Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper PDS and TMD.
Lyndon: Hello, this is Super Informed Radio, the official UniSuper podcast. My name is Lyndon and I hope you've all had a happy and safe Easter long weekend. It is the first business day of the month though, which means we are back in the studio with David Colosimo from UniSuper's Investment team to cover off what's been happening in investment markets and what's on the horizon in April. David's our resident economist, investment manager and general human in-the-know, and we lean on him each month for his expert analysis and insights. David, thank you very much for being here.
David: Thanks Lyndon, great to be here—thank you for that introduction.
Lyndon: No problemo. David, look, it does feel a little bit like Groundhog Day in terms of shares—they just seem to keep heading higher, don't they?
David: Yes, they sure do, Lyndon. US shares are up another 3% in March. Australian shares were also up 2.5%. So definitely a solid month, but it actually looks even more impressive if you stand back a bit and look over a slightly longer time frame. Since they made their lows in late October, that was about five months ago now, the US share market’s up more than 27%. The biggest thing that stands out there is just how steady that increase has been. The biggest pullback we've seen has been less than 2% over that entire period. So very strong returns with unusually low volatility.
Lyndon: And so, David, up until now, it seems like every time we talk about US shares, it's been those big tech stocks that have been driving the rally. Is that still the case? Did that continue in March?
David: No, I'd say that in March, actually, those big Mega-Cap tech stocks, the Magnificent Seven, they were actually a bit more mixed. Instead, the gains were really spread across the rest of the market. In the US, for example, every one of the 11 categories that we often look at, they were up. Now, if we start with tech, you still had Nvidia doing very well—they make the computer chips for AI [artificial intelligence] servers—they were up another 14%, so very strong. But at the other end, Apple was down 5% during March. They've had to face a few things; earlier in the month, there were headlines that suggested iPhone sales in China were down 24% in the first six weeks of the year. Then later in the month, the US Department of Justice launched an antitrust lawsuit—the company apparently has very tight control of its hardware and software. So, a very mixed month for tech.
Lyndon: And what about outside of tech, David?
David: Instead, in March, we saw plenty of the cyclical sectors doing quite well—sectors that tend to be seen as ‘value’ rather than ‘growth’. So, energy, banks, industrials, materials, they were all some of the best performing sectors. Exxon, that's the biggest energy company, that was up 11% given higher oil prices. GE, which is the biggest industrial, was up 12%. Then utilities, which are often considered defensive, they also did quite well. NextEra, which is the biggest utility company, was up 16%. So, maybe rather than saying ‘cyclical’ or ‘value’, we could just say it was the old economy sectors that led the market.
Lyndon: And what about here in Australia, David? What was going on locally?
David: Well, gains were also broad based. Ten of the 11 industry sectors were higher, but it was actually the real estate sector that was the strongest. It was up 9% in the month. It's a very interest rate sensitive sector, so when you've got expectations for rate cuts that really pushed that sector higher. The biggest stock in this sector is Goodman—it was up 13%, it really benefited from positive views on its data centres.
One thing I would say about the real estate sector is there's been really very little transparency on valuations, particularly in the office sector, for some time. No properties have been changing hands there. But then over the weekend we heard about the first transaction in quite a long time, so we should see more certainty in that sector going forward.
Lyndon: And so that was the real estate sector, David, what about other sectors?
David: Well, for me, the most interesting sector at the moment is actually resources. So, it was up 2.5%—that was basically in line with the market. But there's a real divergence going on between different commodities in that sector. Australia's biggest export is iron ore, its price was down 17% in March and that was on signs of apparent weakness in China as they're coming out of the Lunar New Year. Some think that might actually just be temporary from the cold weather, but we're yet to see how that plays out.
But then if you look at other commodities like copper, for example, they're really reflecting that strength we're seeing in the cyclical sectors in other parts of the world. Copper prices are actually up 5%. At those big, diversified miners, those factors cancelled out a little bit, the stocks were reasonably steady. BHP, for example, which is Australia's biggest company, it was up about 0.8% in the month.
The hottest sector, though, does seem to be gold. The gold price was up 10% in March, it's now at all time new highs. It seems like everyone, whether they be central banks or hedge funds or even private investors, they're all out there buying physical gold at the moment and you're seeing that reflected in the share prices. So, the biggest listed gold miners in Australia are Newmont and Northern Star. They were up 17% and 12% respectively in March.
Lyndon: And so to your mind, David, what is it that keeps driving all these share prices so much higher?
David: Well, shares just tend to do very well when central banks are cutting rates or about to cut rates, and that's especially so if the economy has managed to avoid a recession. When it comes to both the US and Australia, that's exactly what the markets are expecting this year. I would say, though, that after this increase, price to earnings ratios are now quite high in both countries. So, if we do see any disappointment to this positive narrative, that could actually be negative for those share prices.
Lyndon: And you know, just on that narrative, where abouts might that disappointment come from, David? Any clues?
David: Well, the market seems to be expecting really strong cyclical growth, but I'm just not sure that the economy has enough spare capacity to accommodate that. Unemployment rates are still very low. So, you know, if we do see strong growth, that could actually lead to another pickup in inflation, and if we get that, then maybe that will make central banks think twice about rate cuts.
Lyndon: Okay, David, you did mention central banks there. So, let's take a quick detour and cover them off now. It's been a pretty eventful month on that front, I understand, is that right?
David: Yeah, definitely. I think the biggest news actually came out of Japan. Now, it wasn't that long ago that central banks all over the world were doing all sorts of unconventional things, like printing money. At one point, five of the global central banks had negative interest rates, and there were trillions of dollars worth of bonds trading at negative yields.
One by one, those banks have all moved back to positive rates, and finally a few weeks ago, the Bank of Japan was the last to emerge. It had held negative rates for eight years. It also announced it would stop purchasing shares and it abandoned its target for bond yields as well. A big part of that decision was some very strong wage negotiations in Japan that have just made the Bank of Japan more confident that higher inflation is sustainable and that Japan is escaping the clutches of deflation. So, it was a real signal that they can finally revert back to standard monetary policy where they’re now just targeting a short-term interest rate, which to me actually feels a bit like the end of an era. Monetary policy looks pretty normal everywhere now.
Lyndon: And am I right in thinking that it was the Swiss National Bank who was one of the first major banks to cut rates, David?
David: Yeah, we have seen some rate cuts already in emerging markets, that includes China. But of the major central banks in developed markets, Switzerland was definitely the first to go down that path. Elsewhere, the US Fed, the European Central Bank (ECB), the Bank of England, the Bank of Canada—they all seem to be getting closer to cutting, but they're not quite there yet. Even our own Reserve Bank of Australia also signalled this month that they think the next move in rates could go either way. Previously, they were definitely more focused on inflation and the upside to rates.
Lyndon: Okay, turning to China, David, as we often do. Last month you mentioned there was going to be a very important policy meeting in March. How did that pan out?
David: Yes, the National People's Congress had their week long meeting in early March. Like Japan, China's been struggling with its own deflation problem in the past year as that collapse in the property market has been a drag on the rest of the economy. So, there's a big report released during that Congress meeting—it set a 5% GDP growth target, which is actually quite ambitious. But I think the general consensus seems to be that with the current level of policy stimulus, that might not be enough to quite get there. I think the recent bank lending data is a really good example of what's going on in China at the moment. Banks are lending a lot of money at the moment to financial institutions to fund purchases in the share market, and that's really propping up share prices at the moment. But if you look at loans to the private sector, especially the household sector, that actually still looks quite weak. So, construction's still in the doldrums. If you look at the volume of new home sales, they're still falling.
Lyndon: Okay, David, looking ahead to April, what's on your radar? Is there anything of note that we can expect from central banks?
David: Well, both the US Federal Reserve and Reserve Bank of Australia, they have a month off. They don't meet again until early May. But the ECB and Bank of England do meet this month. The race is on to see who'll be the next to cut. And finally, we've got US reporting season again for the first quarter of 2024—that starts this month. The US major banks will be the first to report, that's around the middle of the month.
Lyndon: Well, David, as always, it's been a pleasure catching up with you and I'm looking forward to doing it again next month. Thank you so much for being here and we'll see you then!
David: Looking forward to seeing you then, Lyndon.
Lyndon: And that wraps up this episode. Thank you for tuning in. A quick reminder, our Chief Investment Officer, John Pearce—he's going to be sharing his next investment update video later this month. He'll be giving, as usual, a bit of an overview of the financial year to date and some other thoughts as well, so do keep an eye out for that on our website.
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This podcast is general in nature, and it doesn't take into account your financial situation, needs or objectives. So, before you make any decisions about your super, we recommend that you seek financial advice first. Also, make sure you've had a read of the Product Disclosure Statement and the Target Market Determination that's relevant to you. They are all available on our website. It goes without saying that the past performance of any investment options that we talk about isn't indicative of their future performance, and it's worth noting as well that just by talking about certain companies, we aren't endorsing them for you to include in your own portfolio.