Global share markets continue to rally
Global share markets continued to rally over July. Ongoing falls in inflation have fuelled expectations that the global synchronised interest rate hiking cycle, which has been underway for 18 months, is reaching its peak.
Fear around a potential recession in the US has now moved to hope for a soft landing, further encouraging the recovery in markets.
Commentary from central banks points to their concerns about the stickiness of some inflation components. This challenges the current view and suggests that the hoped-for interest rate cuts may not eventuate, with rates having to stay higher for longer.
The next six to eight months are key for share investors, as slower consumer demand from 18 months of monetary tightening is felt throughout the economy. The majority of fixed rate mortgages will roll over to variable rates during thsis period.
The recent downgrade of the US credit rating highlights that massive budget deficits and high fiscal expenditure come with a price. Moves to rein in deficits and spending will have flow-on consequences for economies and for investment returns. ‘It’s time to pay the piper’ seems an apt description, given the ballooning debt levels over COVID – which are now being serviced by governments around the world at substantially higher interest rates.
On the positive side, job vacancies remain at elevated levels – it is a great time to be looking for work. The majority of workers are enjoying high levels of job security.
Savings sitting in cash accounts and cash alternatives remain at record levels. Investors who fled the bond and share markets over 2022, mostly still remain in cash. Many of these investors will be tempted to return by the recent gains in share markets. This will potentially drive returns for shares.
Recent gains in share markets have been predominantly concentrated in high growth stocks, like IT stocks, which have now retraced most of their 2022 losses. But the market rally should broaden and emerge in other sectors that offer better compelling valuations. There are many stocks that missed out on the recent rally that offer better valuations and financial metrics.
The Australian reporting season has started. Over the next three weeks, Australian corporates open their books to disclose their earnings over the last six months.
We have already seen some unexpected earnings downgrades, like CSL & AMCOR. But all eyes once again will be on outlook statements, to gain insight into how Australian corporates are positioning their operations for a challenging 2024.
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