Outlook for Investment Markets
Both equities and bonds have rallied in recent weeks, but the gains have not been enough to outweigh large losses earlier in the year, and many asset classes continue to show year-to-date losses. On the equity side, the recent rally more reflects an assessment that previous price falls may have overstated the cyclical and geopolitical challenges to the world economy, rather than any assessment that the underlying outlook has improved: the outlook remains clouded by higher interest rates, China’s lockdowns, the Russia/Ukraine conflict (and potentially risks around Taiwan), and straitened household finances. On the bond side, investor have taken some comfort from clearer visibility of peak monetary policy tightness by the world’s central banks, and from some evidence that unexpectedly high inflation may be beginning to ease back. At home, businesses have been performing well up to now, but, as overseas, a cyclical slowdown looms, and recent economic forecasts (including from the Reserve Bank) suggest that growth assets will be facing more difficult conditions.
Australian Cash and Fixed Interest
Short-term interest rates have risen further, inline with the continued monetary policy tightening by the Reserve Bank of Australia. As we know, the cash rate has gone from 0.1% to now 1.85% over the space of 4 months with another rise expected on Tuesday the 6th of September as Phil Lowe targets a rate “somewhere above 2.5%”. 10 year bond yields reached 4.2% but have now settled back down to 3.4%.
What is interesting to see is that markets think we have virtually hit the peak of inflation with it hovering around 6% and will start to recede towards the end of the year. The Commonwealth bank actually think the cashrate will peak at 2.6% by the end of the year then be trimmed by two counts of 0.25% sometime in 2023 as the market and prices begin to settle.
Aussie Equities have followed the trend and have continued to rally since the lows in June, however it hasn’t quite been enough to shake the falls from the year still landing down on where we started. As with last month the IT sector continues to be the worst effected with that sector being down 26.8% for the year even after it’s 23.4% rise in the last month.
Despite this the Aussie economy is remaining resilient with growth in the first half of 2022, this continued spending on goods and services will help us in our recovery from the floods and Omicron. Australia looks like we are going to avoid a recession (unlike the US) with GDP looking to be around 3.2% for 2022 and maybe 1.8% in 2023. This could see a material increase in unemployment however coming from such a low base it is hard to predict any material issues will come of it.
The MSCI World index is down 23.1% for the year, and had been sideways until recently. We picked up 14.3% however still down overall for the year.
There are some confusing figures coming out of the US at the moment with negative GDP Quarters for both March and June which signals a recession however we are seeing the job/labour market continue to grow with 528,000 new jobs added in July and the unemployment rate pushed down to 3.5%.
The broader market still faces it challenges in the short term from supply shortages and price rises for commodities due to the conflict in Ukraine (but i guess at least we have faired better than Russia who have had their economy fall by a 1/3rd since the way began). We my start to see supply normalise though if China moves away from its “coronavirus-elimination policy” with all its severe lockdowns (which i personally find amazing given they recorded virtually no deaths when all this began in 2020).
The things we need to be on the look out for in the international space haven’t really changed. That is:
Persistent Inflation, Global Recession, and central bank rate hikes.