Global
The rally in equity markets continued for most of August on falling oil prices and hopes inflation has peaked. However, the US Federal Reserve (the Fed) Chairman’s speech, at the end of the Jackson Hole conference in late August, was very hawkish and led to the US yield curve and US dollar moving higher. In turn, global equities and bonds sold-off and finished the month lower. The Fed is now expected to hike rates by a further 0.75% at its September meeting, bringing the cash rate to 3.25%.
Europe is facing the prospect of gas shortages, leading into the northern hemisphere winter, as Russia reduces flows through the Nord Stream gas pipeline. In addition, the ECB recently increased interest rates by 0.75% to 1.25% to counter inflation but interest rates remain well below most developed countries.
China is still conducting lockdowns against COVID outbreaks, which continues to upset supply chains and economic growth. In addition, its property market looks to be moving into a downturn. China is providing some stimulus but many of the problems look to be structural and the stimulus is having less impact. In turn, commodity prices have generally fallen over the past quarter.
Australia
The Australian economy remained robust to the end of June on strong commodity prices and a recovery in consumer spending. However, commodity prices have retreated in the September quarter and the RBA has lifted the cash rate to 2.35% and looks to be headed to 3.10% by the end of 2022. Higher interest rates are yet to fully impact the household sector as ~30% are on fixed rate loans that mature over the next year.
The Australian share market managed to buck the global trend and finish higher in August, mainly on the back of strong results from the resource and energy sectors. We note that the August profit season showed slowing earnings momentum overall, with companies facing a number of challenges, including:
• Higher costs due to inflation and COVID;
• Disruption to supply chains and labour, due to COVID social restrictions;
• Floods in QLD and NSW; and
• Higher interest rates.
The COVID and flooding issues should fade but inflation and higher interest rates are going to persist well into FY23. Moving forward, we remain cautious on the heavyweight Bank and Resource sectors. Banks may gain some benefit from higher interest rates, but competition remains intense and loan volumes are likely to slow. In addition, loan impairments may rise as higher interest rates fully impact the economy in 2023. Resources generally face lower commodity prices and higher costs.
Outlook
There is some hope that inflation pressures will ease from here, particularly if the oil price retreats. However, there is still a long way to go for inflation to retreat to target (as the Fed reminded the market in late August). Central Banks are likely to keep increasing interest rates for the remainder of 2022. The full impact of higher costs and interest rates are not likely to be felt until 2023. For this reason, we remain cautious. For us it seems too early to cheer the end of inflation and the tightening cycle. Equity markets rallied in July and August, but this now looks like a classic bear market rally.
After a 13-year bull run from March 2009 to January 2022, we think it is logical to expect at least a 2-year bear market, where growth assets struggle to make gains. This is not as bad as it sounds, as investors get much better value, particularly amongst listed assets, for those taking a long-term view.
A counter argument to our bearish stance would be energy prices and inflation retreating more quickly than expected in 2023.
The next key events on the calendar include:
Fed meeting – 20/21 September 2022
RBA meeting – 04 October 2022
G20 meeting in Bali – 15 November 2022
Bill Keenan
Principal, Portfolio Manager
Bill Keenan is the founder of Sunbird Portfolios. Sunbird provides independent advice to leading financial advisers across Australia.
Bill has 28 years’ experience in financial markets and holds a Bachelor of Business in Accounting and a Graduate Diploma in Finance and Investment.
Warnings
General Securities Advice - any advice provided in this document, is general in nature only and does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, the reader must consider whether it is personally appropriate considering his or her financial circumstances or should seek independent financial advice on its appropriateness.
Past performance is not a reliable indicator of future performance.
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