What feels like a lifetime ago, Lowe stopped buying bonds in November 2021, however continued to state “I want to make it clear that this decision does not reflect a view that the cash rate will be increased before 2024.”
But we are now nine (9) rate increases in, going from 0.10% as a starting point to 3.35% as we stand now after the February 2023 meet. The most notable mention though was out of the meeting and parliamentary enquiry where Lowe believes that the full effect of inflation has not been met, with more companies continuing to announce price rises to combat increased costs and retain profit.
If the banks are anything to go by, we have gone from potentially no rise until 2024, to looking like a peak of 4.35% by 2024.
The concerns that lead the parliamentary enquiry is in regards to the “mortgage cliff”, where we are going to see people this year go from 1.99% to approximately 6% when their fixed rates ends. This will see a households repayments double, and the impact of the rate increases delayed. Some people are banking that this could lead to rates falling at the end of the year (or early next year).
With Labor in power, it was only a matter of time before their eyes were cast to the $3.3 Trillion gravy train that is superannuation, now, I am actually for there being a cap on total superannuation balance, however my concern is that too much tinkering will have people lose faith in the retirement savings system, and that would mean they are missing out on some great tax savings.
As it stands Treasurer Jim Charlmers wants to set a superannuation cap at double the transfer balance cap, this means you would only have the 15% flat tax on superannuation (accumulation phase) to about $3.4 million, or $3.8 million on 1 July when the Transfer Balance Cap rises to $1.9 million.
I would agree with Jim, that you really shouldn’t need more that $3million in superannuation, and balances over that amount are reserved to the 1%.
I just don’t want them changing anything else.
Aussie Equities
Aussie Equities were very much down over the last year, however since January we are starting to see a recovery play out, and the Australian market seems to remain a little more resilient than it’s OECD comparators. (Probably because we are mainly mining and banking)
The Energy sector saw the best gains last year, with White Haven Coal taking the top spot due the demand for coal in Europe due to the Russia-Ukraine conflict. Financials are starting to stabilise and are pulling great profits however their share price isn’t reflecting this, as the market braces for the impact of the mortgage cliff that could see a rise in doubtful debts.
Technology was the biggest detractor in all markets with the rise in rates making some of these not yet profitable businesses a lot less attractive, but additionally consumer discretionary is also down, but should have a great outlook if we avoid a recession.
It would pay to tread carefully this year, as there is a huge disparity between sub assets, so it could be worth picking your own sectors opposed to going with an index.
International Equities
Inflation and interest rates have been the biggest forces hanging over financial markets the past year. From a sector perspective, there’s an uneven distribution when it comes to winners and losers from those forces. Energy companies have been significant winners from inflation as oil prices are one of the largest components of the inflation index. In comparison, technology has struggled as higher interest rates have led to a higher cost of capital.
The good news though, is the market is never reward looking, and so is starting to work out where the markets are going to finish up, and what upside will be available as we move out of this current high inflation environment.
The US is currently well priced as it dipped its toes into a technical recession, or perhaps a mildly bear market, however, just like the Aussie market, there are some things that remain expensive, and some stuff we probably won’t want to touch at all.
The energy sector has seen a similar jump as the Australian market, as things like Oil, Gas and Coal hit high valuations, Consumer discretionary is down globally, however you could think otherwise given Bernard Arnault is currently the wealthiest person alive right now. (owns Louis Vuitton).
The UK is running similar to the US, but where there is a change for well adjusted risk-returns is the emerging markets, which absolutely fell out of favour last year, but based on population growth rates alone will see a higher growth in valuations.
Unfortunately though, with emerging markets it pays to pay attention, with a few funds in India recently being wiped out due to some potentially fraudulent activity by the owners of Adani which affected about 7 companies (all in the Indian market, all Adani subsidiaries). This could possibly be avoiding by using an ESG rated fund to invest in the emerging markets, as most questionable companies would be screened out.
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