Falling real wages and a surge in tax and interest payments have led to a slump in living standards.
But a broader driver of the malaise in living standards has been a slump in productivity growth from over 2% pa in the 1990s to near zero since 2016.
Key policies to boost productivity growth include: tax reform; a cap on public spending as a share of the economy, deregulation; greater incentives to invest; and competition reforms.
The key points are:
The main themes for 2024 were: better than feared growth; global divergence; more disinflation; falling interest rates but with Australia lagging; and more geopolitical threats but not as bad as feared. As in 2023, returns were strong.
2025 is likely to see positive returns, but after the surprising calm of 2024, it’s likely to be far more volatile (expect a 15% or so correction along the way) and more constrained.
Expect the RBA cash rate to fall to 3.6%, the ASX 200 to rise to 8800 and balanced super funds to return around 6%.
Australian home prices will likely see further softness ahead of rate cuts providing a boost in the second half of 2025.
Key things to keep an eye on are: interest rates; recession risk; a potential trade war; and the Australian consumer.
Key points:
The economic and financial environment today is more challenging than when Trump first took over in 2017: inflation is a bit higher, the budget deficit is worse, bond yields are higher and shares are more expensive.
He also faces constraints from: rising bond yields; not wanting a sharp fall in shares; a razor thin House majority; and a political mandate to get the “cost of living” down.
This could mean his more populist policies may ultimately be contained resulting in a better outlook for shares than many fear, albeit it will likely still be rough along the way.
Donald Trump elected President of the US (again) - implications for investors and Australia
The key points are:
The return of Donald Trump to the US presidency brings the prospect of more US tax cuts and deregulation, but also more tariff hikes and trade wars and policy uncertainty.
His win was not the surprise it was in 2016, and markets have moved to adjust – but it means higher US bond yields, a higher $US & a knee jerk rise in shares. Shares could be threatened though by the higher bond yields and tariffs.
Australia is vulnerable to an intensification of trade wars.
While the US election is important, investors should bear in mind that many other things influence investment markets
Why value matters in investing - and what are valuations telling us now?
The key points are:
Starting point valuations – like yields and price to earnings ratios – are key drivers of medium-term investment returns.
Valuation starting points for term deposits and bonds have improved.
For shares they suggest constrained return potential, particularly from US shares thanks to rich tech sector valuations - but Australian, European and Chinese shares are a bit more attractive from a valuation perspective.
It's worth noting though that worries about the US share market’s dependence on tech stocks are not new and they have kept going for longer than many thought so trying to time their performance is very hard.
The key points are:
Many of the mistakes investors make are based on common sense rules of thumb that turn out to be wrong.
As a result, it’s often wise for investors to turn common sense logic on its head.
The easiest way to avoid many of these mistakes is to have a long-term investment plan that aligns your financial goals with your risk tolerance.
After a run of disappointing economic data, collapsing property prices and Chinese shares falling to their lowest since 2019 giving rise to increasing concerns about the outlook, China appears to be moving towards aggressive policy stimulus. But what’s driving the change? Will it work? And what does it mean for investors and Australia?
Key points:
A move towards more aggressive fiscal policy stimulus and property support measures should help drive a mild cyclical upswing in China’s economy.
However, it’s doubtful it will be enough to reverse longer term structural problems facing China – around excess saving, demographics and growing state control.
The Australian economy is less sensitive to China than it used to be, but a stimulus driven cyclical boost to the Chinese economy is still positive for the Australian economy, share market and the $A.
Read full article here.
The key points are:
The US election has significant potential to impact markets. A Harris victory would mean more of the same but a Trump victory could lead to uncertainty particularly around trade.
Australia would be vulnerable to a rapid intensification of trade wars which is looking likely under a Trump presidency.
Historically, shares have performed better under Democrat than Republican presidents with the best outcome being a Democrat president & Republican House and/or Senate.
Apart from “what will home prices do?" and "where are the best places to buy a property?" the main debate around the Australian housing market has been about poor housing affordability, occasionally interspersed with a scare that home prices will crash. The most recent example of the latter was on 60 Minutes last week with a call by US demographer & economist Harry S Dent that Australian house prices could fall “as much as 50% in the coming years”. But how serious should we take forecasts for a crash? And more fundamentally how do we fix affordability?
Key points:
Predictions of an Australian house price crash create lots of interest but have been a dime a dozen over the last 20 yrs.
However, there is more to the surge in property prices than easy money with a supply shortfall being the main factor. Absent much higher interest rates and or unemployment, a house price crash in Australia looks unlikely.
The key to sustainably improving housing affordability is to boost supply, better align immigration to housing supply, reduce or delay public infrastructure spending, encourage decentralisation and tax reform.
A failure to boost affordability risks a further slide in home ownership and rising inequality.
Read full article here.
The key points are as follows:
While growth assets like shares go through bouts of short-term underperformance versus bonds and cash, they provide superior long-term returns. So, it makes sense that superannuation has a high exposure to them.
The best approach is to simply recognise that occasional sharp falls in share markets and hence super funds are normal and that investing in both is a long-term investment.
The key points are as follows:
Shares have hit a rough patch since recent highs with concerns about the growth outlook.
We remain upbeat on a 12-month view as falling inflation allows rate cuts and hopefully recession is avoided or is mild. But the risk of a further correction in shares is high.
Seven key charts worth watching are: inflation; inflation expectations; global business conditions PMIs; unemployment and underemployment; earnings revisions; the gap between earnings yields and bond yields; and changes in the $US.
Key points:
The continuing rise of populism globally – as evident in recent European elections and in the US with Trump and the Republican party – is signalling an ongoing shift away from economic rationalist policies in favour of greater government involvement in economies and less free trade.
While extra investment associated with government industrial policies may provide a short-term boost, the risk is high that the rise of populism and a bigger role for government in economies will contribute to more constrained medium-term investment returns.
Australia is less vulnerable but will still be impacted.
Read full article here.
It’s often said that shares climb a wall of worry, with good reason. The Australian All Ords price index since 1900 and despite wars, pandemics, and economic calamities, it’s managed to pick itself up and move on to new highs providing solid long term returns for investors.
Key points:
With Australian shares reaching a new record high we have revised up our slightly our expectations for the ASX 200 this year (from 7900 to 8100) reflecting prospects for lower interest rates globally and eventually in Australia boosting the growth outlook next year.
But given risks around valuations, near term growth and geopolitics we anticipate a volatile and more constrained outlook with a high risk of a correction in the August to September period, particularly if investors factor in the more negative economic implications of a Trump victory.
Read full article here.
The key points are as follows:
After a soft patch since 2021, there is good reason to expect the $A to rise into next year: it’s undervalued; interest rate differentials look likely to shift in favour of Australia; sentiment towards the $A is negative; commodities still look to have entered a new super cycle; and Australia is a long way from the current account deficits of the past.
There is a case for Australian-based investors to remain tilted a bit to hedged global investments but while maintaining a still decent exposure to foreign currency.
The main downside risks for the $A would be if there is a recession or a new Trump trade war.
The key points are as follows:
2023-24 provided another year of strong returns for investors as shares were boosted by falling inflation, central banks pivoting towards rate cuts (although is RBA is lagging) and economic conditions were better than feared.
More central banks moving to cut rates, including the RBA early next year, should provide support for investment returns.
However, balanced growth super fund returns over the year ahead are likely to be more constrained at around 6-7% (compared to 9% over the last year) & more volatile with a high risk of a correction in the months ahead as valuations have deteriorated, recession risks remain high and geopolitical risks – including around the French and US elections – are also high.
The key is to adopt a long-term strategy & turn down the noise.
The key point is as follows:
My nine most important lessons from investing over the last 40 years: there is always a cycle; the crowd gets it wrong at extremes; what you pay for an investment matters a lot; it’s hard to get markets right; investment markets don’t learn; compound interest is like magic when applied to investments; it pays to be optimistic; keep it simple; and you need to know yourself to be a good investor.
Read full article
Since the European Union parliamentary election results were released just over a week ago, seeing a rise in support for far-right parties and French President Macron’s surprise decision to call parliamentary elections, Eurozone shares have had a fall of 4.2%, French shares fell 6.2% and the gap between the French and German 10 year bond yields has increased by 29 basis points indicating that investors are demanding an increased premium to hold French debt. In fact, the gap between French and German 10 year bond yields is back to levels last seen around the 2017 French presidential election. There has also been some flow on to Italian and Spanish bond yields, the Euro and global and Australian shares, although strength in tech shares continued to support US shares.
Key points:
The success of far-right political parties in EU parliamentary elections & the calling of an election in France have boosted uncertainty by risking a return to the Eurozone crises.
However, centrist parties still dominate in Europe and support for the Euro is strong.
Far right success is consistent with a gradual drift towards bigger government & more protectionist economic policies.
Expect a more constrained and volatile ride from shares.
Read full article here.
The key points are as follows:
CoreLogic data showed national average home prices rose 0.8% in May, their strongest rise since last October.
The housing market remains remarkably resilient with the housing shortage and still solid jobs market providing support, offsetting the downwards pressure on prices from high interest rates and poor sentiment towards housing.
We expect home prices to rise around 5% this year as the supply shortfall continues to dominate, but the pushing out of rate cuts and the possibility of rate hikes along with the rising trend in unemployment pose a key downside risk.
Home price gains are likely to remain widely divergent though with continued strength likely in Perth, Brisbane and Adelaide for now partly helped by interstate migration but softness in other cities, particularly Melbourne.
The key points are as follows:
The run up to the 5th November US election could see increased share market volatility if Trump remains ahead and investors focus on the risks of a new trade war and a hit to the US labour force and to Fed independence under Trump.
In terms of the investment market response to a Trump presidency, much will depend on the relative focus and sequencing of his market friendly policies (lower taxes and less regulation) versus his more market negative policies (to hike tariffs, cut immigration and curtail Fed independence).
Historically, shares have performed better under Democrat than Republican presidents with the best outcome being a Democrat president & Republican House or Senate control.
Australia would be vulnerable to a rapid intensification of trade wars which is looking likely under a Trump presidency.
It’s now two years since the RBA first started to raise interest ratesresulting in the biggest tightening cycle since the late 1980s. Rates have gone much higher and stayed high for much longer than I thought would be the case as Australian households proved more resilient than expected thanks to a combination of a boost to demand from reopening after COVID, saving buffers, a greater proportion of borrowers on fixed rates and the strongest population growth rate since the early 1950s. So where to now?
Key points:
While the near-term risks for the RBA cash rate are probably on the upside, the most likely scenario is that the RBA holds rates ahead of rate cuts starting later this year.
The March quarter US and Australian inflation scare is likely receding, Australian economic growth is very weak, the labour market is cooling & the effective rise in interest rates in Australia has been more than in comparable countries.
Read full article here.