Hold That Thought

Snapshot

Global financial markets finished lower (-3.4%) in April, breaking a five-month winning streak that started in November and ended in March. Consecutive readings of higher-than-expected inflation in the United States, as well as elevated geopolitical conflict, curbed investor enthusiasm during the month. 

Inflation in the United States has been 0.10-0.20% higher than expected for the past four months, most recently printing at 3.80% year-on-year in March (excluding volatile items such as food and energy), relative to consensus forecasts of 3.70%. At the time of writing, the market anticipates the first 0.25% rate cut by the US Federal Reserve (Fed) will occur in November, out from June not that long ago, implying interest rates will need to stay higher for longer while inflation remains above the Fed’s inflation target of 2.00%.

This view was reinforced following the Fed’s two-day meeting ending on 1 May, where it kept interest rates steady at 5.25-5.50% and acknowledged the recent setback in its inflation fight. Chair Jerome Powell said the Fed was more likely to keep interest rates at their current level for longer however, rather than to raise them again.

Inflation in Australia also came in higher than expected for the March quarter, printing at 1.00% quarter-on-quarter compared to consensus forecasts of 0.80%. Over the 12 months ending March, inflation rose by 3.60%, above the Reserve Bank of Australia’s (RBA) inflation target of 2.00-3.00%. Similar to the United States, this resulted in expectations for interest rate cuts being priced out of the market, with the RBA now expected to hold interest rates steady at 4.35% for the next 12 months.

Geopolitical tensions also rose between Israel and Iran during April, although the price of oil experienced a decline (-1.5%) despite this conflict. This escalation led to an increase in investor risk aversion, resulting in a rise in the value of gold (+2.9%) and the CBOE Volatility Index (VIX), an indicator of market volatility (+20.3%).

Interestingly, and in contrast to what happened elsewhere in global financial markets during April, Chinese stock markets rose (+3.1%) following signs of economic stabilisation. The economy grew at 5.30% year-on-year in the March quarter, comfortably above expectations of 4.60% and further improving on the 5.20% recorded in the December quarter. Additionally, manufacturing activity, as measured by the Purchasing Managers Index (PMI) survey, has shown a positive trend, entering expansion territory in recent months. These favourable economic indicators led to a rise in the price of iron ore (+8.7%).

Despite the challenges, we remain cautiously optimistic for the year ahead, considering the progress achieved. While inflation remains above central bank targets, it has fallen considerably and continues to trend lower. Thus, we believe 2024 presents a favourable market environment as the path towards lower interest rates comes into view.

Key Stocks

Sumitomo Mitsui Financial Group

Cutcher & Neale International Shares Model

Sumitomo Mitsui Financial Group is one of the largest banks in Japan and has operations spanning commercial banking, leasing, securities and consumer finance. Compared to other major Japanese banks, Sumitomo has a larger consumer finance business and controls one of Japan’s main leasing companies.

Sumitomo Mitsui was added to the Cutcher & Neale International Shares Model Portfolio in December 2023 and has since surged ~37% in local currency terms to the end of April. The company has benefited greatly from the recovery in the Japanese economy, as healthy levels of spending increased inflation to normal levels, following years of negative interest rates. This improved economic outlook has been favourable for Sumitomo, as it is most focussed on consumer and small-to-medium enterprise financing.

Sumitomo’s business strategy also involves increased international expansion, particularly across Asia in growth regions like India. Progress continues to be made here, as the bank completed its acquisition of SMFG India Credit in March. 

Honda Motor Co.

Cutcher & Neale International Shares Model

Honda is a global automobile, motorcycle and power product manufacturer, with the majority of its revenue being generated by cars in the US (~47%). Including joint ventures, Honda sold 22.4 million cars and motorcycles in 2023.

Honda was added to the Cutcher & Neale International Shares Model Portfolio in early April 2024, as the Investment Committee decided to rotate out of European carmaker Stellantis. After extensive comparative analysis, Honda was identified as the most attractive automaker based on its pricing discipline, resilient sales and efficient inventory turnover. Part of this has to do with Honda’s product mix and pricing, given the increased cost of living pressures felt by consumers.

Recently, optimism around electric vehicles has stalled, given elevated input costs and higher price points. This has led to improved demand for hybrid vehicles, a market in which Honda is positioned well. Around half of Honda’s Accord and CR-V sales have been hybrid variants. Meanwhile, the automaker’s flagship Civic model is planned to roll out its new hybrid version in June 2024. 

Sumitomo Mitsui Financial Group

Cutcher & Neale International Shares Model

Sumitomo Mitsui Financial Group is one of the largest banks in Japan and has operations spanning commercial banking, leasing, securities and consumer finance. Compared to other major Japanese banks, Sumitomo has a larger consumer finance business and controls one of Japan’s main leasing companies.

Sumitomo Mitsui was added to the Cutcher & Neale International Shares Model Portfolio in December 2023 and has since surged ~37% in local currency terms to the end of April. The company has benefited greatly from the recovery in the Japanese economy, as healthy levels of spending increased inflation to normal levels, following years of negative interest rates. This improved economic outlook has been favourable for Sumitomo, as it is most focussed on consumer and small-to-medium enterprise financing.

Sumitomo’s business strategy also involves increased international expansion, particularly across Asia in growth regions like India. Progress continues to be made here, as the bank completed its acquisition of SMFG India Credit in March. 

Honda Motor Co.

Cutcher & Neale International Shares Model

Honda is a global automobile, motorcycle and power product manufacturer, with the majority of its revenue being generated by cars in the US (~47%). Including joint ventures, Honda sold 22.4 million cars and motorcycles in 2023.

Honda was added to the Cutcher & Neale International Shares Model Portfolio in early April 2024, as the Investment Committee decided to rotate out of European carmaker Stellantis. After extensive comparative analysis, Honda was identified as the most attractive automaker based on its pricing discipline, resilient sales and efficient inventory turnover. Part of this has to do with Honda’s product mix and pricing, given the increased cost of living pressures felt by consumers.

Recently, optimism around electric vehicles has stalled, given elevated input costs and higher price points. This has led to improved demand for hybrid vehicles, a market in which Honda is positioned well. Around half of Honda’s Accord and CR-V sales have been hybrid variants. Meanwhile, the automaker’s flagship Civic model is planned to roll out its new hybrid version in June 2024. 

About The Author

Wade is the head of the Investment Services division at Cutcher & Neale and has over 10 years of industry experience in accounting and investment advisory roles.

Wade guides his division on the belief that investment portfolios should be built on transparency and flexibility. His expertise focuses on direct portfolio exposure to both Australian and Global Investment markets.