Welcome to the Autumn edition of On the Marc. In this edition, we will review markets for the first quarter of the 2023 calendar year and consider the outlook for the foreseeable future.

Market update 

The Australian investment market has seen a mixed performance in the first quarter of 2023, with most sectors performing well with the exception of the financials and energy sector that struggled with negative returns.

Below is a summary of the key trends so far this calendar year:

Equity Market:

The Australian equity market has had a strong start to the year, with the ASX 200 index reaching record highs in February 2023. This followed a decent sell-off in December. The positive investor sentiment was fuelled by the expectation that we are close to the end of rate rises and a reasonable earnings outlook during the recent reporting season. However, concerns about inflation and rising interest rates continue to cause volatility in the market (both up and down).

Property Market:

2023 so far has seen a reversal in property prices with either sideways or low single-digit growth across most major cities. This has been driven by stronger demand from buyers, and a supply shortage from sellers. However, there are concerns about the sustainability of the recent rebound, with many expecting further downside is likely in the coming months due to fixed loans maturing resulting in mortgage distress for a larger number of households.

Migrant Workers:

Australia is on track for net migration of more than 300,000 people this year, more than 25% higher than Treasury forecasts, due to a surge in arrivals. This would be a record. It is largely the reason why rental property vacancies in Sydney are just 1.4%.

Financial Institutions Collapse:

In April, the Reserve Bank kept the official cash rate on hold at 3.60% for the first time since last May. This was due to a deterioration in global markets. Investor confidence was hit by the collapse of Silicon Valley Bank and Signature Bank in the US due to liquidity concerns. This led to further contagion in Europe, with Credit Suisse subject to a hasty takeover by UBS. As Credit Suisse is one of 30 banks considered to be of systemic importance to the global economy, the Swiss Government and regulator facilitated the takeover to stem further banking turmoil quickly.

The Federal Reserve created liquidity in the US by guaranteeing deposit holders’ deposits to avoid further contagion across other lenders. This led to a large reversal in the Federal Reserve’s money supply which had been contracting for the past year as shown in the below graph.

Currency Market:

The Australian dollar has been somewhat stable this year, fluctuating from around 0.71 USD in January to the current level of 0.67 USD at the time of writing.

Market returns for major indices

Below is a table showing the percentage returns of the major market indices to 31st March 2023.

Source: Lonsec

The outlook for the year ahead 

The outlook for the Australian economy and investment markets for the remainder of 2023 is mixed. There are also some risks and uncertainties that could lead to a deterioration in conditions. The largest risk is the continuation of interest rate rises by major trading partners in an attempt to curb inflation. The challenge is that it will reduce spending leading to fewer exports and lower inbound tourism.

Last night the US released their latest inflation numbers. The headline Consumer Price Index (CPI) rose 5 per cent in the year to March, down from 6 per cent in February, representing the smallest year-on-year gain since May 2021. In June last year, the reading was 9.1%. This is a positive sign that inflation is returning to palatable levels for the economy and financial markets.

Equity Market:

The equity market is expected to perform well into the medium term however, as is almost always the case, the shorter-term timeframe can expect volatility. The future path of interest rates here in Australia will be a large determining factor with any increases leading to downward pressure in the short term.

Property Market:

The residential property market appears to have most of the sell-off behind us. The outlook at this point is for smaller movements in the shorter term that could be either slightly up or down.

Commodity Market

The commodity market is expected to see a mixed performance, with some sectors (such as gold) benefiting from safe-haven demand and the recent expansion in monetary policy mentioned at the start, while others (such as iron ore) facing challenges due to oversupply and weak demand. It is very hard for a forecast of future oil prices to be made on oil as the OPEC cartel and Russia War will determine what happens.

Did you know?

In the US it is 4.75-5.00% and in NZ 5.25%. When purchasing a home in the US, taking out a 30-year fixed loan is normal. The current rate on offer is around 7%. The home loan rate on offer by banks in NZ is also around this level which is a lot higher than the mid 5% range we see in Australia at present.

In Australia money markets are predicting we are at the end of the rate rising cycle. The forecast is for two 0.25% rate cuts between now and September next year (2024) as illustrated in the below table.


Final reMarc

At the end of last year, most market commentators called for a large sell-off in the first quarter of 2023. As is often the case, the herd was wrong. While we don’t want to paint a red and rosy outlook as the impact of the rates rises in the past year still filter through businesses and households, the chance of a recession in Australia is close to 50/50. If a recession eventuates, it is expected to be mild. Remember a recession in Australia is defined as two consecutive quarters of negative gross domestic product (GDP) figures. The difference between two consecutive quarters of 0.1% and two quarters of -0.1% is a non-event in our view however you can be sure if we do go into recession the media will be blasting it upon us.

The two key areas to watch for to see what happens with interest rates in Australia are wage growth and unemployment levels.

"The stock market is a device for transferring money from the impatient to the patient."

Warren Buffet

Key Facts & Figures

  1. The Australian Cash Rate was kept on hold in March at 3.60%.

  2. The RBA Cash Rate is likely (91% chance) to remain on hold in May when the RBA next meet.

  3. Our annualised inflation rate is 7.80%. This is well above the upper end of the RBA’s target band of 2 - 3%.

  4. Australia’s unemployment rate is 3.5%.

  5. The Federal Reserve cash rate currently is between 4.75% and 5.00% in the US.