Oliver's Insights – Recession versus goldilocks

Over the last 18 months, there has been much talk of recession globally and more recently in Australia. But, despite mild technical recessions (ie, two consecutive quarters of falling GDP in a row) in the US and Europe in the last 18 months, growth has generally been more resilient than expected and now with inflation falling many have started to give up on recession with increasing talk of Goldilocks (ie, where growth is okay and inflation is falling). So, have we dodged the recession bullet? 

Key points:

• Rapid monetary tightening points to a high risk of recession and, given lags in the way it impacts the economy, just because it hasn’t happened yet does not mean it won’t.

• However, a combination of falling inflation, a lack of excesses beyond inflation, excess household saving, the possibility of rolling sectoral recessions & strong population growth (in Australia) mean we could still avoid recession.

• We remain of the view that shares will do well on a 12-month horizon, but the risks around recession and higher bond yields mean that the risk of a correction is high.
  

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Oliver's Insights - The confusing economic picture - Why you need to know the difference between leading and lagging economic indicators

Key points

• For nearly 30 years Australia had benign economic cycles so the current environment may be a bit of a shock for many.

• Still low unemployment and still high inflation despite slowing economic growth are not that unusual because they both normally lag big swings in the economic cycle.

• The RBA and other central banks need to tread carefully and allow for the lags from the rapid rise in interest rates to work through - lest they end up pushing unemployment for higher than they need to in order to return inflation to target.

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Oliver's Insights – Seven key charts for investors to keep an eye on – where are they now?

The article link below updates seven key charts worth watching in assessing the investment outlook. The key points are as follows:

• Shares are at risk of a short term pull back and volatility will likely remain high on central bank and recession risks.

• However, we remain reasonably upbeat on a 12-month view as falling inflation takes pressure off interest rates.

• Seven key charts worth keeping an eye on remain: global business conditions PMIs; inflation and our Inflation Indicators; unemployment and underemployment; inflation expectations; earnings revisions; the gap between earnings yields and bond yields; and the US dollar. So far so good.

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Oliver's Insights - 15 common sense tips to help manage your finances

1. Shop around

2. Don’t take on too much debt

3. Allow that interest rates go up and down

4. Contact your bank if struggling with a mortgage

5. Seek advice regarding fixed versus variable rates

6. Allow for rainy days

7. Credit cards are great, but they deserve respect

8. Use your mortgage for longer term debt

9. Start saving and investing early

10. Plan for asset prices to go through rough patches

11. See big financial events in their long-term context

12. Know your risk tolerance

13. Make the most of the Mum and Dad bank

14. Be wary of what you hear at parties

15. There is no free lunch

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Oliver's Insights – 2022-23 saw investment returns rebound - but is it sustainable?

The key points are as follows:

• After the rough ride of 2021-22, the last financial year turned out to be a good one for investors as shares rebounded thanks to falling inflation and hopes rates are near the top.

• Shares are at risk of a pull back as central banks remain hawkish and recession risks are high. However, returns over the next 12 months should still be reasonable as falling inflation takes pressure of central banks enabling rate cuts.

• The past financial year provides yet another reminder of just how hard it is to time investment markets – with shares rebounding just when everyone was most gloomy about inflation and interest rates. The key as always is to adopt a long-term investment strategy and turn down the noise.

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Oliver's Insights – Peak Australian home ownership - rising prosperity (and smashed avocado) versus housing affordability

Key points

- Based on a Report by Bernard Salt, Australia’s home ownership rate peaked at 73% in 1966 as the home was then seen as synonymous with wealth and security.

- Since then, the trend has been down, influenced by a combination of demographic trends, rising prosperity and changed perceptions of wealth.

- A significant deterioration in housing affordability over the last thirty years has also likely been a key driver of declining home ownership. This risks threatening social cohesion.

- The key to improving housing affordability and help home ownership is to boost supply & encourage decentralisation.

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Oliver's Insights – Commercial property returns under threat

Introduction

Over the last 10 and 20 years, returns from Australian unlisted commercial property have averaged 9% pa. This in part reflected the search for decent income bearing investments by investors in response to falling interest rates & bond yields that pushed up property values faster than justified by rents. However, it’s now vulnerable from the rise in bond yields over the last two years and reduced space demand flowing from “work from home” for office property and online retail for retail property.

Key points

- Australian unlisted commercial property returns have been very strong over the last two decades thanks largely to the “search for attractive yields” by investors.

- With the back up in bond yields, this driver is reversing leaving retail and particularly office property vulnerable to significant capital loss in the face of reduced space demand.

- Key to watch will be bond yields, whether the economy avoids recession and where “work from home” settles

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Oliver's Insights – Australian home prices

Australian home prices - Prices look to have bottomed as the supply shortfall dominates, but watch rates and unemployment

Key points

- Australian home prices rose again in April & along with other indicators suggest the home price downturn is over.

- A surge in demand on the back of high immigration and constrained supply appear to be dominating the negative impact of higher interest rates

- As such we have revised up our property price forecasts to flat to up slightly for this year with a 5% rise next year.

- However, the risk of another down leg in prices is high as interest rate hikes continue to impact.

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Oliver's Insights – Five charts on investing to keep in mind in rough times like now

Key points

- Successful investing can be really difficult in times like now with immense uncertainty around inflation, interest rates, issues in global banks and recession risks impacting the outlook for investment markets.

- This makes it all the more important to stay focussed on the basic principles of successful investing.

- These five charts focus on critical aspects of investing that are insightful in times of market stress: the power of compound interest; don’t get blown off by cyclical swings; the roller coaster of investor emotion; the wall of worry; & market timing is hard.

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Oliver's Insights – Seven reasons why Australian shares are likely to outperform global shares over the medium term

Key points

- The underperformance of Australian versus global shares since 2009 reflects a combination of tighter monetary policy, the strong $A into 2011, the slump in commodity prices, property crash phobia and classic mean reversion.

- Australia’s performance is much better if dividends are allowed for, but it has still underperformed since 2009.

- With the prior outperformance in the 2000s resources boom now reversed there is good reason to expect Australian shares to outperform over the next 5-10 years.

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Oliver's Insights – Seven things for investors to keep in mind in rough times like these

The attached note takes a look at the ongoing volatility in share markets and key things for investors to keep in mind. The key points are as follows:

• Share markets remain volatile and at risk of further falls reflecting worries about inflation, aggressive central bank rate hikes, the war in Ukraine and recession fears.

• Seven key things for investors to bear in mind are that: share market falls are normal, but the key is to make the most of compound interest; selling shares after a fall locks in a loss; trying to time investment market moves is hard; share pullbacks provide opportunities for investors to buy them more cheaply; Australian shares still offer an attractive income flow; shares invariably bottom with maximum bearishness; and finally, to avoid getting thrown off a long-term investment strategy it’s best to turn down the noise.

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Oliver's Insights – The RBA hikes rates by 0.25%. Here are five reasons why the RBA was right to slowdown and the top is near

The attached note takes a look at the RBA's latest interest rate decision and why it made sense to slow down the pace of rate hikes. The key points are as follows:

• The RBA sensibly dropped back to a 0.25% hike this month taking the cash rate to 2.6%. Its still signalling more hikes ahead though.

• Slowing the pace of rate hikes makes sense: the RBA needs to allow time to assess the impact of rate hikes so far given that they impact with a lag; many households will see a sharp rise in mortgage payments which will depress spending through next year; global inflationary pressures are easing; inflation pressures are less in Australia than elsewhere; and there is now a high risk of global recession which will impact Australia.

• Just because the Fed is prepared to run a high risk of recession does not mean the RBA should too. The Fed has an unfortunate track record of continuing to hike until there is a crisis.

• We still see the cash rate peaking at 2.85%, but acknowledge upside risk to 3.1%. By late next year the RBA is likely to be cutting interest rates.
  

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Oliver's Insights – Australia’s productivity challenge – why it matters and what to do about it

The attached note looks at the challenge posed by Australia's slowdown in productivity growth which is attracting more discussion lately given falling real wages and the Jobs and Skills Summit. The key points are as follows:

• The last twenty years have seen a sharp slowdown in productivity growth in Australia from over 2% pa in the 1990s to around 1.2% pa over the last decade.

• This has adversely affected growth in living standards and real wages. It will adversely affect asset class returns if allowed to persist.

• Policies to boost productivity growth include: labour market reforms; more skills training; ongoing high levels of well targetted infrastructure spending; increased housing supply; competition reforms; measures to boost innovation; climate policy certainty; deregulation; and tax reform.

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Oliver's Insights – Home price falls accelerated in August – three reasons why this property downturn will likely be different

The attached note takes a look at the housing downturn and the outlook for home prices. The key points are as follows:

• Australian home prices fell another 1.6% in August and are now down by 3.5% from their high, based on CoreLogic data.

• Rising mortgage rates are the main driver and there is likely more to go. We continue to expect a 15-20% top to bottom fall in home prices out to the second half of next year, followed by a gradual recovery.

• There are three reasons why this home price downturn will likely be deeper and the recovery slower than in past cycles: higher home price to income levels; higher debt levels; and an end to the long-term decline in interest rates.

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Oliver's Insights – Investment cycles – why investors need to be aware and wary of them

The attached note takes a look at investment cycles - what drives them and why investors need to allow for them. The key points are as follows:

• Cyclical fluctuations are a key aspect of investment markets. Most are driven by economic developments but are magnified by swings in investor sentiment.

• Of particular importance are the long-term cycles which are often driven by waves of innovation and the 3-5 year business cycle. Right now, we are still in the downswing phase of the business cycle and may have entered a weaker and constrained phase of the long-term cycle.

• Periods of poor returns invariably give way to periods of great returns and vice versa. The key for investors is to not get thrown off by cyclical fluctuations.

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Oliver's Insights – Booms, busts and investor psychology – why investors need to be aware of the psychology of investing

• Investment markets are driven by more than just fundamentals. Investor psychology plays a huge role and helps explain why asset prices go through periodic booms and busts.

• The key for investors is to be aware of the role of investor psychology and its influence on their own thinking. The best defence is to be aware of past market cycles (so nothing comes as a surprise) and to avoid being sucked into booms and spat out during busts. If an investor is looking to trade they should do so on a contrarian basis. This means accumulating when the crowd is panicking, lightening off when it is euphoric.

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Oliver's Insights – Five reasons why the RBA cash rate is likely to peak (or should peak) with a 2 in front of it rather than a 3 (or more)

The attached note takes a look at the outlook for the RBA's cash rate following its latest rate hike. The key points are as follows:

• The RBA has hiked the cash rate by another 0.5% taking it to 1.85% and signalling more rate hikes ahead.

• Market & consensus expectations for the cash rate to rise above 3% are too hawkish as: global supply pressures on inflation appear to be easing; the RBA is already getting traction in terms of slowing demand and is starting to recognise this with downgrades to the outlook for economic growth; inflation expectations are still contained; & many households will experience significant financial stress with rising rates.

• We see the pace of cash rate hikes ahead slowing down with the cash rate peaking around 2.6% either at the end of this year or early next year, which is at the low end of market and economists' expectations. Rates are likely to be falling in the second half of next year.

Oliver's Insights – Investment outlook Q&A – inflation, interest rates, Russia & Ukraine, the risk of a share crash, house prices and other issues

The attached note covers the main questions investors commonly have regarding the investment outlook in a simple Q&A format. The key points are as follows:

• Inflation will likely slow later this year but remain well above pre-pandemic levels over the medium term.

• Wages growth is likely to pick up to 3% this year.

• A Russian invasion of Ukraine risks a short term hit to shares followed by recovery over the next 3 to 12 months.

• Australian home prices are likely to peak later this year followed by falls into 2024.

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Oliver's Insights – Corrections, gummy bears and grizzly bears

Given the rough start to the year in share markets, the attached note looks at past bear markets in Australian and US shares. The key points are as follows:

• While share market corrections and even mild bear markets are common, long and deep bear markets invariably require a recession at least in the US.

• Global and Australian shares have had a good rebound from their January lows but could still fall further in the short term as risks remain high around monetary tightening and geopolitical tensions.

• However, a deep bear market is unlikely as a US, global and/or Australian recession are unlikely to be imminent.

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The RBA ends bond buying - but remains "patient" on rates. We expect the first rate hike in August

The attached note looks at the RBA's first meeting for this year and the outlook for the official cash rate. The key points are as follows:

• The RBA will end quantitative easing this month.

• While it now sees unemployment falling below 4% and higher inflation it is prepared to be "patient" for now on rates.

• We expect rate hikes to commence in August.

• Ultimately, we see the cash rate rising to around 1.5 to 2% in the years ahead but it's a bit of guess and the RBA will only raise rates as far as necessary to cool inflation.

• Rate hikes from later this year are unlikely to be enough to threaten the economic recovery but they will add to the slowdown in the property market where we see dwelling prices peaking later this year.

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