Following the day-to-day news on Iran is frustrating. There appears to be scant progress on the vaguely defined war aims or a pathway to lasting peace. According to the Wall Street Journal this frustration is ironically shared by President Trump who seems unable to accept that he can't just bend the Iranians to his will.
What is becoming clearer is the economic fallout. The IMF projected global economic growth would fall by 1.30% to 2.00%. The lower projected growth rate is perched on the cusp of the IMF’s definition of a global recession.
Global inflation is spiking with Australia expected to follow suit when quarterly CPI is released next week. Will IMF warnings about the inflationary impact of government spending lead to a restrained fiscal response to the economic slowdown? We will find out in mid-May.
Ashley Owen shows our unique and unenviable position in Australia where the RBA faces higher levels of inflation than other nations. There doesn't appear to be a magic bullet to bring inflation back under control.
The April Bank of America global fund manager survey shows investors forecast oil at $84 a barrel by the end of 2026. That is significantly higher than the $55 a barrel prior to tensions in the Middle-East. The impact of higher oil prices are beginning to spread throughout the economy creating credit concerns.
National Australia Bank has lifted loan impairment provisions by $300 million to cover potential stress from sectors directly affected by the Middle East conflict, and broader downside to the Australian economy.
One place credit concerns may manifest is within the private credit space. In the US concerns about lending to software companies upended by AI have led to increases in redemption requests - many of which aren't being honoured. The impact of AI extends beyond smaller software companies and GQG outlines why even Alphabet is seeing challenges to their business model.
In Australia much of the private credit lending is to property developers who are being impacted by higher construction costs. This week Phil Stano looks at concerns Australian private credit will go down the same pathway as the US.
What makes the current situation troubling is the seeming disconnect between markets and what is going on in the world from a geo-political and economic standpoint.
Markets are always forward looking but it seems hard to foresee the optimistic scenarios that have shares at record highs.
How to respond to economic turmoil
In Groundhog Day the character played by Bill Murray finds himself having to relive the same day again and again. This is a metaphor for a boring life where repetitive routines take over.
Routines might be boring, but they are also the secret to building wealth. If you want to create a secure future get into a routine of saving money to invest following a consistent strategy.
As a reader of Firstlinks it is likely that investing is part of your routine. Routines offer a perception of control in a world where so much seems uncertain.
Like many readers, my own pathway to assert control was always through my finances. When I was younger, I pictured a time when I amassed enough wealth to provide security. This was my way of trying to counteract all the uncertainty I felt about the future.
For me, wealth was never about showing off or nice things – it was about independence. I saved and I invested consistently because it felt like it was another step towards self-determination.
When I felt a vague sense of uneasiness about my life or the future, I thought about how much I would save out of my next paycheck. I calmed myself by projecting the value of my portfolio using assumed savings rates and returns.
I suspect a lot of other people reading this article do the same thing – even if it is done unconsciously. We encourage young people by saying they can be anything they want in life. Yet the experience gained by aging often reveals how happenstance plays a large role in our outcomes. Being intelligent, making good decisions and working hard is a good start…but isn’t always enough.
Will Trump’s next move in the Middle East plunge the world into recession? Will the next iteration of an AI model replace your job? Will the next superannuation tax or regulatory change alter your retirement outcome?
All of these potential outcomes could be solved by having more money. The problem is that no amount of money will make you feel completely safe. Money is measurable which makes it all to easy too obsess over. That is a formula for always feeling like you need more.
Final thoughts
Forgive this brief deviation from the normal topics I cover. Perhaps it is turning another year older this week. Perhaps it is frustration and a general unease with the state of the world. Maybe I just needed a break from digging through financial studies and investment data.
My reflections this week might just be a result of reading Andrew Ross Sorkin’s 1929 where the collapse of the financial system showed the fragility of our expectations that the future will resemble the past.
Investing and life are about accepting uncertainty. It is about self-awareness and the balance between financial goals and what makes your life fulfilling.
Maybe your coping mechanism is to save more, plan more or focus on optimising each dollar you have. And maybe you need a break.
Sometimes life is about opening that nice bottle of wine you are saving for a special occasion. Or going out to dinner with someone you care about and haven’t caught up with in a while.
Sticking your head in the sand is rarely the right choice but unplugging for a bit never hurt anyone – just wait until after you’ve read this edition of Firstlinks.
Mark LaMonica
Also in this week's edition...
Nick Callil and David Knox introduce a proposal to address Australia's 'stranded balances' in retirement by requiring super funds to transition members to pension phase at 65, boosting retirement income and reframing super as a source of income.
Tony Dillon's take on energy security. Is it time for Australia to double down on renewables?
Billions continue to be spent on the AI build-out. Jeffrey Tobias asks if there is any proof it is working.
Cromwell takes a look at replacement cost as a practical lens on relative value in commercial property. Is now an attractive time for the asset class?
This week's white paper is Fidelity's latest Analyst survey which focuses on the key questions investment decision makers are asking, helping investors understand how themes could play out across portfolios.
Curated by Mark LaMonica and Leisa Bell
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Weekend market update
From Shane Oliver, AMP
It was a mixed ride for global share markets over the last week as there was little progress towards ending the US War with Iran and the Strait remained effectively closed to shipping with blockades from both sides. US shares rose 0.6% for the week to a new record high with optimism on Friday for fresh Iran talks - with reports that the US was sending envoys to Pakistan to meet with Iranian officials - and good earnings results, Japanese shares rose 2.1% and Chinese shares rose 0.9%. But Eurozone shares fell 2.7%. The volatile global lead, bigger concerns about Australia’s vulnerability to an extended closure of the Strait of Hormuz and profit downgrades saw the Australian share market fall 1.8% led by health, financial and mining shares. Global bond yields rose on concerns about higher inflation flowing from the continuing high level of oil and hence fuel prices, but Australian bond yields fell slightly.
The effective ongoing closure of the Strait of Hormuz to oil flows and the risk of a re-escalation of the War saw oil prices rise with West Texas rising to around $US94 a barrel and Brent around $US105. Oil futures pricing still points a to fall back in oil prices as the market continues to assume there will be a resolution soon but even for next year oil futures imply pricing settling at higher levels than before the War.
With worries about re-escalation and a longer closure of the Strait returning in the past week the $US ticked up a bit and the $A, gold and copper fell back a bit. That said Bitcoin and iron ore rose.
Another TACO Tuesday - our view remains that Trump wants to TACO and will find a way to stay on the off ramp from the War. But it all remains very messy and uncertain. Despite no more talks, Trump extended the ceasefire indefinitely on Tuesday (after saying he wouldn’t) to allow Iran to come up with a “unified proposal” but the Strait remains closed with Iran refusing to remove its blockade of ships from other countries until the US removes its blockade of ships to or from Iran. So, it’s at a standoff with occasional attacks on ships from each side to reinforce the blockade. What’s more Trump’s demeaning and humiliating social media posts may also be encouraging Iran to dig in. Uncertainty remains high but several things are apparent:
- There is still a significant risk that the War could re-escalate again if agreement on a deal is not reached soon. This could see the US expanding its bombing and Iran retaliating by hitting more ships in the Strait of Hormuz and getting the Houthi’s to do the same in the Red Sea. Maybe Trump’s ceasefire extension is just allowing a further military buildup. Share markets appear to be underestimating this risk.
- But, Trump by his actions has shown he wants to end the War and declare victory (however vacuous that victory may be). Pressure on Trump to back down remains very high with only a third of Americans supporting the War and his approval lower than Biden’s. As things stand the GOP could see a loss of both the House and the Senate in November, which could open the door to numerous Congressional enquiries and possible impeachment of Trump.
- And pressure on Iran to reach a deal is high as the US switch from bombing (which can unite a population) to even tougher economic sanctions via the blockade of Iranian oil exports will intensify popular discontent with the Iranian Government. And it may conclude that its ability to cause pain for the US by effectively blocking 20% of global oil supply means it has no need for nuclear weapons to ensure it survives. But Iran has a fractured unclear leadership and still has a relatively strong hand.
- Which means that some sort of deal to end the War and reopen the Strait is more likely than not but that it could be a low quality deal – leaving the regime in place aided by an easing in sanctions but more aggressive than ever (with the new Ayatollah reportedly losing multiple family members in Israeli/US attacks) and arguably more powerful with its now proven control of the Strait. So, 6000 lives and $US40bn plus in war costs later, the War may not have achieved much, meaning it could all flare up again down the track if there is a deal.
The key to watch remains the Strait of Hormuz and despite a brief spike in ship traffic a week ago it remains effectively closed. While a bout of mild stagflation is baked in, the clock is now ticking on whether this turns into a more severe bout like that seen in the 1970s. So far we have been able to get by because refineries still had oil to refine from ships that left in February and could rely on reserves but the longer it stays shut the more the global and Australian economies will have to face the consequence of the 10-15% reduction in global fuel supply its resulting in – which would mean even higher fuel prices (a rough calculation is that oil would need to go to around $US150/barrel) and fuel restrictions.
So, if our base case is right that Trump will stay on the off ramp from the War and soon find way to get the Strait open then share markets have more upside. Particularly, with US March quarter earnings growth likely to come in at a strong 18%yoy. But the risk of a renewed spike in oil prices and more volatility in shares remains high if a deal is not reached soon and the Strait if not reopened. So, it remains a time for caution for those investors with a short time horizon.
This presents a very uncertain outlook for global central banks with five – including the Fed and ECB – due to meet in the week ahead. We expect all to leave rates on hold as they continue to assess the impact, but most are likely to remain biased to the upside on rates based on the experience of the 1970s oil shocks which suggests that the key is to initially focus on keeping inflation expectations down rather than cutting rates to support employment.
In Australia, we expect the RBA to hike again in May as inflation was already more problematic here and March inflation data to be released in the week ahead will reinforce this. It seems that its not just higher fuel prices and fuel levies that are on the way up but everything from airfares to toilets.
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