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. I'm Lyndon, and this is our final investment markets podcast for 2024. David Colosimo is UniSuper’s Head of Fixed Interest, and he's here with me one last time for 2024 in the studio to recap last month and the next couple of months. David, welcome.
David: Thank you, Lyndon, great to be here.
Lyndon: David, a lot has happened since we last caught up, I think it's fair to say—a little thing called the US election I seem to recall happening. In fact, listeners may even recall that last month, you weren't quite brave enough to forecast the outcome of that election but you did happen to say that markets were leaning towards a Trump victory. I guess it has to be said, it certainly played out that way.
David: Yeah, it's also fair to say the share markets have reacted positively, Lyndon. The market was leaning towards that Trump victory but the extent of the victory was even bigger than expected, so there was still a little bit of a surprise. US shares in, particular, were very strong in November, they were up nearly 6%.
Other markets have been a bit more mixed. Australia did quite well, we were up a bit more than 3%. But if you're looking at, say, China and Europe, they were up less than 1% each, and shares in Japan were actually down marginally, so a really big outperformance by the US. I think that reflects the perception that Trump will be very pro-growth and put American companies first.
Lyndon: David, when we were talking before the show, you were saying that even though we know the outcome of the election, it still feels like there's quite a lot of uncertainty around. I'm sure listeners may even feel the same way. What makes you say that, though?
David: I think it's a combination of a few different things. Firstly, I think probably more than any other president, Trump's policies are a much bigger change from the status quo. Usually, we would only expect incremental change. Secondly, he does make a lot of extreme announcements but it's hard to know how far he's going to push each one. Sometimes announcements are just an opening to start negotiating something else. I think the 25% tariff on Canadian imports, that's a really great example here. It's hard to see what economic purpose those tariffs are going to serve, so I'm having to assume that he's just looking to attract concessions from somewhere else in the Canada-US relationship and that he won't put those tariffs on. Finally, I think there are so many different changes all pushing and pulling the economy in different directions, and it's hard to know which one is going to dominate in the end.
A lot of Trump's policies, they're seen as pro-growth. He's advocating for tax cuts for companies and households, big fiscal stimulus, lots of deregulation. But then on the other hand, if we're going to see broad-based tariffs or big budget cuts—and that's what some of his appointees are pushing for—that would probably be quite negative for growth. The same goes for inflation: you restrict immigration, fiscal stimulus, tariffs—they all sound very inflationary—but then if you look at policies like deregulation and pumping a lot more oil, that's actually going to push inflation lower. We've got a lot of moving parts, and we just don't know which one is going to be the most dominant one right now.
Lyndon: Uncertainty central, David. What can we glean from financial markets though. What are they saying?
David: The initial assessment was definitely that the policies, on balance, would be inflationary. Share markets actually started to reflect a little bit of that uncertainty. He's still President-elect, so he's not in office yet, but he's being very quick to appoint senior figures in his cabinet. The initial appointments seem to be his most loyal supporters. As the month’s progressed, he's cast the net a little bit wider. Markets have taken comfort from the background and experience of many of the people selected, and I think the nomination of hedge fund manager Scott Bessent as Treasury Secretary, that was a bit of a turning point for markets. He's seen as a bit of a moderating influence on some of Trump's policies, especially his focus on the need to reduce the budget deficit. Since his nomination, share markets have been quite strong and bond yields, which initially spiked, are lower now than where they were before the election.
Lyndon: In last month's podcast, David, you were using the phrase ‘Trump trades’ to describe some of those detailed moves that the market was expecting. Are you able to talk us through some of those and what's transpired since?
David: I think when you're talking about Trump trades, it's really just tracking the policies through to the various sectors—a definite focus on boosting American fortunes at the expense of other countries, big corporate tax cuts, cutting back on regulation, more drilling for oil at the expense of renewable energy. We've already mentioned that US shares have been stronger than the rest of the world—that was one of the more popular aspects of the Trump trades—even though I suppose there are a few other factors at play here as well that are a bit more of a fundamental underpinning to that outperformance. The first one was that US reporting season was very solid—we touched on that in the last podcast—and the second one is the prospects for European economic growth just really continue to deteriorate relative to the US. The growth outlook there is much weaker, whereas the US economy is being very resilient.
Lyndon: And what about in terms of individual sectors, David. Which sectors have benefited most?
David: When you're looking at the sectors, it's a lot of the cyclical names that have done very well. You'd expect that banks would do well in a world of less regulation and strong growth. If you're looking at names like JP Morgan and Bank of America, they were up 12% and 13% in November. Consumer discretionary stocks have been very strong—Amazon up more than 11%, Home Depot up 9%, and small cap shares (which have more of a domestic focus and therefore probably get more of the tax cut benefits), they were up nearly 11% in the month. Interestingly, Trump's policy of ‘drill baby drill’ when it comes to oil has also seen energy shares up more than 6%, even though the oil price, which is actually a big driver of revenue for those companies, is down 2%.
Lyndon: We've talked about some winners there, David, what about losers? Are there any shares that are on the losing side?
David: Well, I think the big one there is healthcare. Robert Kennedy Jr has been nominated as the Secretary of Health and Human Services. He's been a very staunch critic of big pharma and vaccines. If you look at names like Eli Lilly and Pfizer, they were down 6% and 8% respectively. I think the other loser is the renewable or clean energy space. Take a name like Enphase Energy (that's a solar manufacturer), that was down 14%. Interestingly though, Tesla, which is well within that renewable and clean energy space, that was actually up 38% in November. Trump's already announced the elimination of the EV car subsidy—that helps support EV sales which doesn't sound very good for Tesla—but I suppose when the CEO, Elon Musk, now has an informal position within the Government, that's perceived to be a net positive for the company.
Lyndon: Okay, David, time is getting away from us so it's probably time we bring it back to Australia. What is going on here?
David: The big thing for me is that even though the Australian market followed the US higher, the resource sector is still struggling, down more than 3%. BHP, for example, was down 5%. The potential trade and tariff war impacts from a Trump victory are perceived to be bad for commodities generally. We also had a lack of follow through on policy stimulus from the National People's Congress meeting in China that was held a few weeks ago, so that also didn't help. I think local lithium producers were hit especially hard because Trump's position on renewables is bad for battery mineral producers. Liontown was down 11%, Core Lithium was down 17% in November. Also, if you recall, three of Australia's four major banks reported at the beginning of the month—results were largely in line with expectations, so that strong performance that we've seen over the past year, that's really now being driven by higher price to earnings ratios rather than improving earnings.
Lyndon: Okay, so we have some winners and some losers but the market's been pretty strong overall, David. Do you reckon that's going to continue?
David: If you look at a long-term chart of shares, it does go up over time. I always keep in the back of my mind: ‘you want to remember not to be too negative’. I suppose I do have a few concerns just about how bullish everyone seems to be now. If you look at a survey of US households, they are more positive on share prices now than they've been in 30 years. If you look at the long positions by asset managers, they're also quite stretched, and you're seeing a lot of inflows into ETFs that are leveraged purchasers of shares, they're at a record. When those sorts of things are happening, that actually concerns me because everyone is so bullish. That's often when you see the setup for a pullback—it's very easy to disappoint bullish expectations.
Lyndon: Something to think about there, David. Looking ahead then, as you mentioned last month, we're in a pretty important period for our retailers at the moment, aren't we? Black Friday everywhere.
David: Yeah, for a lot of retailers, Black Friday will account for more than 40% of their annual sales. It's a very big period leading into Christmas. As we're recording, today's Cyber Monday, so that's the last day of that big weekend. The early read is that sales growth has been quite strong, promotional activity was quite rational, but we will hear more in coming days so something to watch there. Also here in Australia, the RBA are going to announce their final decision of the year on 10 December. Given the stickiness in inflation, the labour market’s still quite solid, it's hard to see anything other than rates on hold again this month. Various speeches from RBA officials, they're clearly suggesting that aggregate demand is too strong, labour markets too tight, underlying inflation too high, so not quite ready to cut rates yet. In fact, over the course of the month, if you look at analysts’ expectations, more of them were pushing back their expectations for the timing of the first cut from early next year—now, a lot of them are looking at mid-next year.
Lyndon: So that's Australia's Reserve Bank. What about the US, David, what about the Federal Reserve?
David: The US Federal Reserve have their next rate decision on 18 December. The market’s now undecided whether they're going to cut by 0.25% or actually have no cut. Chairman Powell and other members of the committee, they've recently been talking about the importance of being more gradual when it comes to rate cuts. It was only a few months ago that the market expected ten 0.25% rate cuts in the US, and we've already seen three of those, but now the market only actually sees three more over the next few years, so a lot less rate cuts in the US it seems.
Lyndon: Okay, so a few things still to keep an eye on in December there, David. Speaking of which, before we wrap up—in the spirit of the festive season, I was reliably informed that you have a bit of a gift of sorts to share with our listeners. Do you care to elaborate there, David?
David: Yeah, so a few of my colleagues in the Investment team, they've come up with a bit of a summer reading list. There'll be a link to that in our show notes—it's also on our website if you go to the news and insights section—it's just a really great collection of books and even some podcasts that some members of our Investment team have found interesting. We hope that some of the listeners might as well, so go and check that out.
Lyndon: Amazing, I know I will make sure to do that, David, but before I repair to the couch, I just want to say a huge thank you—we are so fortunate to have you popping in each month and sharing your insights and analysis with our listeners and members. As I often say, you truly are a great mind of UniSuper, so on behalf of our listeners, thank you so much and I look forward to doing it all over again with you in 2025.
David: Thank you, Lyndon. See you next year.
Lyndon: Looking forward to it, David. And that wraps up this episode and the podcast for the year. To you, our listeners, we say thank you for joining us each and every month. We hope you enjoy it, by the way, and if you have any feedback for us, please feel free to shoot us an email at podcasts@unisuper.com.au.
We will be taking a break over Christmas and the New Year, we’ll be back in February—if you don't want to miss us when we are back, subscribe to us wherever you get your podcasts or check unisuper.com.au/podcasts at the start of each month. For the final time in 2024—we are UniSuper, the place where bright minds and passionate people strive to think great and create a future worth retiring for. If you'd like more information about our investments, visit unisuper.com.au. Thank you again for listening, we'll see you next year. We hope you have a lovely, safe and restful break and until then—look forward, think great, with UniSuper.
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.