I’ve been reflecting on the debate within the comments section around the tax policy announced by the government. Firstlinks is not a political publication and instead seeks to inform investors about topics related to markets and building wealth.
This is where politics and markets intersect. Various government policies impact markets and strategies to build wealth. The tax proposals are an obvious example. Firstlinks will continue to cover those topics.
However, I’m going to be stricter about what I let through in the comments section. There are legitimate concerns about the tax proposals. I personally share those concerns and I have several misgivings about the impact on the country.
Significant changes to the tax code should be debated. But – at least on this publication – the debate needs to be productive. Name calling may be edifying but it doesn’t help to inform readers so I won’t publish those comments going forward. I hope this helps to keep the comments section focused on the relative merits of various proposals.
Firstlinks will also continue to publish content on both sides of a debate. Public discourse isn’t helped by Australians retreating into echo chambers.
If your comment doesn’t get published feel free to email me at [email protected] with any questions. Please feel free to leave comments on Firstlinks’ editorial policy.
Should investors be a little more worried?
Recently I’ve been speaking to members of the Morningstar Investment Management team. I haven’t come away from these conversations overly confident.
Markets are forward-looking and represent investors’ collective view of the future. Those expectations are priced into markets. Understanding what investors are anticipating there is no context for valuation levels.
A seemingly reasonable valuation can look optimistic in retrospect if the bottom falls out of the economy. High valuations are deceiving if there is enough growth.
Investors are exceedingly positive. And maybe the market is right to be optimistic, and everything will turn out ok.
The Strait of Hormuz may open and energy prices may drop leading to lower inflation. AI might be all it is cracked up to be with infrastructure investments paying off. We might be at the precipice of an AI enabled surge in productivity.
Is everyone optimistic?
A closer look at what is happening shows not every investor is quite so optimistic.
Bond yields are surging and at their highest level since 1997. This may indicate bond investors are not as confident inflation will be transitory. The equity risk premium narrows when yields are high as bond become more attractive.
It is also worth looking under the hood of the share market’s narrow rally. The S&P 500 increased in value by $9.19 trillion in market cap from March 30 to the record close on May 11. The 10 largest companies by market cap accounted for 62% of that gain and the semiconductor sector made up 43.80%.
Perhaps the AI boom will continue and momentum will win out. Perhaps the shares being left behind represent the best opportunity.
In the midst of the boom leading up the global financial crisis Citigroup CEO Chuck Price infamously said “when the music is playing you gotta get up and dance.” Investors are dancing – the question is, will the music will keep playing.
Final thoughts
The rosy scenario priced into the market may not eventuate. And that is what investors should ponder. This is not a universal call to action or a warning. All long-term investors deal with volatility and predictions about the future are rarely worth the paper they are written on.
Instead, it is a call to assess your own situation and how different market scenarios will impact your life. It is the investor that matters and not the investments.
Mark LaMonica
In this week’s edition Nick Maggiulli argues the more wealth you have the less risk you should take. Something to consider as this bull run continues.
Simonelle Mody extols the benefits of simplicity. She makes a compelling case.
John Abernathy warns against complacency given US fiscal pressure, China’s shifting growth model and Australia’s structural constraints. In his view the global investment landscape is becoming less forgiving - yet markets have yet to fully adjust.
A sustained disruption through the Strait of Hormuz is forcing a rapid drawdown of global inventories. Paul Gooden writes that without a resolution, the arithmetic points to a supply shock by early August and a sharp surge in the oil price.
In the face of inflation and potential interest rate increases infrastructure remains a safe haven. According to Magellan looks at different infrastructure plays and how they might be impacted by the current environment.
Several programs and policies are in place to help first time homebuyers. Little attention is paid to the needs of renters. Jason Teh looks at the historical drivers of rent levels and what policies could ease the recent rent increases.
As super balances grow, SMSFs are becoming central to retirement outcomes. Michael Hamilton says without proper planning for “Armageddon” scenarios, even well-structured funds can unravel when it matters most.
Curated by Mark LaMonica and Leisa Bell
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Weekend market update
From Shane Oliver, AMP
The past week has been dominated by developments around a US/Iran peace deal – but despite some gyrations its looking like a deal is on the way. The week started optimistically with Trump saying “final aspects & details…are…being discussed and will be announced shortly”. But this was followed by more strikes on Iran and Trump saying he is “not satisfied”. But the indications are now that a tentative deal has been reached, pending Trump’s sign-off with him saying he is making a “final determination”. This looks like it would reopen the Strait of Hormuz and extend the ceasefire for 60 days during which negotiations regarding Iran’s nuclear program will proceed. Of course, the deal could still collapse with both sides sending mixed messages. Iran’s desire to toll ships through the Strait, it’s enriched uranium, sanctions & Lebanon are sticking points. And a cynic might say the likely deal just leaves us where things were before the War with no progress on Iran’s nuclear ambitions so it could all flare up again.
But the pressure on Trump to do a TACO and strike a deal is very high as his approval rating is continuing to collapse heading into the mid-terms. He has said it doesn’t matter but it likely matters to him bigly as the longer the Strait remains closed the more global oil reserves run down leaving the clock ticking on when the full impact of the roughly 12-13% cut to global oil production hits the global economy in full resulting in another spike in oil prices and even higher US gasoline prices – which US voters hate.
With a deal likely nearing oil prices have fallen back to the lower end of the range they have been in since the War started. Oil futures are continuing to price a fall on the grounds that the Strait will be opened eventually but that prices will be above pre-War levels as it will take a while for oil and fuel production to ramp up again with a risk premium priced in to allow for the risk of a resumption of the conflict. This is in line with our own views.
Helped along by the reports of a peace deal nearing agreement and ongoing optimism about the boost from AI related demand to profit growth, global share markets rose over the last week. US shares rose 1.8% to a new record high, Japanese shares rose 4.7% also to a new record high, Eurozone shares rose 0.5% and Chinese shares rose 0.9%. Australian shares rose 0.9% for the week, with gains in retailers and miners partly offset by falls in telcos and energy shares, but they remain significant underperformers. While the US share market has surged to new record highs helped also by very strong profit growth and still solid economic activity, the Australian share market has been continuing to struggle not far from its March lows in response to profit downgrades, three rate hikes from the RBA, capital gains tax changes and greater scepticism locally regarding a quick reopening of the Strait.
News of a peace deal saw bond yields fall on hopes for lower inflation with lower oil prices. Metal and gold prices rose over the week, but iron ore prices and Bitcoin fell. The $A rose slightly as the $US fell slightly.
Despite optimism for lower oil prices, central banks continued to edge in the direction of higher interest rates over the last week. Another Fed Governor - Lisa Cook this week, Christopher Waller last week - came out warning of a rate hike if inflation doesn’t start to fall soon. And unfortunately, US core private final consumption inflation rose further in April to 3.3%yoy. And both the Bank of Korea and Reserve Bank of New Zealand while leaving rates on hold warned of rate hikes ahead. Its early days, but as can be seen in the next chart the percentage of global central banks hiking is hooking up.
The risk here is that expectations for higher inflation and rates could drive another leg higher in global bond yields which could put pressure on share markets. A quick reopening of the Strait could short-circuit this though.
In Australia though, mixed inflation data for April provided a bit of relief. The good news was that headline CPI inflation slowed more than expected to 4.2%yoy from 4.6%yoy with a bigger than expected fall in fuel prices (helped by the fuel tax cut) and free public transport in some states. Electricity prices fell 0.9%mom and the annual price ruling from the energy regulator points to falling prices from July helped by record output from wind farms and batteries. (So more clean energy can lower electricity prices!) The bad news was that underlying or trimmed mean inflation edged up further to 3.4%yoy from 3.3%yoy and appears to be tracking in line with the RBA’s forecast for a 0.95%qoq/3.8%yoy rise in the current quarter as a whole.
Some good news on the underlying inflation front was that the breadth of price rises has improved slightly with slightly more CPI items seeing inflation below 2%yoy than above 3%yoy. But against this the second round impacts from the oil supply shock to transport costs, plastics, food prices etc are yet to impact, housing costs are continuing accelerate with new dwelling prices up 0.7%mom and a rise in asking rents pointing to higher rents, business surveys continue to show a sharp rise in cost pressures and there is a high risk that an acceleration in minimum and award wage rises will contribute to stronger wages growth.
On balance the mixed inflation data for April, coming on the back of soft April jobs data, depressed confidence and signs of softening household spending will likely see the RBA leave rates on hold at its June meeting as it waits to see the impact from its three back to back rate hikes and how the oil supply shock pans out. However, we are continuing to pencil in a further and likely final rate hike in August as underlying inflation remains too high. The money is currently pricing zero chance of a rate hike in June and a 70% probability of a further hike by year end.
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