The Australian equity market declined by -1.3 % in October as markets reassessed the scope and potential impact of Chinese stimulus measures and digested the rise in bond yields. The materials sector dropped 4.9 per cent and energy 4.8 per cent while consumer staples, REITs and utilities also declined.

 

In Australia core inflation retreated to 3.5 per cent while headline inflation dropped back into the 2-3 per cent target range for the first time since March 2021. RBA governor Michele Bullock noted that the Australian economy is still running “too hot,” a nod to the high level of capacity utilisation at present. The RBA bank met last week and left the cash rate unchanged at 4.35%, where it has kept the cash rate for the past 12 consecutive months. This was universally expected by economists and financial markets. Economists expected that there could be some tweak to its neutral language, but the Board still maintained that it was “not ruling anything in or out”. Financial markets have pushed back pricing for the first cut to May 2025 after the stronger labour force figures last month.

 

The return of Donald Trump to the US presidency brings the prospect of more US tax cuts and deregulation, but also more tariff hikes and trade wars and policy uncertainty. His win was not the surprise it was in 2016, and markets have moved to adjust, but it means higher US bond yields, a higher $US & a knee jerk rise in shares. Over the longer-term shares could be threatened though by the higher bond yields and tariffs. Trumps administration may actually result in slower economic growth because of lower population growth (as the Republicans want to tighten border restrictions and deport some illegal immigrants) and through lower trade growth if tariff restrictions erupt into a global trade war. Everything will depend on the policies that are announced and the timing of these.

 

Australia is vulnerable to an intensification of trade wars.

 

 

Easing inflation pressures, central banks cutting rates, China ramping up policy stimulus and prospects for stronger growth in 2025-26 should make for reasonable investment returns over the next 6-12 months. However, with a high risk of recession, poor valuations and significant geopolitical risks particularly around the Middle East, the next 12 months are likely to be more constrained and rougher compared to 2023-24.

 

Bonds are likely to provide returns around running yield or a bit more, as inflation slows, and central banks cut rates.

 

Unlisted commercial property returns are likely to start to improve next year as office prices have already had sharp falls in response to the lagged impact of high bond yields and working from home.

 

Australian home prices are likely to see some further slowing over the next few months as the supply shortfall remains, but still high interest rates constrain demand and unemployment rises. Lower interest rates should help the market next year.

 

Cash and bank deposits are expected to provide returns of over 4%, reflecting the back up in interest rates.