Market Key Points
- The Australian equity market finished the month lower, aligning with other Developed Markets.
- In both Australia and the US, the perception of prolonged high interest rates impacted sectors sensitive to interest rate changes.
- Asian and Emerging Markets performed strongly, with Japanese equities experiencing another robust month, diverging from the trend in Developed Markets.
Australian equities
The ASX 200 Accumulation Index fell by 3.2% in December, marking the worst monthly return of 2024. The Index mirrored global markets in its decline. Softer economic activity and fading inflation in Australia led the market to anticipate a potential rate cut in early 2025, but this wasn’t enough to boost the local equity market.
Sector returns were broadly negative, with only minor gains coming from Consumer Staples (+0.6%), Utilities (+0.4%), Industrials (+0.3%), and Energy (+0.3%). Among the sectors that declined over the month, Property (-6.0%), Materials (-4.5%), Information Technology (-4.4%), and Financials (-4.2%) were the biggest losers.
The Property sector, sensitive to interest rate expectations, dropped 6.0%. This decline was due to a more hawkish US Federal Reserve, even after a 25bps policy rate cut. The shift in sentiment led to a rise in bond yields, further impacting the sector. Materials were affected by ongoing uncertainty around the Chinese economy, a trend throughout 2024, which weighed on global metal prices.
As investors now look ahead to 2025, overall uncertainty in the market environment continues.
Global Equities
Emerging Markets outperformed Developed Markets in December, as global equity markets navigated a mix of central bank actions, geopolitical uncertainties, and year-end market dynamics. Emerging Markets gained 5.07% (MSCI Emerging Markets Index (AUD)), while Developed Markets returned 2.58% (MSCI World Ex-Australia Index (AUD)), buoyed by a significant drop in the AUD. In local currency terms, the MSCI World Ex-Australia Index fell 1.89% for the month.
US equity markets experienced volatility in December with the usual year-end portfolio rebalancing and tax-loss harvesting. While the Federal Reserve had implemented a 25 basis point rate cut in the previous month, its hawkish tone dampened investors’ enthusiasm. As a result, the S&P 500 declined 2.5% for the month (in local currency terms), marking one of its weakest periods in 2024. Mega-cap stocks faced pressure from stretched valuations, while market sentiment was also tempered by persistent concerns about corporate earnings growth.
Japanese equities outperformed most Developed Markets, with the Nikkei 225 rising 4.0% (in local currency terms). A weaker yen, which depreciated 4.6% during the month, supported export-driven industries, while financial stocks gained on rising yields.
Emerging Markets delivered strong performance in December, reversing prior month trends, driven by a rebound in Chinese equities and broader regional strength. The MSCI Emerging Markets Index (AUD) gained 5.07%, supported by proactive fiscal and monetary policy announcements from China. The Hang Seng Index rose 1.5%, while the CSI 300 Index gained 2.3% (in local currency terms). Despite these gains, structural challenges and political uncertainties weighed on performance in markets such as South Korea and Taiwan.
Property
The S&P/ASX 200 A-REIT Accumulation Index TR backtracked significantly in December, finishing the month down 6.0%. The Index remains in positive territory YTD, up 19.5%. Similarly, global real estate equities also reverted, decreasing by 6.2% (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)).
Australian infrastructure increased with a return of 3.0%, continuing its growth after an increase of 5.0% in November. The index has delivered a return of 12.9% YTD.
December continued the quiet M&A trend in Australia across the A-REIT sector in the lead up to Christmas and the New Year. Drama continues to evolve in the stoush between Hotel Property Investments (HPI) and the Charter Hall Retail REIT (CQR) led consortium.
After repeatedly asking shareholders to reject the takeover offer (and revised offers), HPI directors have now asked shareholders to accept the A$760m buyout. This came a day after the consortium took a majority stake in the pub landlord and are set to pursue a hostile takeover strategy. As of 30 December, the consortium had increased its voting power to 57.61%.
The Australian residential property market experienced a fall of -0.2% Month on Month (as represented by CoreLogic’s five capital city aggregate).
Perth continued its strong run and was the biggest riser (+0.7%, 19.2% YoY), followed by Adelaide (+0.6%) and Brisbane (+0.5%). In contrast, Melbourne was the worst performer and continued to experience a fall in value (-0.7%) alongside Sydney (-0.6%), Hobart (-0.5%) and Canberra (-0.5%).
Fixed Income
After experiencing volatility in November due to the US Federal election and actions by the Federal Open Market Committee (FOMC), the bond market ended the year on a disappointing note, with a significant rise in yields.
GDP figures came in lower than expected, prompting further speculation that a rate cut could be on the horizon for early 2025. Meanwhile, the Reserve Bank of Australia (RBA) left rates unchanged at the current policy rate of 4.35%, but adopted a more dovish stance, expressing confidence that inflation was easing.
Despite this, a robust labour market with lower unemployment and rising job creation gives further credence to the softer landing and the gradual easing of rates the RBA is aiming for. As a result, we saw a slight uptick in the 10-year Australian Government bond yields by 2bps, while the 2-year bond yield dropped by 9bps.
In the US, the Federal Reserve's decision in their December meeting to cut the policy rate by 25bps was accompanied by caution regarding future rate cuts in 2025, with the Fed adopting a more hawkish stance than expected. This sentiment led to a significant sell-off in both the equity and bond markets.
The rise in yields reflects a potentially shortened rate-cutting cycle, while pro-inflationary pressures expected from the incoming Republican Party have also contributed to the increase in yields. In response, US government bond yields rose by 7bps for the 2-year and 40bps for the 10-year.
Currencies
The Australian dollar (AUD) depreciated over the month of December, closing 2.9% lower in trade weighted terms to 59.7, depreciating against the US Dollar (USD), Pound Sterling (GBP), Euro (EUR) and the Japanese Yen (JPY).
The Australian dollar weakened against the USD led by uncertain economic conditions, specifically around tariffs, and a relative strengthening of the USD. Additionally, the RBA held interest rates as opposed to a rate cut in the US for December.
Relative to the AUD, the USD was the highest performer of the month, appreciating in relative terms by 5.0% against the AUD. Year-on-year, the AUD remains behind the USD, EUR and GBP by 9.2%, 3.2% and 7.7% respectively, whilst remaining ahead of the JPY by 1.3% in relative terms.
Economic key points
- The RBA kept interest rates at 4.35% during its December meeting.
- The FED cut interest rates to 4.50% in its December meeting.
Australia
As widely expected, the RBA held the Australian cash rate at 4.35% in its final meeting for the year, but the accompanying statement was more dovish than previous announcements and omitted the threat that the policymakers were “not ruling anything in or out”.
Noting that some economic data such as the latest GDP growth had been softer than expected, Governor Michele Bullock stated that the board’s “views are evolving”, with “a little bit more confidence” that inflation was coming under control. Following these comments, however, the ABS Labour Force report showed that the job market remains tight, with the unemployment rate falling from 4.1% to 3.9% for November. Financial markets are fully-pricing in a first RBA rate cut in May 2025.
ABS employment data showed that 56,000 more people found work in December, which was well above expectations. The unemployment rate increased marginally to 4.0%, but this was due to the participation rate returning to a record high. The resilience of the local labour market may allow the RBA to defer any rate cuts until the middle of this year, after a federal election.
Retail sales rose 0.8% in November, failing short of market consensus of a +1%., while annual sales jumped 3.0%. The Westpac-Melbourne Institute Consumer Sentiment Index dropped 2% to 92.8 in December with renewed concerns about the economic outlook amid ongoing inflation uncertainty and the potential for interest rate easy and a more unsettle international backdrop.
Composite PMI was steady at 50.2 in December, just into expansion territory, with growth limited to services as manufacturing output shrank.
The trade surplus widened to $7.08bn in November, ahead of market estimates of $5.75 billion and the revised prior reading of $5.67 billion.
US
The US Federal Reserve cut its interest rate by a further 0.25% in December, as widely anticipated, but the accompanying commentary and updated “dot plot” of expected future monetary policy took a hawkish turn.
Fed Chair Jerome Powell noted that the US economy was robust, with low unemployment, but that inflation remained elevated. He emphasised that the bank was not on any preset course, and “could be more cautious” with further adjustments to the Fed Funds Rate, now that monetary policy was already much less restrictive.
The Fed’s summary of future projections showed that the median policymaker now expects a more gradual deceleration in inflation, reaching the bank’s 2.0% target only in 2027. It also implies only two further steps in 2025 to reduce the cash rate (by 0.50% in total), compared to the four (or 1.00% in total) indicated in last quarter’s projections.
Headline inflation accelerated marginally to +2.9% for the year to December, but Core CPI eased to +3.2%. This was generally in line with market forecasts.
Non-farm payroll added 256,000 jobs in December, ahead of market forecasts of 160,000. The unemployment rate came in at 4.1% in December, just below the market forecasts of 4.2%.
Retail sales in December rose 0.4%, below the anticipated 0.6%. Annual retail sales increased 3.9%, below the expected 4.0%. Consumer sentiment came in at 74 in December, matching forecasts. Composite PMI rose to 55.4 in December, with robust services expansion offsetting the continued downturn in manufacturing.
The trade deficit widened in November to $78.2bn, roughly in line with forecasts.
Eurozone
The ECB cut its key interest rates by 0.25% in its December meeting, reflecting a more favourable inflation outlook. Economic recovery is projected to be slower than before, with growth expected at 0.7% in 2024, 1.1%
Annual inflation rose to 2.4% in December, matching market expectations. This increase was largely due to base effects, as last year’s sharp declines in energy prices are no longer factored into annual rates.
Retail sales increased 0.1% in November, below the expected +0.4%. Annual sales rose 1.2%, below the anticipated 1.7% rise. In November, consumer confidence dropped 0.7 points to -14.5, broadly in line with expectations as consumers became notably more pessimistic about general economic conditions.
The unemployment rate was unchanged at 6.3% for November, in line with market forecasts.
The Composite PMI rose to 49.6 in December but remains in contraction territory as modest services growth was outweighed by a sharp decline in manufacturing.
Francis Bayrou was named as the new Prime Minister of France following the collapse of the Barnier government following a no confidence vote prompted by budget disputes.
UK
As largely expected, the Bank of England held that benchmark steady at 4.75% in December as wage growth and a rise in inflation expectations adding to the risk of inflation persistence. Annual inflation dropped to 2.5% in December, from 2.6% in November, and below the forecast 2.6%. Core inflation rate also declined to 3.2% from 3.5%.
The unemployment rate was unchanged at 4.3% for the three months to October, in line with market expectations. Private sector employment saw its steepest decline since January 2021, driven by weak demand and higher payroll expenses.
Retail sales disappointed in December, falling 0.3% against market expectations of +0.4% and under the revised +0.1% in November.
Consumer confidence increased 1 point to -17 in December, the second increase in as many months. However, confidence remains subdued reflecting ongoing concerns about the country’s economic outlook. Composite PMI fell to 50.4 in December, as new orders fell slightly, breaking a year-long expansion streak, as subdued demand and rising costs weighed on business activity.
China
GDP for the fourth quarter of 2024 came in at 5.4% year-on-year, ahead of market expectations of 5.0%, and above the 4.6% reading in Q3. Annual inflation edged lower to 0.1% in November, underscoring the mounting risk of deflation.
Composite PMI fell to 51.4 in December, marking the lowest print since September.
Despite this, it is the 14th month of expansion in private sector activity, as the services sector saw the highest growth since May, but manufacturing activity rose less than expected. Year-on-year Industrial Production for December also came in ahead of consensus at 6.2%, up on the November reading of 5.4%. China’s unemployment rate rose to 5.1% in December, marginally above the expected 5.0%.
Retail sales grew 3.7% year-on-year in December, above the anticipated 3.5% and up from the 3.0% November reading.
Japan
The bank of Japan kept its short term interest rate at 0.25% in its final meeting of 2024.
The Bank adhered to its assessment that the domestic economy was on track for a modest recovery but needed more time to assess certain risk, including the US economic policies under Donald Trump. Annual inflation rate rose to 2.9% in November as food prices rose at the steepest rate in eight months.
Retail sales increased 1.8% in November, with the annual rate rising 2.8% and easily beating market expectations of a 1.7% gain. Consumer confidence came in at 36.2 in December, below the expected 36.6.
Composite PMI increased to 50.5 in December, with services activity showing mild growth and manufacturing contracting at a slower pace.
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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