Oliver's Insights – Seven reasons why Australian shares are likely to outperform global shares over the medium term

Key points

- The underperformance of Australian versus global shares since 2009 reflects a combination of tighter monetary policy, the strong $A into 2011, the slump in commodity prices, property crash phobia and classic mean reversion.

- Australia’s performance is much better if dividends are allowed for, but it has still underperformed since 2009.

- With the prior outperformance in the 2000s resources boom now reversed there is good reason to expect Australian shares to outperform over the next 5-10 years.

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Oliver's Insights – Seven things for investors to keep in mind in rough times like these

The attached note takes a look at the ongoing volatility in share markets and key things for investors to keep in mind. The key points are as follows:

• Share markets remain volatile and at risk of further falls reflecting worries about inflation, aggressive central bank rate hikes, the war in Ukraine and recession fears.

• Seven key things for investors to bear in mind are that: share market falls are normal, but the key is to make the most of compound interest; selling shares after a fall locks in a loss; trying to time investment market moves is hard; share pullbacks provide opportunities for investors to buy them more cheaply; Australian shares still offer an attractive income flow; shares invariably bottom with maximum bearishness; and finally, to avoid getting thrown off a long-term investment strategy it’s best to turn down the noise.

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Oliver's Insights – The RBA hikes rates by 0.25%. Here are five reasons why the RBA was right to slowdown and the top is near

The attached note takes a look at the RBA's latest interest rate decision and why it made sense to slow down the pace of rate hikes. The key points are as follows:

• The RBA sensibly dropped back to a 0.25% hike this month taking the cash rate to 2.6%. Its still signalling more hikes ahead though.

• Slowing the pace of rate hikes makes sense: the RBA needs to allow time to assess the impact of rate hikes so far given that they impact with a lag; many households will see a sharp rise in mortgage payments which will depress spending through next year; global inflationary pressures are easing; inflation pressures are less in Australia than elsewhere; and there is now a high risk of global recession which will impact Australia.

• Just because the Fed is prepared to run a high risk of recession does not mean the RBA should too. The Fed has an unfortunate track record of continuing to hike until there is a crisis.

• We still see the cash rate peaking at 2.85%, but acknowledge upside risk to 3.1%. By late next year the RBA is likely to be cutting interest rates.
  

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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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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.

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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.

Oliver's Insights – Investment outlook Q&A – inflation, interest rates, Russia & Ukraine, the risk of a share crash, house prices and other issues

The attached note covers the main questions investors commonly have regarding the investment outlook in a simple Q&A format. The key points are as follows:

• Inflation will likely slow later this year but remain well above pre-pandemic levels over the medium term.

• Wages growth is likely to pick up to 3% this year.

• A Russian invasion of Ukraine risks a short term hit to shares followed by recovery over the next 3 to 12 months.

• Australian home prices are likely to peak later this year followed by falls into 2024.

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Oliver's Insights – Corrections, gummy bears and grizzly bears

Given the rough start to the year in share markets, the attached note looks at past bear markets in Australian and US shares. The key points are as follows:

• While share market corrections and even mild bear markets are common, long and deep bear markets invariably require a recession at least in the US.

• Global and Australian shares have had a good rebound from their January lows but could still fall further in the short term as risks remain high around monetary tightening and geopolitical tensions.

• However, a deep bear market is unlikely as a US, global and/or Australian recession are unlikely to be imminent.

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The RBA ends bond buying - but remains "patient" on rates. We expect the first rate hike in August

The attached note looks at the RBA's first meeting for this year and the outlook for the official cash rate. The key points are as follows:

• The RBA will end quantitative easing this month.

• While it now sees unemployment falling below 4% and higher inflation it is prepared to be "patient" for now on rates.

• We expect rate hikes to commence in August.

• Ultimately, we see the cash rate rising to around 1.5 to 2% in the years ahead but it's a bit of guess and the RBA will only raise rates as far as necessary to cool inflation.

• Rate hikes from later this year are unlikely to be enough to threaten the economic recovery but they will add to the slowdown in the property market where we see dwelling prices peaking later this year.

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Oliver's Insights – Share market falls - seven things for investors to keep in mind

The attached note takes a look at the recent sharp falls in share markets and looks at seven things for investors to keep in mind. The key points are as follows:

• Share markets have fallen in recent weeks on the back of worries about inflation, monetary tightening, the Omicron disruption and the rising risk of a Russian invasion of Ukraine.

• Its too early to say markets have bottomed.

• Key things for investors to bear in mind are that: corrections are healthy and normal; in the absence of a renewed recession share market falls may be limited; selling shares after a fall locks in a loss; share pullbacks provide opportunities for investors to buy them more cheaply; shares continue to offer an attractive income flow; shares often bottom at the point of maximum bearishness; and finally, to avoid getting thrown off a long-term investment strategy it's best to turn down the noise.

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2022 – a list of lists regarding the macro investment outlook

The attached note takes a look at the continuing surge in global inflation pressures, notably in the US. The key points are as follows:

• Inflation is placing increasing pressure on major central banks to remove monetary stimulus.

• Inflation & rising interest rates will likely contribute to more volatile & constrained investment returns this year..

• The long-term downtrend in inflation and interest rates since the early 1980s is likely to be over removing a tailwind for investment returns.

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2022 - a list of lists regarding the macro investment outlook

The attached note provides a simple point form summary of key insights and views on the economic and investment outlook. The key points are as follows:

• 2021 saw strong investment returns with low volatility.

• 2022 is likely to see more constrained returns with increased volatility.

• Watch: coronavirus and vaccines; inflation; the US mid-term elections; China issues; Russian tensions with Ukraine and the west; & the Australian election.
  

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Five reasons to expect a cooling in the Australian property market and falling prices in 2023

Key Points:

• After a 22% rise in Australian home prices this year, they are expected to slow to 5% growth in 2022 with prices likely to fall 5-10% in 2023.

• The main drivers behind the slowdown are: worsening affordability; rising supply; rising rates; macro prudential tightening; & a rotation in spending away from housing.

• The main risks on the downside are another big covid set back or faster rate hikes & the main risk on the upside would be a fast return to pre-covid immigration.
  

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Central banks – including the RBA and Fed – gradually removing monetary stimulus is more good news than bad

The key points are as follows:

• The march of central banks towards removing monetary stimulus is continuing with the RBA bringing forward its guidance regarding the first rate hike and the Fed set to commence tapering. We expect both to start raising rates later next year.

• The shift towards monetary tightening signals slower more constrained share market returns – but the trend should remain up as the impact of monetary tightening is offset by economic recovery & higher profits, monetary policy is still easy and will be for a while & bull markets usually only end when monetary policy is tight.

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Compound interest is like magic - and it's an investor's best friend

The attached note looks at the recent pull back in investment markets and renewed uncertainty regarding the outlook. The key points are as follows:

• Compound interest is an investor's best friend.

• The higher the return, the greater the investment contribution and the longer the period the more it works.

• To make the most of it, ensure an adequate exposure to growth assets, contribute early and often to your investment portfolio and find a way to avoid being thrown off by the investment cycle.

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Central banks - including the RBA and Fed - gradually removing monetary stimulus is more good news than bad

The attached note looks at the recent pull back in investment markets and renewed uncertainty regarding the outlook. The key points are as follows:

• The march of central banks towards removing monetary stimulus is continuing with the RBA bringing forward its guidance regarding the first rate hike and the Fed set to commence tapering. We expect both to start raising rates later next year.

• The shift towards monetary tightening signals slower more constrained share market returns - but the trend should remain up as the impact of monetary tightening is offset by economic recovery & higher profits, monetary policy is still easy and will be for a while & bull markets usually only end when monetary policy is tight.

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The worry list for shares - how worrying are they?

The attached note looks at the recent pull back in investment markets and renewed uncertainty regarding the outlook. The key points are as follows:

• It's still too early to say that the pull back in share markets is over. Some of the worries around US fiscal policy and politics, China, global supply constraints and central banks likely have further to run and could see the correction go further.

• Historically the main driver of whether we see a correction or a mild bear market, as opposed to a major bear market, is whether we see a recession. While it may take time, ultimately, we see the current worries being resolved in a way that does not severely threaten global or Australian growth.

  So, we continue to see the broader trend in global and Australian shares remaining up once the correction runs its course.

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Why is Australian housing so expensive and what can be done to improve housing affordability?

The attached note looks at the recent pull back in investment markets and renewed uncertainty regarding the outlook. The key points are as follows:

• The key drivers of poor housing affordability and high household debt levels in Australia have been low rates and poor housing supply.

• Macro prudential controls to slow home lending now look imminent. But this is just a cyclical measure.

• More fundamental measures to improve housing affordability need to focus on boosting housing supply and decentralising away from major cities.

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