Portfolio highlights

The Portfolio generated a strong positive return for the September quarter. Global shares achieved solid gains over the quarter despite concerns over the conflicts in the Middle East and Ukraine. Optimism on ‘Artificial Intelligence’ (AI) prospects, milder inflation outcomes, and both the American and European central banks cutting interest rates were the key drivers for higher global share prices.

The best performing fund in absolute terms over the quarter was the Resolution Capital Global Listed Infrastructure Fund (13.2%), outperforming its benchmark by 1.6%. CBA and Westpac were among the biggest contributors for the Direct Australian shares portfolio for the quarter, with the banks continuing to be at record high valuation levels and are benefitting from money flowing from global investors as they seek Australian equities exposure and from super funds buying into positions.

Wall Street’s benchmark S&P 500 Index made historic highs and delivered a very strong 5.8% quarterly return in local currency terms with the exuberant optimism on AI and technology shares. European shares delivered a solid return. Investors gained solace in milder inflation and the European Central Bank (ECB) cutting interest rates. Chinese shares made an extraordinary recovery in September which allowed China’s MSCI index to deliver an astonishing 22.2% quarterly return in local currency terms. Chinese central banks responded to slow economic activity and weak property markets by assertively cutting interest rates as part of broader co-ordinated stimulus measures. Japanese share markets delivered a -6% quarterly return in local currency terms given concerns over higher interest rate settings by the Japanese central bank.

Australian shares delivered a strong quarterly return of 7.8%. The Information Technology sector made a very strong quarterly return of 15.3%. Real Estate Investment Trusts (REITS) were next best with a 14.5% quarterly return given raised hopes for eventual interest rate cuts in Australia. Financial sector shares also made a very strong 8.3% quarterly gain on lower interest rate hopes. Resource sector shares were boosted by China’s stimulus announcements in September which generated a 7.1% gain. However, there were some disappointments with the Energy sector delivering returns of -6.4% given falling global oil prices. Australia’s economy continued to display subdued economic activity with sluggish consumer spending and weak housing construction. Lower inflation results for August has generated optimism that the Reserve Bank of Australia will become more open to lowering interest rates in early 2025.

Australia’s company reporting season proved fairly resilient in the context of a slowing economic environment, concluding with 33% upgrades and 27% misses. Resource names had the biggest downgrades, driven by weaker commodity prices. The main themes were ongoing weak business demand and increasingly challenged consumer demand. This was offset by better margins as many companies still have sufficient pricing power, and companies are no longer suffering from labour shortages.

Global bonds (hedged) posted a strong 4% quarterly return. Bond investors were comforted by lower inflation readings in the United States and in Europe. Australian bonds posted a solid 3% return for the quarter largely on the back of lower global inflation as well as subdued Australian economic activity results.