October 2023 Update

 

Markets

 

I could cut and paste from my last update because the ASX has continued sidewards.  US markets have had a great run which somewhat surprised given inflation numbers and ever increasing debt.  Markets tend to peak around six months before a recession.  Perhaps this is a sign. 

 

The Chart below shows market performance over 12 months for the Nasdaq, S&P 500 and the ASX at the bottom.

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Volumes on the ASX have been somewhat subdued as many investors prefer the safety of fixed interest and term deposits, given returns are at the highest levels in over 10 years.

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Interest Rates / Inflation

 

Inflation rose in August to 5.2%.  Much of this is out of our control with electricity rising 12.7%, gas 12.9% and petrol 13.9%.  The inflation rate is below the peak of December 2022 when it reached 8.4% but any rise is alarming given the RBA has one weapon and that’s raising interest rates.

 

The RBA wants us to spend less and thus slow the economy.  Economics is not always a good thing because a slowing economy leads to job losses and people losing their homes.

 

The Government is overseeing record migration with numbers surging to 400,000 including students.  The number was 150,000 just two years ago.  Whilst migration provides valuable and much needed workforce it also brings in greater taxes for the Government which potentially inflames inflation.  And Economics 101 tells us housing costs will continue to rise when demand exceeds supply.

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Reporting Season ASX

 

The recent reporting season saw some 350 companies report results and advise of dividends. 

30% beat expectations, 42% met expectations and 28% fell short of expectations.

 

Financial companies (banks and insurance) maintained or increased dividends whilst resource companies reduced dividends.  This was no surprise as commodity prices have come off.  And the huge dividends paid by likes of BHP, RIO, FMG and Woodside were always going to reduce.  When I started in the industry 15 years ago, BHP dividend yield was around 2.5%.  The last year has seen dividends of 6%.

 

An underlying theme was increases in costs.  We all have seen our cost of living increase and it is no different for companies.  Fuel costs are massive and interest rates rising impact companies as they do those with loans.  If interest rates are to remain higher for longer, we will likley see less dividends being paid.

 

The cost of borrowing was so cheap from 2010 to 2020.  Low borrowing costs equates to increased borrowing to purchase investments.  This in turn leads to rising investment prices.  We saw this on the ASX. 

 

In the US, Citibank’s chief macro strategist believes long term bond rates will remain higher for longer.  He says the likley casualty of elevated long term bond rates will be share market valuations.  The flip side of this is that we can now get over 5% on term deposits.  It’s been well over a decade since this happened and it’s not a bad return for a risk free asset.

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World Wide Volatility

 

Geopolitical risk weighed on sentiment this week, as turmoil continues in the Middle East. Investors rushed to safe haven assets as the conflict unfolded, which supported the gold price.

 

Israel Palestine conflict – what is the impact?

 

• It could spread with Lebanon & Hezbollah, Iran and Syria all watching closely and making threats

• Worsening humanitarian crisis with neighbours such as Egypt closing their borders

• It could promote another cycle of random violence and terrorism

• Radicalise a new generation of jihadists after the streets of Europe and the US have been relatively free from terror in recent years

• Destabilize hopes for Saudi Arabia and Israel to improve ties which would have been a big step forward for the region

• More pain at the bowser as Iran may reduce supply which is turn increases inflation and interest rates

 

US

 

• Legislation in a very divided government is difficult and the ever present chance the Government will be forced to shut the doors if further funding is not made available is causing major concerns

• Less funding for Ukraine

• Now involved in two wars which certainly takes the heat off China

• Donald Trump is now favourite to be President again in November 2024

• A lucky Powerball from Southern player has just scooped the second biggest lottery prize in history, a whopping US$1.73 billion.

 

Australia

 

• It was sad to see mobs cheering the horrific attacks in Israel

• The Voice referendum caused much division and may well get worse

• We don’t seem like a country united

• Borrowers with living expenses exceeding income hit 13%, up from 3% in April 2022

• Banks are still predicting a soft landing should the economy go into a technical recession

• The key to this is high job numbers and low vacancies.  The unemployment rate of 3.7% is historically low

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This is why people are scared to visit Australia!