Markets – December 2023
The Santa rally has arrived!
Investors breathed a sigh of relief over November, as the consensus view was formed that interest rate hikes are now over.
This outlook saw gains in all the major investment markets, with both the equity and bond markets enjoying rallies over the month.
The recovery in markets has continued into December, with the ASX200 up a further 1.7% in the first ten days of the month.
As mentioned last month, a quarter of the stocks in the ASX 200 hit 12-month lows in October – so many of these stocks have rallied over the past month.
Several sectors that bore the brunt of the market correction saw solid recoveries. The property and healthcare sectors were standouts.
Now that interest rates have peaked, the discussion turns to the timing of rate cuts.
In the US the view coming into the new year is that the economy will continue to slow, prompting the US FED to cut rates in the second half of 2024.
Here in Australia, the outlook is similar. The inflation figures for October came in significantly lower than market expectations. This news eased fears of further rate hikes, with most analysts now expecting rate cuts in Australia in late 2024.
The view is now that the global economy will achieve a soft landing and hence avoid the feared global recession that weighed on markets over 2022 and 2023.
Time will tell if recession is averted – but at least central banks now have interest rate settings back at levels where they can support the economy should that outcome eventuate.
2023 Observations
- Inflation fell faster than expected in most developed economies over the year.
- Returns from international shares were strong over the year as corporate profits held up.
- Australian shares underperformed, due to uncertainties around the economic environment in China, and fears around the impacts that rising mortgage servicing costs would have on households. (Australia is not considered a tech economy; hence our share market did not participate in the AI frenzy in the tech sector).
- Australian house prices recovered, thanks to record levels of migration.
- The depressed property market and a poor recovery from COVID lockdowns in China continued to weigh on returns from Chinese shares.
2024 Observations
- Clear signs are emerging from the business sector of a slowing of activity.
- This slowdown should support further falls in inflation.
- Falling inflation will support interest rates cuts from the second half of 2024.
- The risk of recession continues to hover over markets, but the consensus view has turned - should one eventuate, it is likely to be mild.
- The US election in late 2024 will be a major focus for investors, resulting in higher levels of volatility.
- Australian shares offer better valuations than offshore. This should support relative outperformance over the year.
- Returns for conservative investors are likely to revert to normal, as interest rates on bonds are now above inflation and offer reasonable yields.
The key areas I remain focussed on
I expect some of this reluctance will disappear over 2024, as businesses look to reduce costs while business activity continues to slow.
Households have now mostly depleted excess savings built up during the COVID lockdowns and are dealing with higher levels of taxation, increased mortgage servicing costs, and rising prices for most household items. The pressure on household incomes will be a key area to watch over the year ahead.
Every year has its own risks and opportunities. 2024 will be no exception
The core message I take into 2024 is that here in Australia the fundamentals remain strong.
- Our terms of trade, including prices of our exports, continue to be robust.
- Commodity prices remain at elevated levels.
- The Federal Government maintains a budget surplus.
- Stage three tax cuts remain scheduled for mid-2024.
- Interest rates have peaked and should be lowered from the second half of next year, providing relief for households servicing mortgages.
- China's GDP growth should still be around 5% and the potential for economic stimulus is high.
I look forward to 2024.
Sources: ASX, The Australian, Bloomberg, Morningstar, Forager Funds Management, Westpac, The AFR & SG Hiscock.
The Kauri Wealth office will be closed from Wednesday 20 December and reopen on Monday 8 January 2024.
Wishing you joy, peace, and prosperity this holiday season. Thank you for your continued partnership. Merry Christmas and a Happy New Year!
Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.
I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.
Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
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