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Mid-year outlook 2024: drivers and risks   By Edwin Lo Chief Investment Officer

Edwin Lo, Chief Investment Officer, wraps up the market performance for the past six months and outlines what lies ahead for FY 2024/5. Six months to 30 June 2024 The second half of FY2023/4 saw divergence in economic performance, with individual economies experiencing various growth and inflation experiences.   The US economy was relatively resilient, while its counterparts in the Eurozone, Japan, and China experienced subdued economic growth. Australia's economic results were mixed. While the economic landscape was much softer than expected due to a fall in total capital investments and international trade in goods, labour market and wage growth remained robust.  As global inflation continues to subside, central banks will be better positioned to start easing policy rates. In recent months central banks in Switzerland, Mexico, the Eurozone, Canada, and Sweden have already cut their rates.  Against this backdrop, equities performed well, producing excess returns above cash and fixed-income instruments.  Asset class returns (as at 30 June 2024)  Asset class 1 year 3 years pa 10 years pa Income       Australian bonds and credits 3.68% -2.06% 2.19% Global bonds and credits 2.67% -2.74% 2.04% Growth       Australian equities 12.14% 6.37% 8.05% Global equities 19.98% 11.19% 13.12% Interest rates       Australia cash rate 4.35%* 0.10% 2.50% USA Fed Funds rate 5.32%# 0.05% 0.03% * The Reserve Bank of Australia, June 2024  # The Federal Reserve, USA. June 2024    Outlook for FY 2024/5 Economic growth is expected to be sluggish over the first half of the new financial year as tight monetary conditions impact consumers and businesses. That said, growth is expected from 2025, supported by the positive effect of expected interest rate cuts, strong employment markets, an improved manufacturing sector, and government stimulus.  Progress on inflation should continue to reassert downward pressure on the policy path. However, there appear to be laggards, including the US and Australia. The current market consensus is that the RBA Cash Rate will remain relatively steady at 4.35% through 2024.  The global economy remains vulnerable to external shocks. Investors should be aware of potential risks with the rise in geopolitical tensions, along with unstable energy prices and currencies. Corporate earnings and asset valuations will be set for a volatile period, and high-stakes presidential elections in the US, UK, France, and the EU will add further uncertainty to a handful of geopolitical scenarios this year.  Corporate earnings have been buoyant but are now coming under threat. Given the challenging earnings outlook and overvaluation of some markets and sectors, we will maintain a neutral stance on equities. This makes stock quality the most crucial component of security selection.  With easing interest rates on the horizon, this substantiates the investment case for adding duration to bond portfolios to lock in the current higher rates. Fixed income should deliver returns in line with income yields, helping to stabilise returns and improve fund diversification. In credit, we will trim exposure to global investment-grade papers from an overweight to a neutral position on tighter credit spreads and explore opportunities in the higher-yield sectors for better return outcomes.  One of the main themes in ESG is that global carbon emissions have exceeded the interim targets for meeting the 2050 objective of the Paris Agreement. To achieve the global objective of net zero, governments must issue and maintain more ambitious climate-related policies.  As a result, decarbonisation is becoming more urgent. UFS will continue to increase its allocation to clean energy and adjacent technologies. We intend to strengthen efforts further with dedicated climate strategies to align with the recommendations and requirements of the Task Force on Climate-related Financial Disclosures (TCFD).  Embedding the vision of the UCA Synod NSW and ACT with UFS investment beliefs, we strongly focus on ethics and the UN Sustainable Development Goals when constructing our portfolios across all asset classes. A key priority for the new financial year is to increase our engagement efforts, assessing and validating the sustainability solutions of companies seeking to transition to a carbon-neutral investment outcome by 2050. Also on the agenda are reforms to bank lending practices in the buy-now-pay-later sector.  Applying these considerations, our asset allocation for the first half of FY2024/5 is as follows:   Asset Allocation  Asset Class Overweight Neutral Underweight Listed Equities       Australian       International       Fixed income       Rates       Investment grades       High yields       Real assets       Infrastructure       Real estates       Equity co-investments       Private debts       Cash         Summary Higher interest rates have begun to impact both consumers and businesses. Meanwhile, the fundamental valuation of growth assets appear to be stretched, making security selection important. Looking forward, we encourage investors to build long-term, diversified portfolios with multiple sources of return to enhance performance consistency and reduce risk.     While the information contained in this announcement has been prepared with all reasonable care, Uniting Financial Services accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company or that an asset class may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock or the assets in that class.    

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Kindly note that the information on this webpage is only intended for wholesale, professional or sophisticated investors (as defined in the Corporations Act). Please do not refer to this webpage if you are not one of these investors. Uniting Financial Services is not providing any personal advice or recommendation regarding any financial products described or referred to on this webpage. Prospective investors should make their own enquiries and should seek all necessary financial, legal, tax and investment advice. Past performance is not indicative of future performance, all information contained on this wepbage is current at the date of publication, however may be subjected to change without notice.