The great impasse

Highlights

Australia the sweetest spot 

• We continue to expect the RBA to increase the cash rate by 25bps at today’s meeting, to 3.85%.  The labour market and inflation have slowed only modestly meaning additional tightening is still needed.
• Australia will be the lucky country again – just. While Australia faces some significant risks, China’s policy shift away from COVID zero and the RBA getting a significant amount of tightening in before wages had a chance to take off both mean Australia could avoid a recession.
• If China can pick up pace and Australia can skirt a property/credit implosion, the Australian dollar could do well, particularly against a sliding US dollar. An easing of China trade sanctions will be icing on the cake.
• While the housing market and consumer sentiment have looked a little more stable of late, this is still the “phony war” as the impact of rising rates has yet to fully hit households, with more significant impacts likely to be felt from March onward.
• The Australian consumer staples sector has outperformed its global counterparts by almost 3 per cent over the past quarter reflecting the resilience of the Aussie consumer in the face of 10 consecutive rate hikes.
• When the RBA does pause rate increases we expect a broad rally. Consumer discretionary names like JB Hi-Fi should benefit as consumers have a bit more breathing room in their budgets.
• We continue to think investors should focus on liquidity, focus on balance sheets and cash flow and avoid highly volatile and speculative assets. We continue to see support for gold.

Gold is being turbocharged

• Gold has been playing beach ball under water held down by rising US real rates. But geopolitics, crypto uncertainty and financial fears are now turbo-charging it.
• Geopolitics is a secular support for gold. The retreat of globalisation, the rise of aggressive blocs of nations and the weaponisation of banking and payment systems has seen a fracturing of the US dollar consensus. In turn, central bank gold purchases have been rising sharply.
• Recent movements in yields have also been supportive of gold. In the previous three instances when the short end of the US curve fell from its peak, gold prices rose for a sustained period.
• The market is ignoring the negative effect of sustained higher rates on the global financial system. Interest expense will become a significant problem as record levels of debt across the globe are impacted by higher rates. This increasing debt burden, combined with an economic slowdown and sticky, elevated inflation are supportive of gold prices in 2023 and longer term.

Emerging markets are thriving, not surviving

• One of the bright spots on global markets over the past few weeks has been emerging markets bonds, particularly selected local-currency bonds, which is almost exhibiting signs that it’s a safe haven asset in the current market environment.
• Emerging Markets generally have low debts and deficits, independent central banks solely focused on inflation, and benefit from China’s reopening and are well-supported commodity prices.
• In a world running from unsafe finance to safe finance, EM banks are generally deposit funded, not loan-funded, and have high common equity-to-assets ratios.

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