The Month in Review - Jun 2023
Monthly Review
Farrow Hughes Mulcahy Investment Research 06 July 2023
The 2022-23 financial year saw a solid rebound in returns. Global shares returned around 16% or around 18% once dividends are included and Australian shares rose 9.7% or about 14% allowing for dividends. Australian bond returns look to have been modestly positive as bond yields settled down, after last years losses. The relative underperformance of Australian shares kicked in over the last six months and reflects a combination of increased hawkishness on the part of the RBA and concerns about the strength of the recovery in China.
We continue to see shares doing okay on a 12-month view as central banks ease up as inflation cools, but the risk of a near term correction is high. Leading economic indicators continue to point to a high risk of recession in the US and the risk of recession in Australia is now around 50%. China’s recovery is looking less robust than expected and policy stimulus there so far has been pretty modest. Central banks are probably close to the top, but they remain hawkish with a high risk of going too far. While the month of July is often good for shares (particularly in Australian shares after June tax loss selling is reversed) the period out to September-October is often rough for shares.
Central bank leaders are continuing to warn of more rate hikes ahead, whilst this is nothing new it was the message from the Fed’s Powell, the ECB’s Lagarde and the Band of England’s Bailey at the ECB’s forum in Sintra. BoJ Governor Ueda also alluded to the possibility of policy tightening if the BoJ became confident in its forecast for 2% inflation in 2024. Whilst the RBA kept rates on hold at its last meeting it did indicate that more tightening may be required.
US data releases over the last week were mostly solid. Consumer confidence, durable goods orders, home prices and new home sales all rose by more than expected. Jobless claims fell although the four-week moving average is still rising. March quarter GDP growth was revised up to 2% annualised from 1.3% reflecting stronger consumer services and net exports. Although it should be noted that consumer confidence remains relatively depressed and core capital goods orders have been flat this year, the US economy generally continues to hold up better than feared. However, leading indicators are still pointing down, jobless claims remain well above their lows and real consumer spending in May was flat.
The next 12 months are likely to see a further easing in inflation pressures and central banks moving to get off the brakes. This along with improved valuations should make for reasonable share market returns. But the next few months are likely to be rough given high recession and earnings risks, uncertainty around US banks and poor seasonality out to around September/October. This is likely to impact both global and Australian shares.
Bonds are likely to provide returns above running yields, as growth and inflation slow and central banks become dovish.
Unlisted commercial property and infrastructure are expected to see slower returns, reflecting the lagged impact of last year’s rise in bond yields on valuations. Commercial property returns are likely to be negative as “work from home” hits space demand as leases expire.
With an increasing supply shortfall, we expect residential property prices to be flat this year and up slightly next year. However, the risk is high of a further leg down on the back of the impact of high and still rising interest rates and higher unemployment.
Cash and bank deposits are expected to provide returns of around 4%, reflecting the back up in interest rates.
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
