Key Areas of Economic and Financial Market Interest for 2023

Interview with ausbiz, 5 January 2023

To hear Paul's thoughts, watch the interview below. A summary follows.

Key points

The US Federal Reserve will need to see evidence that higher unemployment is pushing wages growth down. This is important in the medium-term moderation of services inflation, particularly shelter inflation.
US markets continue to look for a favourable pivot, notwithstanding the Federal Reserve’s resolve not to lose the inflation prize won back in the late 1980’s. We view this as overly optimistic, and that a recession (albeit likely to be relatively mild) is a base position for the US. Earnings are likely to be disappointing in the US and the extent of further downward price adjustment will be dictated by the extent of success in inflation moderation with the least damage to aggregate demand. A balancing act highly unlikely to succeed.
With Central Bank resolve, comes an inevitable lowering in long term bond rates and support for duration and risk.
We are mindful of absolute forecasts with defined timeframes. We view that there is a lot more randomness and fragility in systems than perhaps what is given credit for. We discussed making incremental investment as follows:
- Australian Wholesale Bond Income Strategy, a measured increase in exposure to high quality (A/AA/AAA) fixed rate bonds up to 6 years maturity – we view the risk/reward as favourable, with only a modest increase in overall duration and weighted maturity.
- Australian Listed Property Strategy, where exposure has been maintained in high quality warehouse/logistics assets with modest and well managed gearing and robust operating performance. Again, this is an effective affirmation of duration exposure.
- Global Equity Strategy, which sees new exposures being built in quality industrial businesses where the current economic environment is viewed as unfavourable. As is often the case where forward price/earning (PE) multiples are below long term averages, these are businesses we seek to accumulate into over the next few months, allowing them to operate in an improved valuation and economic environment later in 2023 and beyond.
- Australian Equity Strategy, which sees a lower exposure to banks in the face of higher costs due inflation, compliance and risk, and overall system pressure as households struggle under rate increase burden, general inflation, modest income growth (low wages growth and fiscal bracket creep). We have lowered exposure to discretionary spending and remain comfortable with healthcare.