As we approach the end of 2023, it's time to take stock of the year that was and look ahead to what the future holds for the Australian sharemarket in 2024. This year has been marked by significant global and domestic challenges, but it has also demonstrated the resilience of the Australian stock market.
Overcoming Headwinds
The year 2023 saw its fair share of challenges, including geopolitical tensions in Ukraine and the Middle East, persistent inflation, elevated interest rates, and domestic concerns related to the cost of living and the so-called "mortgage cliff." These factors cast a shadow on consumer sentiment and raised concerns about the performance of the Australian sharemarket.
However, despite these headwinds, the Australian sharemarket proved to be remarkably robust. One factor that played a crucial role in this resilience was the unexpected strength of China's demand for Australian resources. As a result, companies like Rio Tinto and Fortescue reached all-time high share prices in 2023, lifting the mining sector and contributing to the overall positive performance of the local market.
Early Enthusiasm and Steady Growth
The year began with a surge of enthusiasm, with the ASX gaining 8 per cent by mid-February. Some experts suggested that taking profits at that point might have been a prudent move, and it took until late in the year to return to those levels on a total returns basis.
Throughout much of the year, the Australian market lagged behind Wall Street, where the price-to-earnings ratio for the S&P 500 hovered around 22, and year-to-date returns exceeded 23 per cent. Nevertheless, the Australian market is poised to finish the year with a total return of over 10 per cent.
The ASX 200 price index increased by more than 6 per cent, and the market's dividend yield stood at approximately 4.3 per cent. For investors holding franked dividend stocks, the news is even more promising, with ASX sharemarket returns potentially reaching 12 per cent.
Encouraging Outlook for 2024
Looking ahead to 2024, the Australian sharemarket seems poised for further growth. Several key factors support this optimistic outlook. First, the market is not considered overpriced, with a price-to-earnings ratio of around 17 times. Additionally, during the recent Annual General Meeting (AGM) season, there were more upgrades than downgrades of company guidance, indicating a positive sentiment among companies themselves.
Perhaps the most significant indicator for 2024 is the signal from Jerome Powell, the chairman of the US Federal Reserve, that the interest rate cycle has peaked. This suggests that inflation has been contained, and interest rates may decrease in the second half of 2024. This signal has unleashed optimism in the market, particularly benefiting stocks dependent on financing for growth, such as small stocks, technology stocks, and real estate investment trusts (REITs).
Fundamental Strengths
Two additional factors are expected to come into play during the first half of 2024. Firstly, the Australian economy is in better shape than anticipated, with a significant reduction in the expected budget deficit. This improvement is partly attributed to rising mining prices, particularly iron ore, which doubled in price from previous estimates.
Secondly, the implementation of the top-end personal tax cuts program on July 1 is expected to boost consumer spending. These tax cuts, initially controversial, will provide significant pay rises for those earning more than $200,000 per year and are likely to stimulate investment and consumption.
Sector Opportunities
As we assess the performance of various sectors in 2023, it's clear that the property trust sector (REITs) stands out as an opportunity for investors. This sector faced challenges due to higher-than-expected interest rates and a shift in working patterns, but these headwinds may turn into tailwinds in the year ahead.
Similarly, the healthcare sector, which struggled in 2023, may find a more favourable climate in 2024. Stocks like Resmed and Ramsay Healthcare are expected to rebound.
Investment Strategies
Whether you prefer individual stock picking, active fund management, or index-based exchange-traded funds, the key takeaway is that the market is not expensive, and the outlook appears positive based on current fundamentals.
Looking Ahead
In conclusion, while forecasting the exact performance of the ASX in 2024 remains uncertain, the Australian sharemarket has demonstrated resilience and the potential for growth. With a combination of improved economic conditions, personal tax cuts, and a more favourable interest rate environment, the outlook for 2024 appears encouraging. As always, investors should consider their individual circumstances and risk tolerance when making investment decisions.
