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Resilient returns - equities soar despite economic headwinds

Equities lead the way as strong investment returns glide through a weak macroeconomic environment.

The past financial year showcased strong investment returns amid challenging economic conditions. Equities emerged as top performer, with US equities returning approximately 23%, global equities around 20%, and Australian equities approximately 8% over 2023-24. Property prices also recorded solid growth, increasing by 8% across the country. Cash yielded around 4%, corporate bonds returned about 6%, and government bonds returned 3%.

Chart 1: 2023-24 financial returns by asset class

Source: S&P 500, MSCI World Index, CoreLogic daily home value index, S&P/ASX 200, S&P/ASX Corporate Bond Index, S&P/ASX Bank Bill Index, S&P/ASX Australian Government Bond Index

The stellar performance of equities was underpinned by several key factors. These included anticipation of lower interest rates on the back of lower inflation, stronger than expected economic activity and profits (particularly in the US), and the enthusiasm for AI bolstering returns in the “Magnificent 8” (Amazon, Apple, Microsoft, Nvidia, Alphabet, Meta, Netflix, and Tesla). 

Australian shares, while performing well, lagged global peers in part due to concerns regarding China’s economic performance (Australia’s largest trading partner) and the more damaging broader impacts of Australia’s rate hikes (with households carrying higher debt and more exposed to variable interest rates). The upbeat sentiment in the US technology sector did rub off on the Australian market as the equities in Australia’s IT sector returned 25% through the year. It was the financial sector, which constitutes a larger share of the market, which played a pivotal role in driving gains. The sector was up 22% in the year as banks engaged in share buybacks and issued special dividends using funds accumulated during COVID-19, originally earmarked for bad debt losses that did not materialise. 

Consumer discretionary stocks defied expectations by posting a 19% increase despite the economy experiencing per-capita recession. This unexpected strength largely came from the first nine months of the financial year where consumer savings were being run down.

Chart 2: 2023-24 financial returns by ASX sector 

Source: S&P Global

Bond markets provided solid returns over the financial year as increasing real yields reflected economic strength, prices were kept in check as stronger-than-expected inflation prevented an expected interest rate cut in Australia and the US.

Australia’s housing market has continued its upward trajectory, with dwelling values rising 8% over the financial year. Perth recorded the strongest growth at 23.6% whilst Hobart was the only city which recorded negative growth at -0.1% over the year. The persistent growth comes despite an array of downside risks including high rates, cost-of-living pressures, affordability challenges and tight credit policy. The market's resilience can be attributed to limited supply levels, which continue to exert upward pressure on property values.

This strong performance in investment returns contributed to buoyant household wealth which rose for a sixth straight quarter to be 10.2% higher in the year to March 2024. Residential land and dwellings were the largest contributor to yearly growth in household wealth, adding 6.8%. Superannuation assets also contributed, adding 2.4% to household wealth growth for the year, driven by strong investment performance both domestically and internationally. Direct ownership of shares and other equity contributed an additional 1.1% to yearly growth in household wealth. 

This newsletter was distributed on 10th July 2023. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Naasha Kermani, Senior Economist at Deloitte Access Economics

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