Good morning as we head towards Spring!
As anticipated, the RBA lifted interest rates by 50 basis points at yesterday’s monthly meeting. Importantly, their outlook statement indicated that interest rates may peak earlier than had been anticipated around Christmas time.
Interest rate decision making
A very strong month for equities as inflation may begin to trend down in 18 months time. As a leading indicator, listed investments tend to run up to 12 months ahead of the current economic environment and try to project where the future may be. This is coming off the back of a very difficult quarter for both shares and bonds as interest rate rises were factored into the current valuation of all assets. All the major western economies have now lifted interest rates in a loosely synchronised fashion reflecting a return to more normal economic conditions. There now remains a balancing act between being overly aggressive and dragging the economy into an unnecessary recession and being too accommodative and allowing inflation to get out of control.
As I see it the main issues are as follows:
- This time last year NSW went into a long Covid lockdown, and it would be unwise to calculate CPI off last year as a base position.
- We now have a significant number of clients with three years of savings looking to travel and spend as restrictions lift which will add to short term inflation.
- With our borders now opening the Government is frantically trying to process the backlog of visas to get visitors back into the country and quickly lift immigration and long-term work visas which should reduce labour shortages.
- The US has now had two quarters of negative growth and hence is in technical recession so less likely to go as hard on lifting interest rates.
- China appears to be slowly reopening after its zero Covid policy and actively stimulating its economy including reducing interest rates which should be positive for Australian exports.
- The Russia invasion of Ukraine appears to have reached a stalemate with some economic negotiations starting which may begin to reduce energy costs.
Australian Inflation Figures
Global economies
So, while fragile global economies may have a better operating environment next year which is what listed markets are trying to assess. No doubt there will be other challenges and most long-term investors are best to stick to the asset allocation of their risk profile and accept the market volatility as the price for longer term superior performance. More encouragingly the increase in interest rates has led to more options for conservative investors with some Term Deposits on Wholesale Wrap platforms now above 5%.
We are actively adjusting these portfolios on client review seeking to de-risk these portfolios as more attractive guaranteed rates become available. This should help to reduce volatility in retirees’ superannuation accounts and in some cases via the use of Annuities improve Centrelink payments. This will help with the current increase in the cost of living that we are all facing which is anticipated by the Federal Treasure to begin to dissipate next year back to the long-term RBA range of 2%-3%. So probably a few more difficult months in the economy till any recovery trend from economic data becomes stronger.
US 2022 Returns
Australian reporting season
This week sees the continuation of the Australian reporting season for listed investments which will give a clearer guide of company profitability and outlook statements. Dividends and distributions recently received for the last financial year were quite strong and there is a lot of cash on the sidelines looking to be redeployed. Sustainable dividends and rent achievable in all market conditions is key to reducing volatility in client distributions and at this stage of the economic cycle the largest listed companies such as CBA and NAB should outperform.
Listed property trusts should also do better with much of their debt locked in at attractive rates for a number of years, and improved trading conditions from their tenants. The larger ones such as Goodman, Dexus and Charter Hall remain my picks. Resources are heavily dependent on the China relationship which appears to be thawing and should benefit from the reopening of their economy. With equity confession season behind us we are not expecting too many earnings misses from the ASX 200 and will be looking for future guidance on 22/23 estimates.
Property market
The corollary of rising interest rates is subdued property prices coupled with significant increases in rent. This would be expected by the RBA who naturally will be looking at monthly data carefully when making further interest rate decisions. Again, it is far better to plan investment decisions on longer term historical growth rates rather than being caught up in some of the hysteria currently being perpetrated in our national press.
Property prices do find an equilibrium based on supply and demand which can be intentionally distorted by monetary policy to seek to slow down growth, but over time markets adjust to the new paradigm and life goes on. People need places to live in and ultimately several years of strong migration should assist in improving demand and ultimately property prices particularly in our inner suburbs. We are re negotiating a significant number of variable rates at the moment with great success so contact haydn.dale@virtueandpartners.com.au as needed.
Australian Rental Increases
In closing
The business remains as busy as ever and I thank you all for your referrals. We are trying to get as much of the compliance automated online as best as possible and appreciate your support and forbearance. We are also continually having to increase our online security in our communications with you and ask you to remain vigilant for anything that looks suspicious. Where possible communicate information via our online client vault and never provide any private financial information to third parties without checking with us first to make sure it is genuine. Let’s hope the current Covid wave dissipates quickly, and we can finally get back to some level of normality.
Full details on our website www.virtueandpartners.com.au or contact us directly.
With our best wishes
Tony and Fiona
