The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.
This is my last edition as Editor as I am leaving Firstlinks to become Commsec’s Equity Market Strategist.
Morningstar’s Director of Personal Finance, Mark LaMonica, will take over the role until a permanent replacement is found.
It’s been a privilege to work at Firstlinks. I came here three-and-a-half years ago to help Graham Hand. He wanted to focus on writing and hand over editing and the administrative responsibilities of the newsletter. A year into coming on board, Graham became ill and my role changed. And it changed more permanently following Graham's passing.
It was a trying period. Not only with Graham but taking on the newsletter which he founded. After all, it was his baby and his audience.
I hope I have at least transitioned Firstlinks from being the founder-led newsletter that it was to what it is today.
Firstlinks remains as relevant as ever. In a world dominated by short-term thinking and marketing spiels, the newsletter stands out for its long-term, thoughtful approach to investing. Long may it continue.
Thank you to the readers, sponsors, and Morningstar for all your support.
If you’d like to stay in touch, please connect with me through LinkedIn or X.
Best wishes.
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In my article this week, the RBA rate rise dominates headlines, but Australia’s inflation problem runs deeper. I look at some of the key myths behind our affordability crisis, what the real drivers are, and three ways to tackle the problem.
On the subject on inflation, Ashley Owen also runs through 125 years of data to reveal the destructive impact of inflation on our wealth and how even if the CPI returns to the RBA's 2-3% target range, it won't solve the problem for investors.
James Gruber
Also in this week's edition...
Tony Dillon says the new draft legislation for Division 296 is a step forward, yet it still feels like a wealth tax. The bigger question: has a chance for simpler, fairer super reform been missed?
Jon Kalkman believes many Australians mistakenly think their super is like a bank account when it's legally a trust - meaning you don’t own the assets, the trustee does. He says proposed changes like Division 296 risk making you liable for tax on growth you don’t actually control.
Investors fixate on tech giants, but much of the world market’s 2025 gains came from other sectors. VanEck's Anna Wu thinks health care, gold miners, and nuclear energy may offer the next big investment opportunities.
When people think of infrastructure, they generally think of steady earnings and cashflows and, while true, it ignores something else they offer: dividends. In a world starved of yield, infrastructure's income prospects are attractive, according to Magellan.
Jeremy Grantham is a legend in the investment industry having correctly called out several bubbles including the 2000 tech wreck and the 2008 financial crisis. Now, he's targeting AI, believing that while it's the most impressive innovation in 100 years, the sector is in a bubble and a reality check is coming.
Lastly, in this week's whitepaper, Fidelity International examines the key themes that will shape markets in 2026.
Weekend market update
US stocks rebounded on Friday with the Dow Jones closing above 50,000 for the first time. After a volatile week for US markets the S&P 500 rose 1.97% while the Nasdaq was up 2.18%.
From Shane Oliver, AMP:
Global share markets mostly fell over the last week amidst increasing worries about tech valuations and overinvestment in AI, some weak US jobs data & ongoing fears of a US strike on Iran. US, Eurozone and Chinese shares fell although Japanese shares rose. Australian shares were dragged down by around 1.8% for the week by the falls in the US not helped by a hawkish rate hike from the RBA, with falls led by IT, resources, utilities and telcos. Bond yields mostly fell helped by safe haven buying.
A hawkish hike from the RBA with higher for longer inflation. While we thought the RBA would leave rates on hold, we also thought it would be a very close call, so it was not surprising to see the RBA decide to hike. What was a bit surprising though was how hawkish the RBA’s messaging and revised forecasts were. It’s now seeing trimmed mean or underlying inflation of 3.2% this year which is up 0.5% on its November forecast and it doesn’t see it getting back to around the midpoint of the target range till June 2028, despite assuming the cash rate being 90 basis points higher and the $A being nearly 5% higher. Its forecasts imply trimmed mean inflation averaging 0.9%qoq in the first half of the year then falling to 0.7%qoq. This reflects a far more negative view on capacity constraints than previously. With inflation expected to stay above target for an unacceptably longer period of time, its effectively endorsing money market expectations for nearly two more rate hikes. Headlines of 6% union wage claims will only add to RBA hawkishness.
We are a bit more optimistic. The RBA’s inflation forecasts actually imply a reacceleration in inflation and reversal of the downtrend seen in the new monthly trimmed mean which seems a bit too pessimistic, particularly with business survey output price readings running around levels consistent with the target. And the pickup in consumer spending is likely to take a hit as the rate hike and expectations for more to come will dent consumer confidence for those with a mortgage.
So our base case is that the RBA will be able to leave rates on hold at 3.85%. That said, we don’t have a lot of confidence in this as the risks are skewed on the upside if domestic demand growth continues to strengthen adding to concerns about the economy bumping into capacity constraints and if inflation does not fall as we expect. The key to watch for what happens next year will be the inflation data. Another move in March seems unlikely given that the RBA has just moved but March quarter CPI data to be released in late April, ahead of the RBA’s May meeting will likely be key. If it shows a further cooling in trimmed mean inflation as we expect then the RBA will likely hold. Monthly CPI releases ahead of this will provide some guidance and will need to show a continuation of the downtrend seen in the previous chart.
What role is government spending playing in the inflation problem? Of course, government spending cannot be directly blamed for higher holiday travel costs and the ending of state energy rebates boosting annual electricity price inflation. But it is playing a role in the rise in annual underlying inflation seen last year. This is because inflation reflects demand – which includes both private and public demand - for goods and services in the economy running ahead of the ability of the economy to meet that demand (ie supply) and this is resulting in “capacity pressures”. It's true that private demand (ie consumer spending and business investment) has picked up more than expected and growth in public demand as measured in the national accounts has slowed but the basic problem is that the level of public spending (or demand) in the economy is still running around a record (at least back to 1960) 28% of the economy. This high level of public spending has constrained the recovery in private spending that can occur without seeing the economy bump up against capacity constraints, which flows through to higher prices. So the best thing that Australian governments can do to in the near term to help bring down inflation would be to cut the level of government spending toward more normal levels which would free up space for private sector demand growth without higher inflation. Failure to do so risks higher for longer inflation and hence increased pressure on interest rates which leaves all the pressure on consumers to cut spending and home building and on businesses to cut investment. This is what economists call crowding out. From a longer-term perspective the key is to expand the supply capacity of the economy to better meet higher levels of demand and this means that the Government needs to implement productivity enhancing reforms like deregulation and tax reform. Of course, this is something that has been much discussed over the last year, with much hope flowing around the Economic Reform Roundtable last August. The upcoming May Budget will hopefully see action on this.
At the Federal level, spending is still rising rapidly, not falling. After big swings around the pandemic, spending as a share of GDP has risen from 24.3% in 2022-23 to a forecast 26.9% this financial year as a result of nominal spending growth of 7.2% in 2023-24, 8% in 2024-25 and 8.2% this financial year. Federal spending growth is forecast to slow in the next two years, but experience tells us this is likely to be revised up once we get there! Again this is seeing public spending settle at a much higher share of the economy than pre-covid which in turn is resulting in capacity pressures as the private sector has sought to spend more after being in the dog box.
Curated by James Gruber and Leisa Bell
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