Investment Perspective Public Markets Summary & Outlook

Investment & Wealth Management

04-04-2024

Investment Perspective Public Markets Summary & Outlook

Soft landing to no landing - early signs of the next upswing

Economic outlook 

Inflation is falling in almost every country around the world with many emerging market countries well progressed in the easing of central bank cash rates. While we are yet to see many cuts in developed markets, one of the first developed markets to cut, the Swiss National Bank, cut rates by 25bps in March in a surprise move. Meanwhile in emerging markets, Brazil’s central bank have had six rate cuts since mid 2023. Australia appears lagging in our inflation journey versus the US and other developed nations.  The US Fed and some other central banks have managed to create ‘immaculate disinflation’ without too much damage to economies, hence a ‘soft landing’ of economies is being heralded. 

Economic growth is at a low ebb, however there are early signs from leading indicators such as the Purchasing Manager Indices (PMI) for manufacturing and services, and the OECD Leading Economic Indicators showing recovery from lows. This is promising for the trajectory of growth for the year ahead. There is possibility in the US that a ‘soft landing’ may transition to a ‘no landing’ or much smaller economic impact than previously thought. 

Employment has been resilient overall with the adjustments in inflation and economic growth taking the heat out of wage rises, resulting in some job losses but not excessively so.  The employment situation is mixed across sectors.  Wealthy baby boomer consumers have more spending power as they have high cash balances and investment assets benefiting from higher interest earned on savings and a strong share market, Early career wealth accumulators in contrast are doing it tough as they have higher debt loads and interest costs, and lower net investment assets. Hence, we are also seeing transitions in employment as consumption mix evolved and some companies responding by cutting back while others are adding staff. 

Central bank policy, particularly the Federal Reserve is wary of upsetting the delicate rebalancing underway in inflation, economic growth and employment and has indicated it is willing to let growth continue to recover while signaling a fewer number of cash rate cuts likely later this year. 

Market scenarios for 2024 

Markets are pricing a “goldilocks” scenario to continue, that is declining inflation and a resurgence in economic growth supported by government spending and soon to be lower policy rates.  We see that valuations in equity markets are higher and bond markets are pricing in lower yields in government and corporate bonds.   

Technical factors such as investor positioning show that retail investors have been more supportive of the upswing of equities than institutional investors.  We would expect institutional investors to continue some gradual capitulation of negative views as the equity market rally gains further pace.   

Risks to the downside include escalation of conflicts that impact trade and energy transportation, or a flare up of losses in the US banking system.  If these risks eventuate, we expect policy response to be swift from governments and central banks. 

Our central scenario is for equity and credit markets to be well supported for the next quarter or two with some potential for modest corrections.  We see more risk to correction when institutions are positioned much more bullish than they are now, and hence more vulnerable to shocks.   

Themes influential this year: 

  • Geopolitical volatility is the new ‘normal’ and has to be factored into investment analysis. 

  • Costs associated with climate change mitigation before benefits of cheaper energy is available. 

  • The top 7 US stocks become even more dominant while valuations are much cheaper in small and mid caps. 

  • AI converges with other themes in a mix of hype and a land grab for opportunities in every industry. 

  • Social disruption potential from the result of the US election no matter who wins.  

What to watch in the next few quarters: 

  • Costs of disruption and delays in global shipping routes that cause a resurgence in inflation. 

  • AI becoming an extended bubble with stocks such as Nvidia and associated semiconductor stocks. 

  • Chinese stimulus efforts finally gain traction without impacting local Chinese savings. 

  • US political debate around the next President and raised uncertainty about the outcome.

Quarterly Market Performance (to 31 March 2023) 

  • Equity markets rose over the quarter in most markets around the world. 

  • Ten-year government bond yields rose over the quarter from below 4% to 4.15% and 4.35% for Australia and the US respectively as recession fears faded. 

  • Credit spreads continued to fall for the second quarter in a row as money available for deployment was ample combined more positive outlook for business influenced investors. 

  • Amongst currencies the USD was stronger for the quarter, with the opposite trends for AUD, JPY and EUR. 

  • Commodities were mostly stronger with higher oil prices, cocoa strong within agricultural commodities, precious metals stronger while industrial metals such as copper were stronger. 

  • Volatility measures for the majority of markets were stronger including US Equity VIX, currency, bonds and gold. 

March 2024 Major Indices

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This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.