Despite the rebound in share markets since the October lows there remains significant risks to keep an eye on including; sticky services inflation which could mean the risk of “high for longer” rates and another RBA rate hike; the still high risk of recession; uncertainty about the Chinese economy and property sector; and geopolitical threats around US politics, Israel and Taiwan.

 

However, while shares remain vulnerable to a very short term consolidation or pull back after strong gains since October, they are likely to see more upside in the months ahead as inflation continues to ease, the monetary policy environment turns progressively less threatening, economic indicators remain consistent with a soft landing, geopolitical threats likely take a back seat for a while and positive share market seasonality remains in place with the Santa Rally normally kicking in later this month. While we should expect lots of bumps along the way our base case remains that global and Australian shares can trend up.

 

 

 

RBA on hold and most likely at the top. As widely expected, the RBA at its December meeting left rates at 4.35% noting that data since the last meeting was consistent with its expectations. While it retained the softened tightening bias used after the November meeting that “whether further tightening of monetary policy will be required…will depend upon the data and the evolving assessment of risks” the Governor’s commentary post the November meeting remained pretty hawkish and the same could happen again given the RBA’s ongoing concerns about inflation taking too long to get back to target. As such the risk of another rate hike remains high at around 40% - and if it occurs it will probably be at the February meeting. Key to watch ahead of this meeting will be December quarter inflation data and the next two rounds of retail sales and jobs data. However, we remain of the view that the RBA has already done enough as the September quarter GDP data shows a sharply slowing economy and struggling consumer, October data suggests that consumer spending growth may be turning negative this quarter and monthly CPI inflation is likely to have a three in front of it by December. Our central view is that economic data between now and the February meeting won’t provide the justification for another rate hike and that the cash rate is at the top. The money market is attaching no probability to any further rate hike with nearly a full rate cut priced in by September 2024.

 

The next 12 months are likely to see a further easing in inflation pressure and central banks moving to get off the brakes. This should make for reasonable share market returns, provided any recession is mild as we expect. But sticky services inflation, still high recession risk, China worries and geopolitical risks are likely to ensure a few significant bumps along the way.

 

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 soft returns, reflecting the lagged impact of the rise in bond yields on valuations. Commercial property returns are likely to remain negative as “work from home” continues to hit space demand as leases expire.

 

With the lagged impact of high interest rates appearing to get the upper hand again, we now expect national average home prices to fall around 5% in 2024. The supply shortfall should prevent a sharper fall and we expect a wide dispersion with prices still rising in Adelaide, Brisbane and Perth but sharper falls in Sydney and Melbourne. A deep recession and sharply higher unemployment would risk pushing prices below their January 2023 low.  

 

Cash and bank deposits are expected to provide returns of around 4-5%, 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.