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In what was a very eventful month, global equity markets rose 2.6 % in August, taking the year to date return to 16.9 per cent in USD terms. With the AUD rising against a weaker USD, the MSCI World ex-Australia index in AUD was up just 0.1%. However, that solid performance masks a significant shakeout in the early part of the month. On the back of weak July US labour market data and associated fears of US recession the S&P500 dropped 6 per cent to 5186 by August 5 before rallying to near record highs at 5648 at month-end.

The Australian equity market lagged global equities in August, rising 0.5%, to take the year to date gain to 9.1 per cent. Although the bank sector continued to lift, miners and energy were down heavily while the small cap index was off 4.4 per cent.
 
The main factors driving markets at the moment are: expectations for Fed rate cuts (more than 100 basis points of cuts are still predicted by markets by December), concern over the strength of the US tech industry, the state of the economy (any signs of a recession will be taken as a negative) and seasonality. September is seasonally a poor month for the US stocks. We remain of the view that shares are at high risk of further falls in coming months because valuations are high, seasonality is a problem in September, there could be more downside for tech names like Nvidia, economic data could start moving into “concerning” territory as activity has slowed which will increase fears of recession and geopolitical risks like the US election and the issues in the Middle East could see investor uneasiness result.
 
Australian June quarter GDP rose by 0.2% or 1% over the year, right on expectations. However, the components of GDP were more interesting than the headline. Consumer indicators were weaker, with the largest decline in consumer spending since the GFC (outside of the pandemic), the household savings ratio was unchanged at a low 0.6% and real household disposable income was low, at just 1% over the year to June (although at least its not negative anymore). Government spending remains a key driver of GDP growth.
 
The RBA is of the view that the demand/supply imbalance in Australia is still one where demand is exceeding supply. This has occurred as demand has been stronger than expected but also because the supply-side of the economy hasn’t increased as much as expected. They reiterated that the Board maintains its view that’s its “premature” to be thinking about rate cuts, unless circumstances change which is basically an unchanged message from the last meeting.
 
Easing inflation pressures, central banks moving to cut rates and prospects for stronger growth in 2025-26 should make for reasonable investment returns over 2024-25. However, with a high risk of recession, poor valuations and significant geopolitical risks particularly around the US election, the next 12 months are likely to be more constrained and rougher compared to 2023-24 and there is a high risk of a further correction in the next few months. A recession is the main threat for shares and there is a risk that we may have already seen the high for the year in the Australian share market.
 
 
Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. 
 
Sources: AMP Capital,  Pendal , Zenith.