The Month in Review - Apr 2023
Monthly Review
Farrow Hughes Mulcahy Investment Research 02 May 2023
Shares are at risk of another rough patch. Shares have had a good start to the year – with global shares up 8.5% and Australian shares up 3.8%.
Falling inflation is a big positive, but the going may get a bit rough over the next few months. Bank stress is continuing to impact in the US with concerns about First Republic escalating again suggesting the issue may still not be contained, the US debt ceiling issue is starting to hot up, inflation likely won’t fall in a straight line, recession risks remain high and the period from May to September is often rough for shares. Australian shares are likely to be caught up in this as the recovery in China is so far less commodity intensive than thought earlier this year which partly explains the local market’s relative underperformance so far this year.
Falling Australian inflation should enable the RBA to remain on hold this week, but it’s a close call. Following significant falls in inflation in the US, Canada and New Zealand, Australian inflation is now also falling, adding to confidence we have seen the peak. CPI inflation fell back to 7% YoY and trimmed mean inflation fell to 6.6% YoY with both below RBA forecasts. While another RBA hike on Tuesday can’t be ruled out given RBA concerns about wages growth and faster population growth adding to housing related inflation and rising wealth, on balance we expect the RBA to leave rates on hold for May with the faster than expected fall in inflation providing it with greater scope to continue the pause to better assess the impact of past rate hikes. Either way, from later this year or early next we anticipate rate cuts to deal with a slowing economy.
Expect a further fall in Australian inflation ahead. Australia lagged US inflation by about six months on the way up so it’s no surprise that its lagging on the way down. While services price inflation is still rising this is similar to the US experience. Just as good price inflation led on the way up it’s leading on the way down, with services price inflation likely to follow with a lag, albeit an acceleration in wages growth and rents associated with stronger than expected population growth along with a further spike in electricity costs are an upside risk.
Aggregate earnings for the S&P 500 have fallen 3.7% in Q1, versus expectations of 6.7% as at the end of March. Aggregate revenue has grown 2.9%. Of the 53% of companies that have reported, 79% are ahead of consensus EPS expectations, versus a five-year average of 77%. 74% have beaten consensus revenue expectations, versus a 69% five-year average. In aggregate, earnings are 6.9% above expectations, below the five-year average of 8.4%.
The next 6-12 months are likely to see easing inflation pressures, central banks moving to get off the brakes and economic growth weakening but stronger than feared. This along with improved valuations should make for better returns this year than in 2022. But there will still be bumps on the way – particularly regarding interest rates, recession risks, geopolitical risks and raising the US debt ceiling.
Global shares are expected to see reasonable returns this year. The post mid-term election year normally results in above average gains in US shares, but US shares are likely to be a relative underperformer compared to non-US shares reflecting still higher price to earnings multiples versus non-US shares. The $US is also likely to weaken further which should benefit emerging and Asian shares.
Australian shares are likely to be boosted by stronger economic growth than in other developed countries and stronger growth in China supporting commodity prices and as investors continue to like the grossed-up dividend yield of around 5.5%.
Bonds are likely to provide returns a bit above running yields, as inflation slows, and central banks become less hawkish.
Unlisted commercial property and infrastructure are expected to see slower returns, reflecting the lagged impact of weaker share markets and last year’s rise in bond yields (on valuations). Commercial property returns are likely to be negative.
Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
Source: AMP Capital, Pendal Group, AZ Sestante
