Despite a year of geopolitical uncertainty and the inflation/interest rate ‘tug-of-war’, local and global share markets have managed to post yet another strong result. But is it reasonable to expect this will continue?

According to AMP’s Dr Shane Oliver, the ‘base case’ is for more constrained returns in the current financial year (possibly 6-7%). That said, the risk of another correction is high and investors should be prepared for more volatility.

It’s also worth noting that unlisted property returns are also likely to struggle over the year ahead as weak economic activity and the adjustment to working from home result in rising office property vacancy rates (as leases expire) & more downwards pressure on property values.

So why are risks higher today than a year ago?

Consider the following…

• Shares are offering a low-risk premium over bonds.

• Investor sentiment levels, while not euphoric, are still elevated suggesting less tolerance for bad news.

• Shares are technically overbought.

• The risk of recession in the US and Australia remains high, with increasing signs that the US economy is now slowing (particularly evident in labour market and consumer indicators) and the Australian economy close to stalling in the March quarter and set to lose support from surging population growth. This would threaten earnings growth expectations for 2024-25.

• Geopolitical risk is high (eg US Presidential Elections, and the Eurozone)…

➢ With Trump ahead in the polls and betting markets (PredictIt has Trump at 58% probability of winning versus Biden at 33%) the focus will increasingly turn to his policies which – with higher tariffs, lower taxes, lower immigration and a less independent Fed – suggests bigger budget deficits (bad for bonds) and higher inflation;

➢ The far-right National Rally’s “win” in the first round French elections runs the risk of another Eurozone crisis. It may not get enough seats to form Government though, which could result in a hung parliament – the least bad option, but if it does it could lead to conflict with the European Commission over fiscal policy. That said it’s worth bearing in mind that market riots with surging bond yields headed off economically irresponsible policies in Greece (under Syriza), the UK (under PM Truss) and Italy (under the far-right Brothers of Italy) & the same would likely happen in France but the market riot would still mean a period of market volatility;

➢ Risks remain around Israel and Iran and Ukraine.

Keep in mind…

Of course, short term forecasting and market timing is fraught with difficulty and it’s best to stick to sound long term investment principles. Several things are always worth keeping in mind: periodic and often sharp setbacks in shares are normal; selling shares or switching to a more conservative superannuation strategy after falls just turns a paper loss into a real loss; when shares and other investments fall in value they are cheaper and offer higher long term return prospects; Australian shares still offer an attractive dividend yield; shares and other assets invariably bottom when most investors are bearish; and during periods of uncertainty, when negative news reaches fever pitch, it makes sense to turn down the noise around investment markets in order to stick to an appropriate long term investment strategy.

______________________________________________

Excerpts taken from Dr Shane Oliver’s ‘Olivers Insights’, 2 July 2024.