25 Jul 2023
Markets defied economic logic as we saw most asset classes gain reasonable to strong positive returns while data all but confirmed looming recessions locally and globally as inflation remains high and geopolitical tensions and conflicts continue to rise.
Tough talk was back from Central Banks as they continued to fight inflation which remains stubbornly high worldwide.
In Australia, leading economic indicators continue to flash red, indicating a possible recession. The Labor government delivered a surprise Federal Budget surplus and we saw higher than expected increases in award and minimum wages. Australian residential property prices moved higher as “fear of missing out” crept back into the collective psyche following the RBA’s April rate pause and the misguided talk the rate hiking cycle may have been over.
On the international front, China’s growth continued to disappoint with foreign investors growing more impatient with their re-opening efforts, while across the waters Japan performed well over the quarter with the country having what looks to be a more sustainable inflation and economic growth outlook.
Geopolitical risks rose with China and the West as they continued with trade and economic sanctions and restrictions while US ally Taiwan’s semiconductors (chips) and military exercises in the South China sea risked further escalation of already sky-high tensions. Social unrest in France worsened with violent street protests. The Russia/Ukraine conflict continued to put pressure on Europe causing energy and food costs to remain high.
US equities were the highlight in the quarter, as technology stocks performed exceptionally well with a very narrow seven stocks doing all the heavy lifting.
At the quarter close, we remain cautious on the short-term outlook given central bank action is clearly aimed at crushing excess demand. We also remain constructive on the medium-term outlook as higher interest rates punishes speculative behaviour while rewarding patient, selective, and valuation-focused behaviour. Tougher economic backdrops do bring about both risks and opportunities, with the latter usually playing out through the demise of weaker companies and the strengthening of quality companies.
Diversification is pleasingly working again and correlations (relationship) between individual stocks are falling at rapid pace presenting great opportunities for active investing.
We remain watchful of evolving data and overreactions by investors and central banks. Now is not the time for unnecessary risk taking nor is it the time to stretch for returns. But it is also not the time to check-out of markets, with this being one of the most well telegraphed and anticipated recessions we have seen for some time. For now, we are neutral cash, positive bonds, cautious equities, and mixed on property / infrastructure.
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
