Global market's compound strength

1. Strong Markets (Again)

The market strength in November (ASX200 +5.0%) continued into December with the ASX200 rising another +7.3%. This rally has been exceptionally strong.

Our Blackwattle Large Cap team well-articulated the 2023 year’s performance: the ASX200 index was flat for the eleven months to November, with the December alone accounting for the entire year’s gain.

The root-cause of market strength was the belief that the Federal Reserve’s hiking cycle is over, and moreover that the Federal Fund’s rate may well decline by 100bps in 2024, and 150bps in 2025. Treasury Secretary Janet Yellen commented that:

“What we’re seeing now I think we can describe as a soft landing”. 

The materiality of these comments cannot be discarded. Expectations for the better part of 2023 were for slower global economic growth, and moreover a recessionary environment in many counties. The “soft landing” commentary and spectre of rate cuts were a significant positive surprise.

2. Sector Performance

The best performing sectors in Australia (ASX200) for December were again the yield sensitive sectors of Real Estate (+10.0%), Healthcare (+9.0%) and Technology (+8.5%).

Energy & Utilities lagged.

The ASX Small Ordinaries Accumulation index (Small Caps) rose +7.2% in December, this was led by Industrials (+8.5%). Resources increased by +3.7%.

3. Opportunity and ROE

We continue to see opportunities to invest in great businesses on the ASX. Businesses with a clear forward advantage, run by trustworthy aligned management, that are priced sensibly.

When focused on Quality investing, Return on Equity (ROE) stands as a beacon, guiding us towards companies that may unlock meaningful shareholder value. ROE being a key measure of financial efficiency, revealing how effectively a company uses shareholder funds to generate profits. Companies that generate a high ROE deliver not only profitability but often efficient and sustainable returns.

On the ASX200 there are several good and great businesses currently offering outstanding returns, some of these include:

- Light & Wonder (ASX: LNW)
- Deterra Royalties (ASX: DRR)
- The Lottery Corporation (ASX: TLC)

In fact, currently, there are approximately 18 (ASX 200) companies generating a forecast ROE of greater than 40%.

Outlook

Whilst we do not attempt forecast markets, we do apply stringent risk and macroeconomic overlays to our investments. 

We train ourselves to think long-term and not be distracted by short-term thinking or short-term market fluctuations.

The 2024 year will be dominated by both the Federal Reserve’s rate cutting cycle (both the quantum and timing) and the US Presidential Election. We highlight that “soft landings” have been achieved in history, specifically in 1966, 1984, and 1995. When these occurred, equity markets subsequently outperformed.

The key question remains: will 2024 be such a year?

In this dynamic, we remind ourselves that consensus expectations are often the catalyst for contrarian surprises (whether it be either positive or negative).

And as we stand today, current market expectations are overwhelmingly positive.