Market Commentary December 2024

31 December 2024 - Market update from John Laver, Head of Investment at Generation Life

Equity markets were quite subdued during the final quarter of calendar year 2024 compared to the previous three quarters. Macro factors again played a major role in market pricing.

October and December were dominated by concerns around the possible reduction in the speed and number of official interest rate cuts in Australian in 2025. This was coupled with mixed market sentiment in Australia created by the presidential election in the United States. Markets were wrestling between the expected positive fiscal policy settings in the US and the potential negative impact of trade wars between the US and Australia’s Asian trade partners potentially hurting resource demand.

This led to an overall return for the Australian share market of -0.82% (as measured by the S&P/ASX 200 Accumulation Index) while the return for the calendar year was a strong 11.44%. US share markets received the election of Donald Trump in a much more positive light for corporate earnings with the market returning 2.10% for the quarter. It was a very strong year for global markets with the MSCI World Ex Australia Index (hedged) producing a 20.66% return, the second successive 20%+ year.

Even as the US Federal Reserve cut interest rates during the quarter, bond yields rose significantly as investors looked ahead to what could be a shortened rate cutting cycle and the potential inflationary consequences of the incoming Republican administration. Globally, the Bloomberg Global Aggregate index dropped 1.70% in the December quarter.

Meanwhile, Australian government bond returns also fell returning -0.26% as measured by the Bloomberg AusBond Composite +-0%. The higher projected interest rate expectations also impacted Australian 10-year bond yields, rising from 3.96% to 4.37% for the quarter as measured by the Australian 10-year government bond yield.

The average after tax returns on the reported Tax Optimised investment options for the 12 months to 31 December 2024 was an impressive 10.2%, whereas the comparable average pre fees and after-tax return for an investor on a 47% marginal tax rate (including Medicare levy), was 6.89%. Over the longer 4-year period the Tax Optimised options have delivered an average 1.11% p.a. higher return when compared to investors on a 47% tax rate (including Medicare levy) invested in identical investment strategies.

Over the last 2 years, we have witnessed a temporary shift in how some portfolios have been managed, particularly the level of turnover and rebalancing activity that has occurred in an environment where growth has been concentrated in a few securities and sectors. This has been particularly evident within the conservative and balanced multi-asset strategies where these strategies have delivered below expected long-term income levels. These temporary shifts have seen an anormal level of unrealised gains accumulating in these portfolios. From a tax perspective, these unrealised gains attract a CGT discount for personal investors. The performance numbers provided assume a full withdrawal with the benefit of any CGT discount applicable for personal investors. This benefit is reflected in the performance returns and have created a temporary shift in the expected after-tax return profiles between personal investor returns and returns for company investors. We view these changes as temporary in nature and not representative of the longer-term income and growth profile of thesestrategies. This should see a change in the after-tax return differentials between company investors and personal investors over the long term.

Pleasingly, the Generation Life Tax Effective Australian Share Fund continues to be the best performing fund in the investment bond Australian Share Fund (Blend) investment universe.¹ Over a five year period to 31 December 2024, the Generation Life Tax Effective Australian Share Fund has outperformed the next best fund in the category by 0.78% p.a. on an after fees and tax basis and has outperformed the average return in the category by 1.93% p.a over this period.

The Generation Life Tax Effective Growth Fund has also achieved top quartile after fees and tax performance in the Diversified Growth category of the investment bond universe over the 12 months to 31 December 2024.¹ The fund was introduced onto the Generation Life investment menu in October 2023.

1.       Source: Morningstar Direct