Markets – October 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.
US consumers begin to buckle
Signs are emerging that the mighty US consumer is on the cusp of exhaustion. The US savings rate (a measure of the percentage of disposable income that households save rather than spend on consumption) is close to zero.
Mortgage rates in the US are hitting 7.5%. Student loan repayments have recommenced. And recent statistics show falls in earnings for used car dealers and major retailers. The overall rejection rate for credit in the US has also reached 22% – the highest since 2018. All point to a consumer beginning to buckle.
Long-term bond rates in the US continue to rise and sit at 4.7% – the highest since 2007. The budget deficit is expected to double to US$2 trillion, or roughly 7.5% of US GDP.
The US deficit is unsustainable
US government spending is growing at an unprecedented pace (outside of recessions and the Vietnam War). In 2022, the net interest paid to service the national debt increased by 35% compared with the previous year. It will be much higher in 2023 and in 2024.
Tackling the deficit can’t be kicked down the road for ever. If not dealt with, the US government will face higher interest rates and a lowering in the value of the US dollar.
Here in Australia, the government enjoys a budget surplus, thanks to ongoing strong demand for our commodities. As in the US, jobs remain robust and available for most. But the return of migrants is adding to housing pressures, with state and federal governments signalling housing as one of their major areas of focus.
Don’t expect much to happen quickly in this space. It takes years to reform planning laws. Chief Economist at AMP, Shane Oliver recently suggested that migration levels into Australia should be adjusted to align with the growth in our housing stock. This certainly has merit, but new home builds continue to struggle due to insolvencies of many building companies over the last few years.
No growth in dividends for the current financial year
The six-monthly reporting season ended in September, with earnings falling by around 2.4% over the 2023 FY. The big commodity producers in particular (BHP, RIO, Fortescue) all reduced their dividend payments.
The 2024 financial year earnings outlook was lowered by 4.8% over the reporting season, with many companies noting margin compression in their business – caused mainly by the rising costs of finance, wages, and energy.
Ausbil, a leading Australian fund manager, projected an average dividend yield of 4.1% (before franking) for the current financial year. This compares with an average dividend yield of 4.5% in the previous financial year.
Ausbil’s research shows that the average dividend payout ratio was 62%, compared with 72% prior to the pandemic – an indication that many companies are reducing dividends to shareholders as they brace for tougher conditions over 2024.
Sources: ASX, Bloomberg, Morningstar, Capital Investors, Westpac & AFR
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Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
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