Monthly Newsletter Late Month Recovery as Investors Buy Dip.

Financial market volatility returned last month, with stocks breaking from their remarkably smooth up-track as fears of tech overspend and hawkish sounding Fed members undermined investor confidence. The S&P/ASX 300 Accumulation Index returned -2.64% in November as investors were reminded that risk assets can go down in price as well as up. Global equities increased by +0.2% in Australian dollar terms. Australian fixed income sold off over the month, with rates rising 27 bps following the CPI release and hawkish sentiment from the RBA. Similarly, Japanese rates sold off, underperforming over the month. Meanwhile, U.S. Treasuries and U.K. Gilts rallied, driven by dovish sentiment from their respective central banks. On the credit side, investment-grade and high-yield spreads both widened by 2 bps.

Shifting expectations for a US Federal Reserve interest rate cut in December, driven by softening labour data and signs of slower retail spending, buoyed hopes for lower global interest rates and supported a late-month recovery in global share prices. Indeed, the US Federal Open Markets Committee reduced the Fed Funds rate by 0.25% to 3.50–3.75%, as widely anticipated. The decision was not unanimous, however, with two regional Federal Reserve presidents voting to remain on hold and Trump appointed Stephen Miran voting for a larger 50bp cut. The dot plot points to one further rate cut in 2026.

United States: Economic Conditions

In the US, the NFIB Small Business Optimism Index missed expectations with small businesses reporting inventories as too high, likely reflecting low sales. Hiring and capital expenditure intentions were roughly flat. With the September employment report delayed by the government shutdown, the NFIB provides timely labour insight. It confirms that the labour market has stalled but not collapsed. Job openings were flat, and only a small share of respondents plan to increase employment. The share of firms citing poor sales is high. This is a leading indicator of unemployment and aligns with consumers reporting that jobs are getting harder to find. The report fits with other indicators showing a growth deceleration in the US.

Beyond the deceleration in growth, US data showed concerning inflation details. Actual and planned price changes moved higher, as did wage growth while expected compensation growth was negative. It implies inflation pressures are coming from the supply side, not demand. US consumer confidence also saw a material drop in November. At the same time, core services inflation remains elevated. This suggests that members of the Federal Reserve will remain divided on the need for further interest rate cuts as we move into 2026.

Australia: Inflation & Interest Rates

In contrast, persistent and "sticky" Australian inflation data largely diminished prospects for a further interest rate cut by the Reserve Bank of Australia pushing Australian bond yields higher. A tight labour market, and strong housing and household consumption point to monetary policy being accommodative although not greatly so. Interest rate futures suggest Australia’s official cash rate will increase twice in 2026, starting as early as February, followed by May. Real GDP growth should accelerate by circa. 2.3% in 2026 with the public sector likely to contribute 0.5% and the private sector to contribute roughly 1.5% to GDP growth next year. The supply side of the economy looks to have reached its limits suggesting the labour market will likely remain tight and wage gains should continue over the course of 2026. As mentioned last month, inflation has returned and will likely remain elevated in 2026. Rising prices for electricity, services inflation and rebounding housing related pressures all points to upside inflation risks.

China: Economic Momentum

In China, economic momentum continues to weaken as key activity data disappointed across the board in November. Retail sales fell to 1.3% from 2.9% in October. This not only fell well short of forecasts, but it also marked the weakest month of retail sales growth since 2022. This was caused by the trade-in policy turning from a tailwind to a headwind. While the trade-in policy has primarily been seen as successful in front-loading consumption, we need to see either an expansion of the policy to new categories next year or a new direction in supporting consumption. If this does not occur, we are likely to continue to see pressure on consumption as the policy is phased out.

China's economy is suffering downbeat confidence, which risks becoming entrenched. While official confidence indicators have been inching higher over the past year, they remain well below historical averages. The negative wealth effect from falling property prices remains a major drag. Falling property prices have thus far overshadowed a solid equity market recovery, which is unsurprising given the greater weight of property prices in household balance sheets. The other key area is the widespread cost-cutting environment, which has led to sluggish wage growth and layoffs. This has resulted in less hiring and labour mobility. As we have outlined all year, these factors feed into an overall deflationary environment, which is a key drag on both consumption and investment.

Australian Share Market Performance

The decline in the Australian share market was driven by the Technology and Financials sectors. Adding to broader concerns about technology stock valuations in the US, the underperformance of local technology share prices was accompanied by a decline in forward earnings expectations for Life360 (-18.7%) and Technology One (-17.6%). The Financials sector (-6.5%) also declined whilst Materials (+1.7%) and Consumer Staples (+1.4%) gained and Health Care increased following the sector’s underperformance in recent months (+1.7%) led by Ramsay Health Care (+14.6%) and Sonic Healthcare (+10.2%). Within the financial sector, rising wholesale funding costs and continued pressure on net interest margins was the cause of the decrease in the sector. At a stock level, the best performers included Light & Wonder (+39.7%), IGO (+26.0%) and Pilbara Minerals (+22.7%), while Bendigo and Adelaide (-19.0%), Life360 (-18.7%) and Technology One (-17.6%) were amongst the biggest laggards.

Outside of the AI hype, the broader share market landscape is relatively investor friendly. The investment committee sees that the share price increases we have witnessed in Australia and the US, moved valuations above fair value in the short term. Whilst it was recognised that the AI investment theme, which has lifted share prices (particularly in the US), will continue for many years, the level of capital expenditure (money spent by businesses to make future profit) has been large. Profits need to rise to justify the return on the capital expenditure. If not the return on shareholder funds will drop and so could the share price. This heightened risk has prompted our reduced exposure in the STAR Tactical portfolio. Share market volatility has increased and more volatility is expected. This should be positive for gold. Gold has bounced as the appetite by investors seems insatiable. We also recognise that CBA, being 12% of the Australian share market index, remains very expensive despite having corrected meaningfully.

STAR Portfolio Highlights

Within the STAR Accelerated Australian shares portfolio performance has bounced in the last 2 months. The Manager – Joseph Palmer and Sons, reduced the holding in Aurizon as the price target was reached. Aurizon shares have performed well in recent months and news of Macquarie Asset Management’s takeover of Qube Logistics helped sentiment. Ramsay Healthcare was one of the portfolio’s best performers, finishing 14.67% higher over the month. This followed a better-than-expected 1st quarter trading update. Additionally, the collapse of rival Healthscope, provides Ramsay the potential to acquire some of Healthscope’s more profitable operations.

Sonic Healthcare, also provided a trading update and confirmation of full year guidance saw their shares increase 10.26% in November. Both Ramsay and Sonic shares underperformed over the past 18 months and news that margins have stabilised in both businesses has seen investors start to think that the worst is now behind them and they can begin to grow profits again.

Amcor shares increased 9.9% after the company issued 1st quarter results and reaffirmed full year profit guidance. Amcor’s acquisition of US Berry Group is rolling out smoothly. Flight Centre held its annual general meeting over the month and provided full year 2026 profit guidance of $305-$340m, implying growth of 6-18%. News about price gouging from suspended competitor Corporate Travel, also helped sentiment, with Flight Centre a likely winner from Corporate Travel’s unethical behaviour. The share price increased 9.9% over the month. Macquarie Group was the portfolio’s worst performer, falling 8.56%. The company’s 1st half result missed analyst expectations, with profits growing just 2.7%. Revenue grew 5.7% to $8.7b, however, operating expenses rose a larger than expected 5.4%, impacting results. The Group’s banking division continues to shine, stealing market shares from their big 4 competitors (CBA, NAB, ANZ and Westpac). Siteminder fell 7.88% on profit taking, the company was caught up in the sell-off of technology names in general. It is pleasing to see the turnaround in the manager’s performance over the past 2 months.

Within the STAR Accelerated International shares portfolio the Hyperion Global Growth Companies Fund returned -8.3% in November, underperforming its benchmark by 8.4%. Intuitive Surgical, Inc. and Costco Wholesale Corporation were the only stocks to rise in November, while Axon Enterprise Inc, ARM Holdings PLC, and Palantir Technologies Inc. saw the largest declines. The Global Fund experienced volatility throughout November as markets grappled with shifting Federal Reserve rate cut expectations and heightened AI investment scrutiny. Insync performed in line with their index as the manager has taken a defensive stance in the portfolio in relation to expensive technology companies. It is pleasing to see that the combination of the two managers sees them perform at different stages of the investment cycle providing complementary benefits for risk adjusted returns. The investment in QUAL, which provides access to high quality companies based on key fundamentals including high return on money invested in the business, profit stability and low financial leverage performed in line with the broader market.

As mentioned last month, the Federal Reserve’s dual mandate to balance inflation and employment has become more difficult as the US labour market weakens and prices remain sticky while the impact of tariffs still flow through the economy. We continue to expect the U.S. economy will show resilience, though momentum is softening. In Australia, interest rates seem to have stopped falling and this has weighed on interest rate sensitive companies. Bank share prices remain expensive with CBA at the helm of the group. If rates are indeed higher for longer it implies that valuation multiples should be lower particularly for technology stocks. However, the excitement regarding AI has seen investors buy the dip.

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General Advice Warning

The information contained in this report has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. Investment markets past performance are not necessarily indicative of future performance. Whilst Financial Advice Co Pty Ltd is of the view the contents of this report are based on information which is believed to be reliable, its accuracy and completeness are not guaranteed, and no warranty of accuracy or reliability is given or implied and no responsibility for any loss or damage arising in any way for any representation, act or omission is accepted by Financial Advice Co Pty Ltd.