Market Trends: Shares rally, but valuations look stretched

Easing fears of a global recession remained the major global market theme in February, with the US Federal Reserve signalling the next move in rates is likely down. The only near-term debate is how quickly the Fed will cut, with markets potentially at risk in the short term if the Fed delays until later this year or even early 2025.

Our hypothetical balanced portfolio returned 1.8% in February, reflecting gains in growth assets more than offsetting a small decline in defensive asset returns.

Defensive asset returns were down 0.4%, reflecting weaker fixed-rate bond returns. In turn this reflected a rise in local and global bond yields as resilient economic data and an upside surprise to US inflation caused markets to push out the timing of expected central bank rate cuts.

Growth assets returned 4.0%, with global equities in unhedged AUD terms rising 5.9%. Global equities have been trending upward since late 2022, but the PE ratio and equity risk premium appear a little stretched by recent historic standards.

Despite higher bond yields, local listed property returned a solid 4.8%, while Australian equities returned a more modest 0.8%. The trend in the relative performance of Australian equities has remained downward since early 2023. Relative returns for Australian versus global bonds has been choppy over the past year.

Read my full Market Trends report for February below.


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Written by

David Bassanese

Chief Economist

David is responsible for developing economic insights and portfolio construction strategies for adviser and retail clients. He was previously an economic columnist for The Australian Financial Review and spent several years as a senior economist and interest rate strategist at Bankers Trust and Macquarie Bank. David also held roles at the Commonwealth Treasury and Organisation for Economic Co-operation and Development (OECD) in Paris, France.

Read more from David.

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