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The five reasons why the $A is likely to rise further – if recession is avoided

Date: Jul 10th, 2024


Changes in the value of the Australian dollar are important as they impact Australia’s international export competitiveness and the cost of imports, including that of going on an overseas holiday. They are also important for investors as they directly impact the value of international investments and indirectly impact the performance of domestic assets like shares via the impact on Australia’s competitiveness. But currency movements are also notoriously hard to forecast. Late last year it seemed the $A was at last on a recovery path but it topped out in December and slid back to $US0.64. Lately it’s been looking stronger again getting above $US0.67. So maybe the five reasons we thought would drive the $A higher in a note last November (see here) are at last starting to work?

The $A has been weak since the mining boom ended

But first some history. Way back in 1901 one $A bought $US2.40 (after converting from pounds to $A pre 1966), but it was a long downhill ride to a low around $US0.48 a century later. See the blue line in next chart.

The $A is below fair value baed on relative prices

Source: RBA, ABS, AMP

Thanks to the mining boom of the 2000s, the $A clawed back to $US1.1 by 2011, its highest since the 1981. But since 2011, the $A has been mostly in a downtrend again briefly hitting a low around $US0.57 in the pandemic after which there was a nice rebound into 2021 up to near $US0.80 but with weakness quickly resuming. The key drivers of the weakness since 2011 have been: the end of the commodity boom; increasing worries about the outlook for China which takes around 35% of Australia’s goods exports; a narrowing gap between Australian and US interest rates (which makes it less attractive for investors to park their cash in Australian dollars); and a long term upswing in the value of the $US generally. See the next chart.

The $US v major currencies & the $A

Source: Bloomberg, AMP

But there remain five reasons to expect the $A to rise

Back in November we saw five reasons to expect a higher $A. These largely remain valid and the $A seems to be perking up again.

  • Firstly, from a long-term perspective the $A remains somewhat cheap. The best guide to this is what is called purchasing power parity (PPP) according to which exchange rates should equalise the price of a basket of goods and services across countries – see the red line in the first chart. If over time Australian prices and costs rise relative to the US, then the value of the $A should fall to maintain its real purchasing power. And vice versa if Australian inflation falls relative to the US. Consistent with this the $A tends to move in line with relative price differentials – or its purchasing power parity implied level – over the long-term. This concept has been popularised over many years by the Big Mac Index in The Economist magazine. Over the last 25 years the $A has swung from being very cheap (with Australia being seen as an old economy in the tech boom) to being very expensive into the early 2010s with the commodity boom. Right now, it’s modestly cheap again at just above $US0.67 compared to fair value around $US0.72 on a purchasing power parity basis.

  • Second, after much angst not helped by another US inflation scare, relative interest rates might be starting to swing in Australia’s favour with increasing signs that the Fed is set to start cutting rates from September whereas there is still a high risk that the RBA will hike rates further. Central banks in Switzerland, Sweden, Canada and the ECB have already started to cut rates. Money market expectations show a narrowing of the negative gap between the RBA’s cash rate and the Fed Funds rate as the Fed is expected to cut by more than the RBA. As can be seen in the next chart, periods when the gap between the RBA cash rate and the Fed Funds rate falls have seen a fall in the value of the $A (see arrows – and this been the case more recently) whereas periods where the gap is widening have tended to be associated with a rising $A. More broadly the $US is expected to fall further against major currencies as US interest rates top out.

The interest rate gap between Aust & the US versus the $A

The dashed part of the rate gap line reflects money mkt expectations. Source: Bloomberg, AMP

  • Third, global sentiment towards the $A remains somewhat negative, and this is reflected in short or underweight positions. In other words, many of those who want to sell the $A may have already done so, and this leaves it susceptible to a further rally if there is any good news.

$A positioning remains short

Source: Bloomberg, AMP

  • Fourth, commodity prices look to be embarking on a new super cycle. The key drivers are the trend to onshoring reflecting a desire to avoid a rerun of pandemic supply disruptions and increased nationalism, the demand for clean energy and vehicles and increasing global defence spending all of which require new metal intensive investment compounded by global underinvestment in new commodity supply. This is positive for Australia’s industrial commodity exports.

Long term bull and bear markets in commodity prices

Source: Bloomberg, AMP

  • Finally, Australia’ current account surplus has slipped back into a small deficit as commodity prices have cooled and services imports have risen (particularly, Australian’s travelling overseas) but it remains much better than it used to be over the decades prior to the pandemic. A current account around balance means roughly balanced natural transactional demand for and supply of the $A. This is a far stronger position than pre-COVID when there was an excess of supply over demand for the $A which periodically pushed the $A down.

Aust current account surplus remains in better shape

Source: ABS, AMP

Where to from here?

We expect the combination of the Fed cutting earlier and more aggressively than the RBA, a falling $US at a time when the $A is undervalued and positioning towards it is still short, to push the $A up to around or slightly above $US0.70 into next year.

Recession & a new Trump trade war are the main risks

There are two main downside risks for the $A. The first is if the global and/or Australian economies slide into recession – this is not our base case but it’s a very high risk. The second big risk would be if Trump is elected and sets off a new global trade war with his campaign plans for 10% tariffs on all imports and a 60% tariff on imports from China. If either or both of these occur it could result in a new leg down in the $A, as it is a growth sensitive currency, and a rebound in the relatively defensive $US.

What would a rise in the $A mean for investors?

For Australian-based investors, a rise in the $A will reduce the value of international assets (and hence their return), and vice versa for a fall in the $A. The decline in the $A over the last three years has enhanced the returns from global shares in Australian dollar terms. When investing in international assets, an Australian investor has the choice of being hedged (which removes this currency impact) or unhedged (which leaves the investor exposed to $A changes). Given our expectation for the $A to rise further into next year there is a case for investors to stay tilted towards a more hedged exposure of their international investments.

However, this should not be taken to an extreme. First, currency forecasting is hard to get right. And with recession and geopolitical risk remaining high the rebound in the $A could turn out to be short lived. Second, having foreign currency in an investor’s portfolio via unhedged foreign investments is a good diversifier if the economic and commodity outlook turns sour as over the last few decades major falls in global shares have tended to see sharp falls in the $A which offsets the fall in global share values for Australian investors. So having an exposure to foreign exchange provides good protection against threats to the global outlook.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital July 2024

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

2023-24 saw strong investment returns again – but can it continue?

Date: Jul 02nd, 2024


There has been a wall of worry for investors over the last year but as is often the case share markets climbed it. This resulted in another financial year of strong investment returns in 2023-24. But can it continue?

Key themes – lower inflation was the big one

Investment markets were hit hard in 2022 by surging inflation, interest rate hikes to combat it, fears that this would cause recession with various geopolitical threats (notably the war in Ukraine) not helping. This drove poor investment returns in 2021-22. However, inflation peaked in mid to late 2022 kicking off a new bull market in global shares from October 2022 which has been in place ever since. Against this backdrop, the key themes driving investment markets over the last 12 months have been:

  • A further fall in inflation globally. While there have been a few scares along the way – notably into last October and earlier this year – the broad trend in inflation has remained down. This reflects improved goods supply, some lower commodity prices, lower transport costs, easing demand and cooling jobs markets.

Global Inflation

Source: Bloomberg, AMP

  • Australian inflation has also fallen but it’s lagging. This is not necessarily a concern as it lagged global inflation on the way up, peaked later and is lagging on the way down and the situation may be a bit confused by the new and incomplete monthly inflation indicator.

  • Central banks pivoting towards rate cuts. After slowing the pace of rate hikes, central banks have pivoted towards rate cuts albeit with expectations over the timing and extent of cuts waxing and waning and driving bouts of volatility along the way. Central banks in Switzerland, Sweden, Canada and the Eurozone have now started to cut with the US and UK expected to start around September.

  • The RBA is a laggard due to lagging disinflation. RBA rate cut expectations have been pushed to 2025 with a risk of another hike.

  • Better than feared global growth. While Europe & Japan have flirted with mild recession global growth generally has held up better than feared around 3%, led by the US. This in turn has supported profits.

  • China worries. Growth in China has been faltering with the property slump weighing but it’s remained around 4.5-5%. What’s more, the copper price reached a record high & iron ore prices remained strong.

  • Geopolitical threats remained high. The war in Ukraine continued to rage, Hamas attacked Israel with the aim of starting a war in Gaza, Iran and Israel traded missiles, Houthis have attacked shipping in the Red Sea, China/West tensions have continued to fester and the election in France threatens another Eurozone crisis. But so far, worst case scenarios have been averted with limited market impact.

  • AI enthusiasm. AI has continued to boost key, mainly US, tech stocks with optimism about its productivity enhancing benefits.

Another financial year of strong returns

The net result has been another financial year of strong return for most assets as can be seen in the next chart.

2023-24 – major asset class returns

Source: Bloomberg, AMP

  • Global shares returned 21% in local currency terms over 2023-24, with a slight rise in the $A cutting this to a still strong 20% in $A terms. Japanese and US shares outperformed with the US continuing to benefit from the AI boost. Chinese shares fell again.

  • Australian shares returned 12%, benefitting from the positive global lead but were relative underperformers again on the back of China worries, the RBA lagging in moving to cut rates and the greater sensitivity of Australian households to higher rates.

  • Australian real estate investment trusts surged but global REITs only returned 4.6%.

  • Unlisted commercial property returns look to have been negative again as the lagged negative impact of higher bond yields and reduced space demand for office and retail weighed on capital values.

  • After seeing their worst loss in decades in 2022 as bond yields surged with inflation, bond returns have since stabilised with modest returns.

  • Cash returned 4.4% helped by two years of rate hikes.

  • Australian home prices rose 8% as a supply shortfall on the back of a surging population offset the drag from higher mortgage rates. Gains were concentrated in Perth, Brisbane and Adelaide though.

  • Combined, this drove an estimated 9% return in balanced growth superannuation funds for the second year in a row.

Balanced/growth superannuation fund returns

Source: AMP

The last few years has seen a zig-zag pattern in returns with average super funds seeing losses in 2019-20, very strong returns in 2020-21, a loss in 2021-22 (as inflation and bond yields surged) and have now had two years of strong returns. Given the volatility it’s best to focus on their longer-term average returns which has been 6.8% pa over the last decade or 4.2% pa after inflation. Which is pretty good as it’s after fees and taxes.

Some lessons from 2022-23

A big lesson of the last year is that monetary policy still works in slowing inflation (just as it was a key driver of its rise in 2021-22). Second, lower inflation is good for shares (assuming economic activity holds up). And finally, the last year was yet another reminder of just how hard it is to time markets. Numerous scares – inflation fears into October last year and more recently, Hamas’ attack on Israel, worries about the US election, worries about China – have threatened markets but they just kept going.

Expect a more constrained and volatile ride

Our base case is that share markets can continue to rally as more central banks join in cutting rates as inflation continues to fall towards central bank targets, including the Fed from around September and the RBA from around February enabling bond yields to fall and investors to focus on stronger growth in 2025. Our Inflation Indicator continues to point down for Australian inflation, despite recent setbacks.

However, the risks regarding equity markets are higher than a year ago:

  • Shares are offering a low-risk premium over bonds compared to the experience of much of the last two decades, particularly US shares.

  • Investor sentiment levels are not at euphoric levels but are still elevated suggesting less tolerance for bad news.

  • Shares are technically overbought with narrow breadth in the critical US market with high reliance on Nvidia and tech to push it higher.

Equity risk premium over bonds

Source: Bloomberg, AMP

  • The risk of recession in the US and Australia remains high, with increasing signs that the US economy is now slowing (particularly evident in labour market and consumer indicators) and the Australian economy close to stalling in the March quarter and set to lose support from surging population growth. This would threaten earnings growth expectations for 2024-25.

  • Geopolitical risk is high. In particular:

    • With Trump ahead in the polls and betting markets (PredictIt has Trump at 58% probability of winning versus Biden at 33%) the focus will increasingly turn to his policies which – with higher tariffs, lower taxes, lower immigration and a less independent Fed – suggests bigger budget deficits (bad for bonds) and higher inflation;

    • The far-right National Rally’s “win” in the first round French elections runs the risk of another Eurozone crisis. It may not get enough seats to form Government though, which could result in a hung parliament – the least bad option, but if it does it could lead to conflict with the European Commission over fiscal policy. That said it’s worth bearing in mind that market riots with surging bond yields headed off economically irresponsible policies in Greece (under Syriza), the UK (under PM Truss) and Italy (under the far-right Brothers of Italy) & the same would likely happen in France but the market riot would still mean a period of market volatility;

    • And risks remain around Israel and Iran and Ukraine.

Our base case is for more constrained returns in the current financial year of 6-7% down from the 9% or so seen over the last year. However, the risk of another correction in shares is high and investors should allow for a more volatile ride than seen over the last year.

It’s also worth noting that unlisted property returns are also likely to be negative over the year ahead as weak economic activity and the adjustment to working from home result in rising office property vacancy rates (as leases expire) & more downwards pressure on property values.

Things for investors to keep in mind

Of course, short term forecasting and market timing is fraught with difficulty and it’s best to stick to sound long term investment principles. Several things are always worth keeping in mind: periodic and often sharp setbacks in shares are normal; selling shares or switching to a more conservative superannuation strategy after falls just turns a paper loss into a real loss; when shares and other investments fall in value they are cheaper and offer higher long term return prospects; Australian shares still offer an attractive dividend yield; shares and other assets invariably bottom when most investors are bearish; and during periods of uncertainty, when negative news reaches fever pitch, it makes sense to turn down the noise around investment markets in order to stick to an appropriate long term investment strategy.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital July 2024

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The 9 most important things I have learned about investing over 40 years

Date: Jun 25th, 2024


I have now been in the investment world for 40 years. I first looked at the lessons I learned in 2019. But they haven’t changed much since. Much has happened over the last 40 years with each new crisis invariably labelled “unparalleled” and a “defining event”: the 1987 crash; the US savings and loan crisis and the recession Australia “had to have” around 1990; the Asian/LTCM crisis in 1997/1998; the late 1990s tech boom and the tech wreck in 2000; the mining boom and bust; the GFC around 2008; the Eurozone crisis that arguably peaked in 2012 but keeps recurring; China worries in 2015; the pandemic of 2020; and the resurgence of inflation in 2021-22. The period started with deregulation and globalisation but is now seeing reregulation and de-globalisation. It’s seen the end of the Cold War, US domination and the rise of Asia and China but is now giving way to a new Cold War. And so on. But the more things change the more they stay the same. And this is particularly true in investing. So, here’s an update of the nine most important things I have learnt over the past 40 years.

#1 There is always a cycle – stuff happens!

A constant is the endless phases of good and bad times for markets. Some relate to the 3 to 5 year business cycle, and many of these are related to the crises listed above that come roughly every 3 years. See the next chart. Some cycles are longer, with secular swings over 10 to 20 years in shares.

Australian share returns over rolling 12 mth & 20 yr periods

Source: ASX, RBA, Bloomberg, AMP

Debate is endless about what drives cycles. But all eventually contain the seeds of their own reversal and often set us up for the next one with its own crisis, often just when we think the cycle is over. So cycles & crisis are not going away. Ultimately there is no such thing as “new normals” & “new paradigms” as all things must pass. Also, shares often lead economic cycles, so economic data is often of no use in timing turning points in shares.

#2 The crowd gets it wrong at extremes

Cycles show up in investment markets with reactions magnified by bouts of investor irrationality that take them well away from fundamentally justified levels. This flows from a range of behavioural biases investors suffer from and so is rooted in investor psychology. These include the tendency to project the current state of the world into the future, the tendency to look for evidence that confirms your views, overconfidence, and a lower tolerance for losses than gains. While fundamentals may be at the core of cyclical swings in markets, they are often magnified by investor psychology if enough people suffer from the same irrational biases at the same time. From this it follows that what the investor crowd is doing is often not good for you to do too. We often feel safest when investing in an asset when neighbours and friends are doing the same and media commentary is reinforcing the message that it’s the right thing to do. This “safety in numbers” approach is often doomed to failure. Whether it’s investors piling into Japanese shares at the end of the 1980s, Asian shares in the mid-1990s, IT stocks in 1999, US housing and credit in the mid-2000s. The problem is that when everyone is bullish and has bought into an asset there is no one left to buy but lots of people who can sell on bad news.

#3 What you pay for an investment matters – a lot!

The cheaper you buy an asset the higher its return potential. Guides to this are price to earnings ratios for shares (the lower the better) and yields, ie, the ratio of dividends, rents or interest to the value of the asset (the higher the better). Flowing from this it follows that yesterday’s winners are often tomorrow’s losers – as they get overvalued and over loved. But many find it easier to buy after shares have had a strong run because confidence is high and sell when they have had a big fall because confidence is low.

Australian shares – the higher the dividend yield the better

Source: ASX, RBA, Bloomberg, AMP

#4 It’s hard to get markets right

The 1987 crash, tech wreck and GFC all look obvious. But that’s just Harry Hindsight talking! Looking forward no-one has a perfect crystal ball. As JK Galbraith observed, “there are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

Usually the grander the forecast – calls for “great booms” or “great crashes” – the greater the need for scepticism as such calls invariably get the timing wrong (so you lose before it comes right) or are dead wrong. Market prognosticators suffer from the same psychological biases as everyone. If getting markets right were easy, prognosticators would be mega rich and would have stopped long ago. Related to this, many get it wrong by letting blind faith – “there is too much debt”, “house prices are too high” – get in the way of good decisions. They may be right one day, but an investor can lose a lot of money in the interim. The problem for ordinary investors is that it’s not getting easier. The world is getting noisier with the rise of social media which has seen the flow of information & opinion go from a trickle to a flood and the prognosticators get shriller to get clicks. Even when you do it right as an investor, a lot of the time you will be wrong – just like Roger Federer who noted that while he won almost 80% of the 1526 singles matches in his career, he won only 54% of the points, or just over half. It’s unlikely to be much better for great investors. For most investors its best to focus on the long term trend in returns – ie, the green line as opposed to the blue line in the first chart.

#5 Investment markets don’t learn, well not for long!

German philosopher Georg Hegel observed “The one thing that we learn from history is that we learn nothing from history”. This is certainly the case for investors where the same mistakes are repeated over and over as markets lurch from one extreme to another. This is despite after each bust, many say it will never happen again, and the regulators move in to try and make sure it doesn’t. But it does! Often just somewhere else or in a slightly different way. Sure, the details change but the pattern doesn’t. As Mark Twain is said to have said: “History doesn’t repeat, but it rhymes”. Sure, individuals learn and the bigger the blow up, the longer the learning lasts. But there’s always a fresh stream of new investors so in time collective memory dims.

#6 Compound interest is key to growing wealth

This one was drummed into me many years ago by my good friend Dr Don Stammer. Based on market indices and the reinvestment of any income flows and excluding the impact of fees and taxes, one dollar invested in Australian cash in 1900 would today be worth around $259 and if it had been invested in bonds it would be worth $924, but if it was allocated to shares it would be worth around $879,921. Although the average annual return on Australian shares (11.6% pa) is just double that on Australian bonds (5.6% pa) over the last 124 years, the magic of compounding higher returns leads to a substantially higher balance over long periods. Yes, there were lots of rough periods along the way for shares, but the impact of compounding returns on wealth at a higher long-term return is huge over long periods. The same applies to other growth-related assets such as property. So, to grow your wealth you need to have a decent exposure to growth assets.

#7 It pays to be optimistic

Benjamin Graham observed that “to be an investor you must be a believer in a better tomorrow”. If you don’t believe the bank will look after your deposits, that most borrowers will pay back their debts, that most companies will grow their profits, that properties will earn rents, etc, then you should not invest. Since 1900, the Australian share market has had a positive return in roughly eight years out of ten and for the US share market it’s roughly seven years out of 10. So, getting too hung up worrying about the two or three years in 10 that the market will fall risks missing out on the seven or eight years when it rises.

#8 Keep it simple, stupid

We have a knack for overcomplicating investing. And it’s getting worse with more options, more information, more apps and platforms, more opportunities for gearing, more fancy products, more rules and regulations. But when we overcomplicate things we can’t see the wood for the trees. You spend too much time on second order issues like this share versus that share or this fund manager versus that fund manager, or the inner workings of a financially engineered investment so you end up ignoring the key drivers of your portfolio’s performance – which is its high-level asset allocation across shares, bonds, and property. Or you have investments you don’t understand or get too highly geared. So, it’s best to keep it simple, don’t fret the small stuff, keep the gearing manageable and don’t invest in products you don’t understand.

#9 You need to know yourself

The psychological weaknesses referred to earlier apply to everyone, but smart investors seek to manage them. One way to do this is to take a long-term approach to investing. But this is also about knowing what you want. If you want to take a day-to-day role in managing your investments then regular trading and/or a self-managed super fund (SMSF) may work, but that will require a lot of effort to get right and will need a rigorous process. If you don’t have the time and would rather do other things like sailing, working at your day job, or having fun with the kids then it may be best to use managed funds or a financial planner. It’s also about knowing how you would react if your investment just dropped 20% in value. If your reaction were to be to want to get out, then you will either have to find a way to avoid that as you would just be selling low and locking in a loss or if you can’t then you may have to consider an investment strategy offering greater stability over time and accept lower potential returns.

What does all this mean for investors?

All of this underpins what I call the Nine Keys to Successful Investing:

  • Make the most of the power of compound interest. This is one of the best ways to build wealth, but you must have the right asset mix.

  • Don’t get thrown off by the cycle. Cycles can throw investors out of a well thought out investment strategy. And they create opportunities.

  • Invest for the long-term. Given the difficulty in getting market moves right in the short-term, for most it’s best to get a long-term plan that suits your level of wealth, age and tolerance of volatility and stick to it.

  • Diversify. Don’t put all your eggs in one basket. But also, don’t over diversify as this will just complicate for no benefit.

  • Turn down the noise. After having worked out a strategy that’s right for you, it’s important to turn down the noise on the information flow and prognosticating babble now surrounding investment markets and stay focussed. In the digital world we now live in this is getting harder.

  • Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa.

  • Beware the crowd at extremes. Don’t get sucked into the euphoria or doom and gloom around an asset.

  • Focus on investments you understand and that offer sustainable cash flow. If it looks dodgy, hard to understand or has to be based on odd valuation measures, lots of debt or an endless stream of new investors to stack up then it’s best to stay away.

  • Seek advice. Given the psychological traps we are all susceptible to and the fact that investing is not easy, a good approach is to seek advice.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital June 2024

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

Not another Eurozone crisis! The rise of the far right in Europe, the French election and implications for investors

Date: Jun 19th, 2024


Since the European Union parliamentary election results were released just over a week ago, seeing a rise in support for far-right parties and French President Macron’s surprise decision to call parliamentary elections, Eurozone shares have had a fall of 4.2%, French shares fell 6.2% and the gap between the French and German 10 year bond yields has increased by 29 basis points indicating that investors are demanding an increased premium to hold French debt. In fact, the gap between French and German 10 year bond yields is back to levels last seen around the 2017 French presidential election. There has also been some flow on to Italian and Spanish bond yields, the Euro and global and Australian shares, although strength in tech shares continued to support US shares.

French, Italian and Spanish bond yield spreads up

Source: Bloomberg, AMP

So why all the fuss? Put simply investors are fearful that far-right success could lead to more populist policies, greater economic uncertainty and a fear that a far-right win in the French election could ultimately threaten a breakup of the Eurozone which, if it occurs, would plunge the world’s third biggest economic region (i.e. the 20 countries in the Eurozone) into financial chaos & possible recession, which would weigh on global growth.

Of course, the fears of a breakup of the Eurozone was a recurring soap opera through the last decade with recurring crises in Greece, Spain and Italy and worries around French elections which saw the far right Marine Le Pen in run-off elections against the centrist Macron all leading to fears that any one of them could leave the Euro (with a Grexit, Itexit, Frexit, etc) triggering a contagion of countries seeking to leave. Investment markets threatened to make this self-fulfilling by pushing up relative bond yields in countries perceived to be vulnerable on the grounds that if they leave, the Euro bond holders will be paid back in a devalued Drachma, Lira, Francs etc. The crisis peaked in 2012 after various measures to strengthen European integration and the ECB’s commitment to “do whatever it takes to preserve the Euro” which was backed by various policy tools that could be triggered at times of instability in bond markets. But ever since then there has been various flareups, such as around Greek, Italian, Spanish and French elections. The British decision to leave the EU also briefly added to such fears although less so as Britain was not in the Euro.

That such fears keep arising reflects the fundamental flaw in the Euro. Having a monetary union without common budgetary policies is problematic and differences in competitiveness, work ethics and savings are immense across Europe. But how serious is the current threat and what are the implications of the rise of the far-right in Europe?

The EU elections – less dramatic than portrayed

The current concerns started with the EU parliamentary election that saw a rise in support for far-right parties that support less immigration, less rationalist economic policies and tend to be more nationalist. However, their success was less than feared. Right-wing parties certainly saw a rise in support but their proportion of seats in the new parliament only rose from 19.6% to 22%. See the next table. The rise in support for populist parties in this case on the right does point to a bias towards more protectionist policies, a crackdown on immigration and slower progress towards climate action. But this shouldn’t be exaggerated. Firstly, the centrist parties remain dominant with 63% of EU parliament seats which suggests little substantive change in EU policies or support for the Euro.

Seats in the European Parliament


Outgoing parliament

New parliament







Social democrats



Renew (Liberals)



EPP (Conservatives)



Unaffiliated (others)



Unaffiliated (right-wing)



ECR (right-wing)



ID (right-wing)



Centrist parties incl Greens



Right-wing parties



May not add to 100% due to rounding. Source: Deutsche Bank, AMP

Secondly, EU elections are often seen as opportunities for a protest vote – given issues around the cost of living and immigration. This is arguably magnified as the elections are not compulsory with 51% turnout which is below most national elections, which means the voters are often more motivated and lean more extremist than the wider population – and so won’t necessarily translate to elections at the national level.

Finally, it should be noted that unlike the fascists of the 1930s, European far-right parties – such as National Rally in France, the Party for Freedom in the Netherlands, the Brothers of Italy and Fidesz in Hungary – are similar on immigration and nativism but have very different views on things like the Euro, NATO, Ukraine, and economic policies.

French parliamentary elections – a far bigger risk

Of course, things are a little different in France with the success of Le Pen’s National Rally which received more than double the 15% or so share of votes that President Macron’s Renaissance Party received in the EU election, prompting Macron to call parliamentary elections. This would see Macron remain President (until 2027 when his term expires, and he can’t run again) but could see him lose control of the government and domestic policies compared to the current centrist alliance he relies on to govern. This election is three years ahead of when its due and is an attempt by Macron to force the French people to choose between the far right and more centrist forces now or alternatively if National Rally is able to form a government, then hope that their extreme policies will work against them and see the electorate swing back to the centre by 2027.

The first round of the election is on 30 June with run-off elections on 7 July. The first round often sees more than 10 candidates in each electorate with only those receiving support from more than 12.5% of registered voters moving to the second round where the winner is the one who gets the most votes (which does not necessarily mean a majority). In theory this can make it easier for extremist parties to win but centrist parties often coordinate to drop those with the least chance in the second round. The EU election suggests that the far-right National Rally has a chance to form government in its own right or with an alliance with other right-wing parties. But French polls are not decisive, and another broad centrist alliance could be the outcome. But it’s a close call.

A far-right National Rally led government could go two ways:

  • It might go hard to implement its policies to cut tax on energy, exit the EU electricity market, unwind Macron’s pension & other reforms and be less compliant with EU fiscal rules. This could set up conflict with the European Commission, result in an adverse market reaction and eventually set France on a path to exit the Euro. This would be bad for markets but could play into Macron’s strategy with the turmoil leading to National Rally’s rejection in the 2027 elections.

  • Or it might follow a similar path to Italy’s PM Meloni from the Brothers of Italy and come down hard on social issues like immigration but adopt market-friendly EU compliant economic policies with the hope that it wins the presidency in 2027.

Of course, markets have no way of knowing the election outcome and which way it will go so the uncertainty is weighing. With France at the centre, along with Germany, of the EU and the Euro, anything that threatens its commitment is a big concern. However, there are reasons for optimism that a return to a full-blown Eurozone crisis will be averted and the Euro will yet again survive without a series of exits.

  • First, the commitment to the European Union and the Euro is very strong. While the Euro is flawed economically, it’s part of a grand political vision that’s led to a long period of peace across Europe and rapid growth in prosperity that neighbouring countries envy. As a result, most European politicians don’t want to give up on what has been a successful political journey towards a more united Europe. Particularly at a time of increasing geopolitical threats from Russia and a less certain commitment from the US. So European leaders will likely continue to find a way to make the economics work.

  • Second, consistent with this, public support for the Euro is high with 67% of the French and 69% of people in the Eurozone agreeing that the Euro is a good thing for their country. In contrast to the British, Europeans are far more likely to see themselves as European in addition to citizens of their own country.

Public support for the Euro is generally high

Source: Eurobarometer, AMP

  • Thirdly, knowing this most, far-right parties including Le Pen’s National Rally have dropped leaving the Euro from their policies as it’s not popular and prevents them from achieving broad support.

  • Fourthly, surging bond yields will likely influence any National Rally government to modify its less market friendly economic policies.

  • Finally, the ECB retains its tools to stabilise national bond markets if there is a threat to the application of its monetary policy across Europe.

While investment markets are nervous and a far-right win in the French elections could see that nervousness rise further before it falls, a return to the crisis days of last decade and a serious threat to the Euro is unlikely. In this regard, it’s noteworthy that bond spreads to Germany, including in France, are well below 2012 extremes, as evident in the first chart.

More bigger government and deglobalisation

However, at a broader level, the modest success of the far-right parties in the EU elections is consistent with a backlash seen against free market economic policies that has been building since the GFC. The political pendulum is continuing to shift towards more protectionism, industrial policies, tougher immigration and bigger government and slower progress towards net zero carbon emissions. This has been seen in the last month in the US and EU’s moves to impose higher taxes on some imports from China (notably on electric vehicles) and in the Future Made in Australia policies. While the economic impact of each move on their own is minor (e.g. the 17-38% tariffs on Chinese EVs in the EU will only have a minor impact on European inflation as they are just 0.4% of all EU imports), taken together they will mean slightly slower growth in living standards and slightly more inflation prone economies over time.

Implications for investors

The uncertainty around the French election adds to geopolitical uncertainty and reinforces our view that share market returns over the remainder of this year will be constrained and volatile and that bonds will rally. The ongoing rise in support for populist policies is likely to also constrain medium term returns. That said, the far-right is still far from dominant, and we continue to see reasonable returns from shares this year as central banks move to cut interest rates, at varying paces.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital June 2024

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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