Australia's H2 2024 investment landscape: how to seize market opportunities?

Given these conditions, it is essential to assess the performance and trends of global markets in the first half of 2024 before anticipating the outlook for the remainder of the year.

In the second half of the year, Australian investors face challenges of persistent inflation and uncertainty in interest rate policy. Additionally, the weak Chinese economy, and geopolitical risks further complicate the investment landscape. While current conflicts and elections do not seem to pose significant economic or market threats, geopolitical risks remain. Potential new trade wars and disputes over the globe could impact market stability.

Diversification of income streams is a critical strategy for investors to hedge against future uncertainties. With this in mind, let's take a look at the projections for the second half of 2024.

The global trend towards rate cuts is expected to accelerate in the second half of 2024. The Swiss National Bank initiated the first rate cut in March, followed by European central banks and the Bank of Canada. The market expects the US Federal Reserve to start a rate cut in September. In May, the core PCE price index rose by 0.1% month-over-month, marking the lowest rate since December 2023. This cooldown raises the likelihood of the Fed cutting interest rates within 2024. The Fed aims to avoid causing a recession and would consider rate cuts if inflation continues to ease, the labor market shows more slack, and consumer spending remains subdued. In contrast, RBA is likely to maintain its current rate of 4.35%, given the persistent inflation and tight labor market.

High inflation is threatening aussies' daily lives with surging expenses. Since raising the interest rate by 0.25% in November last year, the RBA has kept the rate at 4.35%. Although domestic inflation has eased from 4.1% at the end of last year to 3.6% in the first quarter of this year, the slowdown has been slower than expected. The RBA anticipates that inflation will not return to the target range of 2% to 3% until the second half of 2025. High inflation continues to impact the daily lives of Australian residents, increasing living expenses significantly.

The U.S. Presidential Election, set to take place on Tuesday, November 5th, features Democratic President Joe Biden against former Republican President Donald Trump. Both candidates are among the oldest to ever contend for the White House. The outcome of this election will have substantial implications for various sectors of the economy and financial markets.

If Donald Trump wins and the Republican Party also secures control of both the House and the Senate, economic growth is likely to experience an uptick. This projection is based on the extension of tax-cut policies that Trump initially introduced during his tenure in 2017. Such tax cuts are expected to spur corporate investment and consumer spending. However, these measures could also incite inflationary pressures and lead to increased volatility in the bond market.

China's economy is showing signs of a mild recovery, driven by a rebound in exports. Hong Kong stocks are currently trading at the lowest forward PE ratio across the 12 Asia Pacific stock markets. Hong Kong stock market is attractively valued and has low foreign capital allocation. If the US Federal Reserve proceeds with interest rate cuts in the second half of the year, capital inflows are likely to favor undervalued markets like Hong Kong. This improvement of liquidity would provide a significant boost to the market in the short-term. However, a more robust and lasting recovery of the market will still depend on improvements in economic fundamentals, and China needs to take stronger measures to stimulate demand and address the real estate market crisis.

In H1 2024, battery-grade lithium carbonate prices experienced a rebound in February but continued their overall downward trend, falling below USD$12,500/ton in June. The cost structure suggests that external lithium concentrate processors face intense pressure, with costs estimated at approximately USD$12,300/ton. Companies with low self-sufficiency are particularly vulnerable, potentially leading to operational losses.

The current oversupply situation, worsened by new African lithium projects, suggests that lithium carbonate prices could continue to fall. However, several large-scale lithium mines around the world have proposed curtailing their production, which should help balance supply and demand.

The Australian government has demonstrated robust support for the local critical minerals industry, recognizing its importance for both the economy and environmental objectives. In the latest federal budget, critical minerals, hydrogen, and green metals were identified as key beneficiaries. Treasurer Jim Chalmers confirmed that these industries would receive significant government support to promote growth and sustainability.

Overall, the lithium market is expected to remain volatile, with prices stabilizing and limited room for further declines.

Following OPEC+'s announcement to lift some of the current production cuts starting in October, the outlook for global oil prices in the second half of the year has shifted. International oil prices are expected to remain above USD$80 per barrel in the latter half of 2024. Several factors will influence oil prices in the coming months. First, the summer demand peak and geopolitical risks may support prices. Second, clearer expectations of Federal Reserve rate cuts are favorable for oil prices, with most officials now anticipating two rate cut this year. Additionally, the International Energy Agency (IEA) has revised down its global oil demand growth forecast for this year, while OPEC remains relatively optimistic. This difference in demand forecasts adds another layer of uncertainty to oil prices.

The launch of OpenAI's ChatGPT in November 2022 marks a significant breakthrough in artificial intelligence. As the demand for AI increases, the integration of generative AI into various sectors, such as document processing, manufacturing, and product design, has led to increased stock returns in related industries. Companies like NVIDIA and TSMC, which support AI infrastructure, have remarkable gains in 2024. As AI continues to expand into everyday applications, its impact on stock markets will grow, prompting investors to keep a close watch on AI advancements. After experiencing a strong rally, although opportunities still exist, valuations of AI related stocks are not cheap, and return expectations should be more moderate in the next. A key factor in maintaining high valuations is whether the performance of earnings can consistently meet Wall Street's expectations.

Given the diverse macroeconomic and regional trends, it's clear that global financial dynamics will have a significant impact on investment strategies. For Australian investors, this means looking beyond domestic markets to identify opportunities that can offer growth and diversification. The expected rate cuts by the US Federal Reserve in the second half of 2024 contrast sharply with the RBA's stance. The RBA is likely to maintain(may even hike) its current interest rate of 4.35% due to persistent inflation, with any potential rate cuts postponed until 2025. This divergence in monetary policy presents a unique opportunity: lower interest rates in the US are likely to boost liquidity and support stock valuations, making US equities particularly attractive. As such, the US market stands out as a key area for potential investment, especially considering the sectors that are poised to benefit from these global trends. Here are four sectors to watch in the US market that align with the current macroeconomic and regional outlooks.

The ongoing capital investment in AI is set to further boost the earnings growth of key companies within this sector. The semiconductor growth cycle, fueled by the AI wave, is expected to continue into next year with double-digit growth projected through 2025. As AI applications accelerate, tech companies’ earnings are being consistently revised upwards. Current valuations of tech stocks are not excessively high, and potential Federal Reserve rate cuts in H2 could further enhance valuation space, increasing market liquidity and fueling a tech stock rally.

Nvidia(NVDA.US) starts shipping its advanced Blackwell GPUs in the Q2 and anticipates ramping up production in the Q3, contributing significantly to its revenue this year. CEO Jensen Huang has highlighted Blackwell's unprecedented adoption across major cloud service providers and AI companies, positioning it as a pivotal driver in the AI revolution and further solidifying Nvidia's leadership in the sector.

Microsoft(MSFT.US) has launched its AI-enhanced Copilot+ Windows PCs in May, featuring advanced AI capabilities, improved performance, and significant integration with AI tools and services. In 2024, the introduction of AI-powered PCs is set to spark a significant wave of PC upgrades. According to Canalys, global shipments of AI PCs are projected to exceed 100 million units by 2025. Between 2024 and 2028, the compound annual growth rate (CAGR) is anticipated to reach 44%.

The biotechnology sector has undergone nearly three years of valuation adjustments, bringing many companies' valuations to historically low levels. During this period, significant progress has been made in the development of product pipelines, with multiple companies securing product line authorizations from major global pharmaceutical firms. Over the next three years, leading biotech companies are expected to enter profitability, potentially enhancing the sector's valuation stability.

Former President Trump's rising support rate has led to increased optimism among investors, boosting healthcare stocks as they anticipate fewer regulatory challenges under a potential Trump administration. Additionally, biotech companies may benefit from lower borrowing costs if interest rates are cut, enhancing their growth prospects. Historical trends show biotech stocks typically underperform before elections due to policy uncertainty.

The renewable energy sector deserves close attention due to emerging supply-demand imbalances. The demand for energy is growing faster than previously anticipated, driven by the trends in electric vehicles (EVs) and as well as the explosive growth of energy-intensive user——AI. In the United States, overall electricity demand is expected to grow by 2.4% annually, a significant increase from nearly zero growth in previous years.

A substantial portion of this growth is attributed to AI data centers, which could account for 7-10% of total electricity demand in the coming years, up from 2-3% at the end of 2023. Despite the increasing demand, most developed market economies lack the proper infrastructure to support it, especially in regions where energy is most needed. This setup presents a significant opportunity for investors, particularly in the infrastructure sector, which will be crucial in bridging the gap between energy supply and demand.

Despite recent strong performance driven by optimistic forecasts in AI applications, the renewable energy sector could suffer from reduced government support under a Republican administration. It may lead to a cut in subsidies that have been crucial for the sector's growth.

Small and mid-cap growth stocks present a investment opportunity. Historically, these stocks have been more sensitive to rising interest rates compared to large-cap stocks. The interest rate hikes in 2022 significantly impacted many small companies, making them spend a larger portion of their profits on paying off debt. In contrast, large-cap companies allocate less of their EBITDA to debt repayment.

This burden has caused small-cap stocks underperforming large-cap stocks over the past two years. However, this underperformance has resulted in a significant valuation discount for small and mid-cap stocks, making the current environment an attractive entry point for building a diversified investment portfolio.