Oliver's Insights – Seven key charts for investors to keep an eye on in assessing the investment outlook

The attached note takes a look at seven charts we see as critical for the investment outlook. The key points are as follows:

  • While we are optimistic on a 12-month horizon, shares remain at high risk of further falls and a re-test of their June lows in the short term given hawkish central banks (including the RBA), heightened recession risks and geopolitical risks.

  • Seven key global charts worth keeping an eye on by investors in assessing the investment outlook are: global business conditions PMIs; US inflation and our Pipeline Inflation Indicator; unemployment & underemployment; inflation expectations; earnings revisions; the gap between earnings yields and bond yields; and the US dollar.

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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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Retirement activities you can look forward to

Contrary to popular belief, retirement is not only about rest or relaxation. After all, your interests and objectives in life could change. The goals you have today could be very different from those you have in mind for retirement in a few years.

Besides, during retirement, you get to set the rules and change them as you see fit. It’s also time to pursue bigger dreams, especially since Australians are living longer and have more time on their hands.

For tips about the best retirement activities, consider the following and discover just how wide and varied your options could be. Find them here!

Econosights: Have we reached peak inflation?

  • A peak in inflation (in annual terms) has likely been reached in the US while Australia is lagging behind and is likely to see a peak in December 2022. Extremely high European energy prices means Euro inflation will increase further and may not peak until 2023.

  • But, inflation is unlikely to be headed back to its pre-Covid levels of ~2% per annum or less and we expect it to remain “sticky” in 2023 around 3-4% in the US and Australia which means central banks are not done with rate hikes.

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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.

Full article here

Vector Insights – Three reasons to stay the course

Markets have moved with such speed and velocity in both directions since the beginning of the COVID outbreak it has been difficult for investors to adjust with so much conflicting information being circulated.

Decades of data, however, shows that staying invested through volatile times has been a smart long-term strategy.

There are three main reasons why you should avoid the impulse to hit the sell button.

Read through the full article here.

Thoughts on the market: Risk market outlook

Over the past 25 years, global investors have become conditioned to the notion that central banks will bail out global asset markets amid the first sign of stress. Many of these occurrences have been when the economy has been firmly in expansion territory such as 1998 when the Russian default crisis and the collapse of LTCM saw the Fed cut rates during one of the biggest economic and speculative equity booms in recorded history. Twenty years (and a few months) later, the Fed was completing one of its slowest tightening cycles ever and decided to go on hold in early 2019 because the US equity market had declined -20% in Q4’18, and then they cut rates in September 2019 when US unemployment was at a fresh 50-yr low of 3.5%, which sparked a huge gain in the S&P 500, despite zero earnings growth.

Although there are numerous other examples of the Fed, in particular, bailing out markets in the past quarter century, all of these policy pivots were possible as their preferred inflation gauge, the core PCE, was close to the +2% target. In 2022, investors have once again formed an expectation that the Fed could pivot on policy and be easing rates as lower commodity prices means financial conditions may not need to tighten as much as previously thought to get core inflation back to 2%. This is a challenging notion as reducing inflation from 6% to 4% will be much easier, than from 4% to 2% without a recession.

In this paper, we examine more closely, why the market may be over-estimating the Fed's optionality.

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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.

Advice Evolution News Update

Recession risk and the audacity of hope

With the recent discussion about the risk of a global recession, the below looks at the following points and examines them more closely.

• Only a few weeks ago there was a “hope trade” in markets that the Fed will back off the rate hikes in the September quarter. However, extremely high inflation, very low unemployment, and very late policy tightening means central banks are not in a position to pivot on policy and bail out markets like the Fed did in 2016 and 2018. This would only occur if they have made a mistake as evidenced by a sharp slowing of economic growth or the S&P 500 declining through 3,500. Neither of these are evident at present, and central banks need to continue moving rates higher to lessen the heat from very tight labour markets.

• Although fiscal and monetary stimulus is finally being wound back, a major misalignment persists between 40-yr highs in inflation, 40-yr lows in unemployment and real interest rates close to historic lows. Central banks are well behind the curve, but Morgan Stanley estimates that the tightening in US financial condition in the past six months is equivalent to 2.5% in Fed Funds equivalent terms, albeit from incredibly low levels. However, over the past 25 years financial condition at current levels have not sparked a material decline in inflation in the subsequent two years outside the severe recession which occurred during the 2008/09 GFC. This suggests that firstly rates need to go materially higher and, secondly that the Fed does not have the optionality to pause.

• The key for markets and investors moving forward is what happens to inflation, and there is no clear path here, but at present real cash rates are far too low to see core inflation back at 2% within the next few years. There is considerable cashflow pain ahead for households given higher energy and food prices, in addition to central banks having to tighten policy to get growth materially sub-trend. This is needed to have inflation within the realm of the typical 2% target by 2024, and rate hikes this year will weigh on activity in 2023 where recession risks seem much higher than what they are for the remainder of this year


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