Markets – November 2023
Australian share market hits a six-month low
Rising global interest rates; oil prices reaching close to $100 a barrel; and a relatively uncertain outlook for corporate earnings over the next 12 months, are all driving the current down cycle in share markets.
The view 12 months ago was that the US economy would experience a soft landing and that this was the main reason for strong gains in global share markets since September last year. That view is now being challenged, with the possibility of a US recession back on the agenda.
Markets are adjusting to prospects of an ongoing and longer period of high interest rates and the US government’s vast borrowing needs.
Geopolitical events and military action in the Middle East also weighed on the negative returns over the month.
More than a quarter of stocks in the ASX 200 Index hit 52-week lows – an indication of how poorly the markets have fared.
Stocks like CSL, ResMed & Macquarie and many other quality companies have felt the brunt of the market correction. It is notable that many good quality stocks are trading at discounts of between 10% to 20% or more from their fair value.
Inflation continues to concern the RBA, which raised interest rates by 0.25% to 4.35% after several months of holding course.
The trigger for the rate rise was the higher-than-expected CPI update for the September quarter.
The RBA is clearly worried about inflation plateauing around current levels. The recent inflation figures confirm the economy is performing well, with the RBA noting a robust employment market.
The strong jobs market has forced the bank to trim its expectation for the unemployment rate down to 4.25% by the end of 2025. Clearly it has identified multiple signs of unexpected resilience in parts of the economy.
All eyes now turn to February and whether the RBA decides to move rates higher from here. Household spending over the busy Christmas period, as well as Middle East geopolitics will be the main areas that are likely to influence its decision.
Another important signal this month is that markets are concluding that interest rate rises around the world are coming to an end, with rates expected to peak at near current levels.
As we approach 2024, a key area to watch will be the impact of a peak in interest rates against an economy that is showing signs of resilience.
Quality stocks are trading below fair value, the jobs market remains tight, and households are continuing to spend. Coupled with ongoing high levels of migration and government fiscal expenditure (especially around infrastructure and decarbonisation), the possibility of a Santa rally in markets over the next couple of months is relatively high.
Sources: ASX, The Australian, Bloomberg, Morningstar, Forager Funds Management, Westpac, The AFR & SG Hiscock.
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Russell Lees
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Email: russell@kauriwealth.com.au
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