Oliver's Insights - 2023 saw the return of Goldilocks, but what's in store for 2024 for investors?

Key points:

• The five key themes for 2023 were: better than feared growth; disinflation; peak interest rates (probably in Australia too); lots of geopolitical threats but not as bad as feared; and AI hit the big time. This boosted shares and helped bonds with solid superannuation fund returns.

• 2024 is likely to see positive returns helped by falling rates but they are likely to be more constrained given likely volatility associated with the high risk of a recession.

• Expect the RBA cash rate to fall to 3.6%, the ASX 200 to rise to 7500 and balanced super funds to return around 5.3%.

• Australian residential property prices will likely see falls as high rates resume their impact after prices rose in 2023.

• Things to keep an eye on: Inflation; interest rates; recession risk; China risks; US politics; and the Australian consumer.

Read full article here.

Oliver's Insights - The RBA leaves rates on hold - have we finally reached the top?

Key points:

• At its December meeting the RBA left rates on hold but retained a tightening bias with still hawkish commentary.

• Our concern remains that the RBA has tightened more than necessary with a high risk of recession next year.

• The risk of another hike rate - which if it occurs would most likely be at the next meeting in February after December quarter inflation date - remains high at around 40%.

• However, our base case is that the RBA has reached the top and we see it cutting rates in second half of 2024.

Read full article here.

Oliver's insights - nine key things for successful investing

Key points

- Successful investing is not always easy and can be stressful. Even in good times. For this reason, it’s useful for investors to keep a key set of things in mind.

- The nine key things are: make the most of compound interest; don’t get thrown off by the cycle; invest for the long term; diversify; turn down the noise; buy low and sell high; beware of the crowd; focus on investments offering a sustainable cash flow; and seek advice.

- These are very important in times like the present when uncertainty around inflation, interest rates, economic activity and geopolitics is high.

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Oliver’s insights Australian home prices up on supply shortfall, but at risk from high rates

The big surprise in the Australian housing market last year was how quickly home prices fell with RBA rate hikes. But the big surprise this year is how they rebounded when most including myself were looking for further falls. October CoreLogic data showed another 0.9% rise in national home prices, leaving them just 0.5% below their April 2022 record.

Key points

– Australian home prices rose again in October, with the supply shortfall on the back of record immigration dominating. Prices are now on track for a 9% gain this year.

– While the supply shortfall is likely to continue there is a high risk that the impact of high interest rates will start to get the upper hand next year particularly if the RBA hikes again and unemployment rises by more than expected.

– Price gains are expected to slow to 5% next year, but the risk of another leg down in prices next year is high.

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Oliver's Insights - Five constraints on medium term investment returns

Key points

- Five megatrends suggest higher medium term inflation pressures & lower economic growth than pre-pandemic.

- These are: a move away from economic rationalist policies; the reversal of globalisation; rising geopolitical tensions; climate change and decarbonisation; as well as slowing and aging populations. A productivity boost from artificial intelligence should provide some partial offset though.

- But taken together this will likely constrain medium term superannuation returns, potentially to around 5.5% pa.

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Oliver's Insights - The threat of higher oil and petrol prices flowing from the war in Israel

Key points:

• The war in Israel has added to the upside risks to oil prices and downside risks to shares in the near term.

• If Iran stays out of conflict & a major supply disruption is avoided the impact on shares should ultimately be minimal.

• If alternatively, oil prices do have a renewed surge it’s more likely to be deflationary as it will act as a “tax on spending”. So central banks, including the RBA, should look through it.

• The rise in petrol prices has already added $12 a week to the average household fuel bill in Australia since May.

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Oliver's Insights - 1987 vs now - Rising bond yields (& war in Israel) and the risks for shares

Key points:

• The rise in bond yields has left shares offering a low risk premium over bonds leaving them at risk of more softness.

• The conflict in Israel has added to the risk, although the threat should be minimal if Iran is not drawn in avoiding a severe impact on oil supplies.

• These are parallels with the run up in bond yields prior to the 1987 crash but relative valuations are less threatening.

• Still falling inflation should take pressure off central banks next year, which should in turn be positive for shares.

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Oliver's Insights – For what it’s worth: why what you pay for an investment is a key driver of its return…and how do valuations look now?

The key points are as follows:

• Starting point valuations – like yields and price to earnings ratios – are key drivers of medium-term investment returns.

• For growth assets it’s often more complicated, with the level of interest rates playing a big role.

• At present, valuation starting points for term deposits and bonds have improved. For shares they suggest constrained return potential from US shares but are better for Australia.

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Oliver’s insights – Three reasons to err on the side of optimism as an investor

Introduction

The “news” as presented to us has always had a negative bent, but one could be forgiven for thinking that it’s become even more negative with constant stories of disasters, conflict, wrongdoing, grievance and loss. Consistent with this it seems that the worry list for investors is more threatening and confusing. This was an issue prior to coronavirus – with trade wars, social polarisation, tensions with China, worries about job loss from automation and ever-present predictions of a new financial crisis. Since the pandemic higher public debt, inflation, geopolitical tensions and rising alarm about climate change have added to the worries. These risks can’t be ignored, but it’s very easy to slip into a pessimistic perspective regarding the outlook. However, when it comes to investing the historical track record shows that succumbing too much to pessimism doesn’t pay.

Key points

– The natural human tendency to focus on bad news, the increased availability of information and the rise of social media are magnifying perceptions around worries and making it easier to be pessimistic.

– However, to succeed as an investor it makes sense to err on the side of cautious optimism: otherwise, there is no point in investing; growth assets like shares have trended up over the long term; and trying to get the timing right of the 2 or 3 years out of 10 when they fall can be very hard.

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Oliver's Insights - China's slowdown and structural challenges and implications for Australia

Key points

- China’s economy is slowing not helped by a property collapse and longer-term structural constraints around poor demographics and threats to productivity growth.

- China needs to save less and spend more, and this requires significant fiscal stimulus. So far policy stimulus has been tepid, but a more forceful response is likely.

- Chinese shares are cheap but short-term risks are high.

- The risks around China’s outlook mean Australia can’t rely on the China/commodity boom indefinitely.

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Oliver's Insights – Why the need to lift productivity and why it might be hard

Introduction

Outgoing Reserve Bank Governor Philip Lowe has highlighted Australia’s weak productivity growth and noted that boosting it “should be the issue that dominates economic discussion”. So why is boosting productivity so important? And why is it seen as so hard to do? It’s worth having another look at it given its importance to our economy and investment markets.

Key points

- The last 20 years have seen a slump in productivity growth in Australia from over 2% pa to less than 1% pa. This has curtailed 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; more infrastructure spending; increased housing supply; deregulation; and tax reform.

- Unfortunately, the political pendulum has moved against many of the policies necessary to boost productivity.

Read full article here.

Oliver's Insights – Recession versus goldilocks

Over the last 18 months, there has been much talk of recession globally and more recently in Australia. But, despite mild technical recessions (ie, two consecutive quarters of falling GDP in a row) in the US and Europe in the last 18 months, growth has generally been more resilient than expected and now with inflation falling many have started to give up on recession with increasing talk of Goldilocks (ie, where growth is okay and inflation is falling). So, have we dodged the recession bullet? 

Key points:

• Rapid monetary tightening points to a high risk of recession and, given lags in the way it impacts the economy, just because it hasn’t happened yet does not mean it won’t.

• However, a combination of falling inflation, a lack of excesses beyond inflation, excess household saving, the possibility of rolling sectoral recessions & strong population growth (in Australia) mean we could still avoid recession.

• We remain of the view that shares will do well on a 12-month horizon, but the risks around recession and higher bond yields mean that the risk of a correction is high.
  

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Oliver's Insights - The confusing economic picture - Why you need to know the difference between leading and lagging economic indicators

Key points

• For nearly 30 years Australia had benign economic cycles so the current environment may be a bit of a shock for many.

• Still low unemployment and still high inflation despite slowing economic growth are not that unusual because they both normally lag big swings in the economic cycle.

• The RBA and other central banks need to tread carefully and allow for the lags from the rapid rise in interest rates to work through - lest they end up pushing unemployment for higher than they need to in order to return inflation to target.

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Oliver's Insights – Seven key charts for investors to keep an eye on – where are they now?

The article link below updates seven key charts worth watching in assessing the investment outlook. The key points are as follows:

• Shares are at risk of a short term pull back and volatility will likely remain high on central bank and recession risks.

• However, we remain reasonably upbeat on a 12-month view as falling inflation takes pressure off interest rates.

• Seven key charts worth keeping an eye on remain: global business conditions PMIs; inflation and our Inflation Indicators; unemployment and underemployment; inflation expectations; earnings revisions; the gap between earnings yields and bond yields; and the US dollar. So far so good.

Read full article here

Oliver's Insights - 15 common sense tips to help manage your finances

1. Shop around

2. Don’t take on too much debt

3. Allow that interest rates go up and down

4. Contact your bank if struggling with a mortgage

5. Seek advice regarding fixed versus variable rates

6. Allow for rainy days

7. Credit cards are great, but they deserve respect

8. Use your mortgage for longer term debt

9. Start saving and investing early

10. Plan for asset prices to go through rough patches

11. See big financial events in their long-term context

12. Know your risk tolerance

13. Make the most of the Mum and Dad bank

14. Be wary of what you hear at parties

15. There is no free lunch

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Oliver's Insights – 2022-23 saw investment returns rebound - but is it sustainable?

The key points are as follows:

• After the rough ride of 2021-22, the last financial year turned out to be a good one for investors as shares rebounded thanks to falling inflation and hopes rates are near the top.

• Shares are at risk of a pull back as central banks remain hawkish and recession risks are high. However, returns over the next 12 months should still be reasonable as falling inflation takes pressure of central banks enabling rate cuts.

• The past financial year provides yet another reminder of just how hard it is to time investment markets – with shares rebounding just when everyone was most gloomy about inflation and interest rates. The key as always is to adopt a long-term investment strategy and turn down the noise.

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Oliver's Insights – Peak Australian home ownership - rising prosperity (and smashed avocado) versus housing affordability

Key points

- Based on a Report by Bernard Salt, Australia’s home ownership rate peaked at 73% in 1966 as the home was then seen as synonymous with wealth and security.

- Since then, the trend has been down, influenced by a combination of demographic trends, rising prosperity and changed perceptions of wealth.

- A significant deterioration in housing affordability over the last thirty years has also likely been a key driver of declining home ownership. This risks threatening social cohesion.

- The key to improving housing affordability and help home ownership is to boost supply & encourage decentralisation.

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Oliver's Insights – Commercial property returns under threat

Introduction

Over the last 10 and 20 years, returns from Australian unlisted commercial property have averaged 9% pa. This in part reflected the search for decent income bearing investments by investors in response to falling interest rates & bond yields that pushed up property values faster than justified by rents. However, it’s now vulnerable from the rise in bond yields over the last two years and reduced space demand flowing from “work from home” for office property and online retail for retail property.

Key points

- Australian unlisted commercial property returns have been very strong over the last two decades thanks largely to the “search for attractive yields” by investors.

- With the back up in bond yields, this driver is reversing leaving retail and particularly office property vulnerable to significant capital loss in the face of reduced space demand.

- Key to watch will be bond yields, whether the economy avoids recession and where “work from home” settles

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Oliver's Insights – Australian home prices

Australian home prices - Prices look to have bottomed as the supply shortfall dominates, but watch rates and unemployment

Key points

- Australian home prices rose again in April & along with other indicators suggest the home price downturn is over.

- A surge in demand on the back of high immigration and constrained supply appear to be dominating the negative impact of higher interest rates

- As such we have revised up our property price forecasts to flat to up slightly for this year with a 5% rise next year.

- However, the risk of another down leg in prices is high as interest rate hikes continue to impact.

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Oliver's Insights – Five charts on investing to keep in mind in rough times like now

Key points

- Successful investing can be really difficult in times like now with immense uncertainty around inflation, interest rates, issues in global banks and recession risks impacting the outlook for investment markets.

- This makes it all the more important to stay focussed on the basic principles of successful investing.

- These five charts focus on critical aspects of investing that are insightful in times of market stress: the power of compound interest; don’t get blown off by cyclical swings; the roller coaster of investor emotion; the wall of worry; & market timing is hard.

Click here to read the full article.