10-year yield tumbled to as low as 3.79% on 27 December 2023 from a peak of 4.99% on 19 October before closing the year at 3.88%. Australian bond yields followed suit, bottoming out at 3.89% on 28 December 2023, finishing the month with a 46-basis point compression. The rally in treasuries saw the exceedingly strong performance in the Bloomberg Global Aggregate (LEGATRUU) and AusBond Composite (BACM0) Indices returning 4.16% and 2.69%, respectively. It was also a strong month for credit as the AusBond Credit FRN (BAFRN0) Index producing +0.51%, its highest monthly return since April 2020.
It was a rally across the domestic fixed income universe with BondAdviser’s All AUD AT1 and Tier 2 Indices also producing strong results. The T2 Index again trumped the AT1 Index with 1.93% versus 0.90%. The Prime Australian Defensive Income Portfolio’s +1.25% return in December follows on from last month’s 1.17% to produce the Prime Portfolio’s 8th best month. Prior to this, the Portfolio had only ever produced consecutive months of greater than 1% each month in the mid-2020 recovery. The Bloomberg Bank Bill Index rose by 37bps over the month. Prime is ahead of the benchmark at all tenors in Figure 2. Finishing the year strongly, the portfolio returned 6.57% for the year, in excess of all key benchmarks, whilst holding an average A- rated portfolio and duration of under 1.5.
December was a cracking month for the portfolio as the three duration-heavy holdings which constitute just 22.1% of the portfolio’s allocations contributed 73-basis points to the weighted result. The PIMCO Global Bond, Yarra Australian Bond, and Pendal Government Bond Funds saw HPRs of 3.41%, 3.33%, and 2.89% respectively. It was also a good month for income as quarterly and semi-annual paying holdings drove income returns of 24 basis points additional to the usual monthly contributors. These included the Ardea Real Outcome Fund, the Yarra Higher Income Fund, CBAPM and MQGPF. The only detractors were again the Ardea Real Outcome Fund, with a HPR of -1.87% (-9bps) and also the exit of WBCPJ which was at a weighted average price of 70 cents lower than the start of the month (noting it closed December even lower). Countering this exit, the 1.75% stake in WBCPM came online on 18 December and an additional 0.75% was added to the holding of Yarra Higher Income Fund.
International Equities
Over the month, developed markets were mixed while positive returns concentrated in the tech sector. Continued evidence of moderating inflation boosted hopes of easing rate hikes. Commodities and oil sold off on global growth concerns. The risk rebound was most pronounced in higher beta assets like small caps and cyclical sectors.
The Langdon Global Smaller Companies Fund (+5.6%) was the best performing fund in the portfolio, benefitting from investors rotating into cheaper parts of the market. - The Trinetra Emerging Markets Growth Trust (-0.1%) was the only fund to lose value over the month. Despite optimism around a potential reopening in China, broader emerging market exposure proved negative versus devloped equities as global growth concerns mounted. Trinetra further struggled due to stock specific factors.
The Pzena Global Focused Value Fund (+4.6%) was added to the portfolio near the end of December. As a deep value strategy, Pzena benefited from the rotation into cheaper parts of the market and more cyclically-oriented sectors.
The ongoing rally in mega-cap technology stocks boosted returns for the Munro Global Growth Fund (+2.2%) and Nanuk New World Fund (+4.6%). Investors grew increasingly optimistic on the AI and cloud computing trends benefiting tech giants like Microsoft, Apple and Nvidia.
The Aoris International Fund (+3.6%) was also one of the top contributors last month as its quality value approach paid dividends amid the growth stock resurgence
If you would like further details on Prime’s Separately Managed Accounts (SMA), please contact your friendly adviser or our client services team via e-mail at clientservices@primefinancial.com.au
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