Be Positive... But Vigilant

Across the globe, economic conditions continue to surprise to the upside. Most markets have absorbed rapidly rising interest rates without any major disruption or dislocation and look poised for continued growth. While we’re positive on the near-term outlook, we outline some lingering risks that investors should bear in mind.

The global outlook is more positive than it has been in some years. The inflation threat has mostly passed and higher interest rates have not resulted in the recessions that were predicted for most western economies.

Positive drivers

The drivers of activity are households spending the savings they had accumulated during the COVID years and a new wave of construction linked to clean energy transition and manufacturing reshoring. The Chinese economy has stabilised and other developing economies are performing well.

Lingering issues

We need to be vigilant on a few issues though: lingering wage and price inflation in the US, pockets of financial distress including the US commercial property market, heightened political risk in the Middle East and the US presidential election later this year.

Domestic strength

In Australia, the local economy has also held up much better than many expected as it has been boosted by healthy consumer balance sheets and a surge in immigration. A strong labour market has allowed workers to work more hours and take on second jobs to cope with higher interest rates. Going forward, the huge savings pool points to more strength in consumption once interest rates start to fall and confidence returns.

Stretched valuations

Less good news for investors from here is that equity markets have now priced in this better outlook quite aggressively. The US market has risen by around 25% since October and this has dragged other markets higher. Around 9 million US households have bought shares for the first time using excess savings and this has benefited the biggest US tech companies – those that are household names – the most. This is now starting to spill over into other parts of the equity market and speculative assets like bitcoin. Much excess cash remains so it is possible that this will continue to play out.

We still see opportunities in markets:

• Smaller companies and emerging markets have lagged and are normally major beneficiaries of improving economies.
• The jump in interest rates has lifted returns in interest rate securities so investors should look to add to their holdings in this asset class.

Unemployment Rate

Major Region Core Inflation (CPI)

US Manufacturing Construction Investment