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Olivers Insights

Bitcoin to infinity and beyond… again!

Posted On:Mar 13th, 2024     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Introduction

After another 80% or so plunge from its high in 2021 to its low in 2022, Bitcoin has rebounded again to a new record high. The next chart shows Bitcoin’s price relative to the $US since 2010, both on a regular scale and on a log scale to show perspective. From its 2022 low it’s up more than fourfold. This

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Introduction

After another 80% or so plunge from its high in 2021 to its low in 2022, Bitcoin has rebounded again to a new record high. The next chart shows Bitcoin’s price relative to the $US since 2010, both on a regular scale and on a log scale to show perspective. From its 2022 low it’s up more than fourfold. This is naturally sparking a new round of questions as to “what’s driving it”? and “should we invest in it”? The answer not simple. Bitcoin attracts extreme views – evangelists on the one hand and agnostics and atheists on the other in contrast to other things where the debate is between bulls and bears. This note looks at what it means for investors.

Bitcoin price in US dollars

Source: Bloomberg, AMP

Bitcoin basics

Bitcoin was invented in 2008 by a person or group named Satoshi Nakamoto and the first “genesis block” was created in 2009. Trying to explain it and cryptocurrencies generally (and the blockchain technology that underpins them) is very complicated! The blockchain basically means that transactions in Bitcoin are verified and recorded in a public ledger (the blockchain) by a network of nodes (or databases) on the internet. New Bitcoins are created as a reward for an intensive computational record keeping process called mining, that groups new transactions into a block which is added to the chain. This requires significant computing power to show what is called “proof of work”. The supply of Bitcoins is limited to 21 million, but because of a process called “halving” which occurs roughly every four years and sees miners compensated by less Bitcoins over time the limit will only be reached around 2140 after which transactions fees will be the only reward for record keeping. Because each node stores its own copy, there is no need for a trusted central authority like a central bank. Bitcoin is also anonymous with funds tied to Bitcoin addresses which require a private key (a long password) to access.

Because of Bitcoin’s limited supply and independence from government it’s seen as a hedge against the debasement of paper currencies (through inflation), the failure of central banks or outright seizure. This has made it attractive to supporters of the Austrian school of economics (which advocates a free market in money), libertarians and anarchists.

As with most technologies, the more that use it the greater its appeal. So news that various groups will accept transactions in it, El Salvador’s 2021 move to allow it as legal tender and various financial organisations allowing customer access via their platforms have aided its growth. The recent approval of Bitcoin ETFs and regulation of it, along with a coming halving (around April) have helped propel the recent surge in its price.

The number of cryptocurrencies blew out to more than 10,000 at the end 2023. Some started as jokes (eg, Dogecoin); some prioritise underpinning smart contracts (like Ethereum); some prioritise transactions (stablecoins that link to the value of a paper currency, eg, Tether); whereas others prioritise being a store of value independent of government (eg, Bitcoin). Of course, there is a lot of overlap. The focus for most remains on Bitcoin which is the oldest and biggest with a near 50% crypto market share.

Reasons for scepticism

Bitcoin enthusiasts see it as the future currency and as a way to riches with rapid price gains since inception seen as confirmation. The counter view is that it’s just another bubble. Reasons for caution are as follows:

  • First, it’s not suitable for everyday transactions: Bitcoin transactions are not cheap costing $US9 at present; they can take 8 minutes or so to complete; its price is very volatile (being roughly 13 times greater than US shares, 12 times greater than gold, 26 times greater than the $US and 17 times greater than the $A/$US exchange rate) suffering 80% plunges in price every few years (in 2011, 2013-15, 2017-18 and 2021-22) rendering it unreliable as a short term store of value. Its limited value for use as a means of payment explains why most Bitcoin transactions are by speculators, not merchants. This is not to say Bitcoin may not have a role in some countries – eg, El Salvador – where the government is not trusted and much of the population lives in the US and faces high transaction costs sending money home. But even in El Salvador merchants have not rushed into using Bitcoin and the US, Europe & Australia are not banana republics!

  • Second, there may be a role for cryptocurrency in payments systems (either stablecoins or Ethereum that have moved to speed up their processing), but who knows which one it will be and governments are likely to want to provide it themselves. But even here work on Central Bank Digital Currencies has slowed as its not clear people want to use them as we can already do digital transactions instantly & cheaply. There is almost certainly a role for blockchain technology in smart contracts but it’s hard to work out which cryptocurrencies it will be.

  • Third, given the uncertainty around the use case for cryptocurrencies and particularly Bitcoin (which is less amenable for smart contracts and payments), it’s very hard if not impossible to value. Unlike property or shares, it is not a capital asset and so does not generate rents or earnings. Unlike most commodities, it is not used to make things. Most of the major positive news about its value (eg the introduction of Bitcoin ETFs) have nothing to do with its fundamental use or value. Some claim it can generate a “yield” if you lend (or stake) your Bitcoin to traders…but this is relying on them actually making money trading crypto currencies. This makes it impossible to put a price on what it’s worth – it could go to $1,000,000 or $100.

  • Fourth, cryptocurrencies have had various issues with illegal activity and a lack of integrity. While there have been no cases of the Bitcoin or Ethereum blockchains being hacked, there have been high profile cases of people having their private keys hacked, people losing their holding via crypto exchanges and people simply losing their keys. Cryptocurrencies, notably Bitcoin, are also used for criminal activity. One benefit of using a bank to hold your cash is that it provides protection in the event your account is compromised, or you lose your password. Of course, wild west behaviour can be common at the start of new asset classes which may settle with regulation.

  • Fifth, the computing power involved in mining for Bitcoin requires significant electricity, just below that of Denmark. This makes it bad for the environment. A single Bitcoin transaction consumes as much energy as 500,000 Visa transactions. Of course, not all cryptos are the same with those using a “proof of stake” (or proof of ownership of a currency) being less energy intensive (but arguably also less secure).

  • Finally, Bitcoin and other crypto currencies face numerous threats from governments. Many governments have been looking at doing CBDCs although progress has been slow. Government’s may also crack down on illicit use of crypto currencies, its energy use and regulation is on the rise – although some see this as strengthening it.

Is Bitcoin “digital gold’?

Bitcoins longevity, its ability to rebound to new highs after each setback (so far), the potential use value from blockchain technology in smart contracts and decentralised finance and progress to greater respectability (with regulation on the rise) suggests Bitcoin and cryptocurrencies can’t simply be dismissed as just another bubble.

However, the question remains that if Bitcoin is not really digital cash and it’s not a capital asset suitable for normal valuation, what is it? The short answer is that it’s something to speculate on. The strongest argument for its existence is that it’s a digital version of gold and is displacing some of the demand that would have gone into gold. For millennia there has been demand for precious metals, like gold. While gold has a fall-back use as jewellery, its use for this does not explain movements in its price. Rather it has value because enough people have faith in it as a store of wealth which is independent of government – and people buy it not because they see jewellery demand going up but if they believe someone will pay a higher price for it. Some call this the “greater fool” theory.

Apart from not having the fall back of jewellery demand and not being able to see and touch, Bitcoin has many of the characteristics of gold – notably limited supply and independence of government. Bitcoin’s resistance to relaxing its proof of work approach has by limiting its ability to be used as cash effectively strengthened its decentralisation and immutability characteristics – making it more gold like (unlike many other cryptos). Like gold bugs it has a similar demand base of people who don’t trust central banks and governments. Which partly explains why Bitcoin resembles “more of a cult than a currency” – with a god (the mysterious Satoshi Nakamoto), a belief set and defined behaviours. Critical amongst the latter is to hodl (buy and “hold on for dear life”) and have faith that new buyers will come along to keep it going to the moon, Of course many might describe this as a giant Ponzi scheme (without the illegality).

Of course, Bitcoin has arguably failed its first big test as a hedge against inflation because as inflation surged in 2022 Bitcoin saw a near 80% fall in value. Gold has also failed as an inflation hedge at various points though, but this has not stopped faith in it. Bitcoin’s rising sensitivity to movements in interest rates suggest its becoming more gold like as rising rates increase the opportunity cost of holding gold or Bitcoin and vice versa for falling rates – like now which has pushed both to record highs.

If Bitcoin is digital gold it could have lots more upside as younger digital savvy buyers favour it over gold. Rough estimates suggest that if Bitcoin were to approach say 25% of the market value of gold its price could rise to $US160,000. Increasing ease of exposure via vehicles like ETF’s could see it pushed beyond that as buyers extrapolate past gains. But just be aware that owes to an assumption that enough have faith. If investors decide to move on to a new next best thing then watch out below!

So what does all this mean for investors?

There are five key things to be aware of when considering an investment in Bitcoin or crypto currencies. First, Bitcoin may have a lot more upside: its very momentum driven so its recent gains will attract new buyers; new demand via ETFs and the next “halving” are giving it a push; it tends to run to a four-year cycle which would run into next year; and displacement of gold may have further to go. So far we are yet to see all the crypto ads like in late 2021/early 2022 which suggests its yet to hit a manic phase. It is worth cautioning though that as more own crypos their returns appear to be slowing (as highlighted by the arrows in first chart).

Second, none of this has anything to do with a fundamental assessment as to Bitcoin’s worth which is impossible. Like gold it depends on faith that more buyers will arrive to push its price ever higher.

Third, it’s hard to work out where to put Bitcoin in a portfolio. It’s too volatile to be a defensive asset like cash. It’s impossible to get any reasonable idea as to what it may be worth or return (unlike shares, property, bonds or regular cash). And since its inception its seen a rising positive correlation with shares (averaging 40% over the last five years) with a beta of 2.3 times shares – so if US shares move 1% it moves by more than twice as much in the same direction – so its a poor diversifier.

Bitcoin vs US Shares

Source: Bloomberg, AMP

Fourth, its extreme volatility means investors should expect a wild ride.

Finally, don’t forget the basic principles of investing – there is no free lunch (high returns mean high risk); past returns are a poor guide to future returns; and if you don’t understand something, don’t invest in it.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital March 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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21 great investment quotes

Posted On:Mar 05th, 2024     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Introduction

Investing can be scary and confusing at times. But the basic principles of successful investing are timeless and quotes from experts help illuminate these. This note revisits a series on insightful quotes on investing I first started a decade ago.

The aim of investing

“How many millionaires do you know who have become wealthy by investing in savings accounts?” Robert G Allen,

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Introduction

Investing can be scary and confusing at times. But the basic principles of successful investing are timeless and quotes from experts help illuminate these. This note revisits a series on insightful quotes on investing I first started a decade ago.

The aim of investing

“How many millionaires do you know who have become wealthy by investing in savings accounts?” Robert G Allen, investment author

Cash and bank deposits are low risk and fine for near term spending requirements and emergency funds, but they won’t build wealth over long periods of time. The chart below shows the value of $1 invested in various assets since 1900. Despite periodic setbacks (see the arrows) shares and other growth assets like property (not shown) provide much higher returns over the long term than cash and bank deposits.

Shares versus bonds & cash over the very long term – Australia

Source: ASX, RBA, AMP

“The aim is to make money, not to be right.” Ned Davis, investment analyst

There is a big difference between the two. But many let their blind faith in a strongly held view (e.g. “there is too much debt”, “aging populations will destroy share returns”, “global oil production will soon peak”, “the IT revolution means this time it’s different”) drive their decisions. They could be right at some point but end up losing a lot of money in the interim.

The investment process

“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.” Warren Buffet, investor, chair & CEO of Berkshire Hathaway

Unless you really want to put a lot of time into trading, it’s advisable to only invest in assets you would be comfortable holding for the long term. This is less risky than constantly tinkering in response to predictions of short-term changes in value and all the noise around investment markets.

“Investing should be like watching paint dry or watching grass grow. If you want excitement…go to Las Vegas.” Paul Samuelson, economist

Investing is not the same as gambling and requires a much longer time frame to payoff.

“Successful investing professionals are disciplined and consistent and they think a great deal about what they do and how they do it.” Benjamin Graham, investment author, “father of value investing”

Having a disciplined investment process and consistently applying it is critical for investors if they wish to actively manage their investments successfully in the short term.

“Don’t look for the needle in the haystack, just buy the haystack!” John C Bogle, founder of Vanguard

The key insight here is that trying to beat the market by stock picking can be hard and so if you want to grow wealth over time the key is to get a broad exposure to the market and letting compound interest do its job.

The investment market

“Remember that the stock market is a manic depressive.” Warren Buffett

Rules of logic often don’t apply in investment markets. The well-known advocate of value investing, Benjamin Graham, coined the term “Mr Market” (in 1949) as a metaphor to explain the share market. Sometimes Mr Market sets sensible share prices based on economic and business developments. At other times he is emotionally unstable, swinging from euphoria to pessimism. But not only is Mr Market highly unstable, he is also highly seductive – sucking investors in during the good times with dreams of riches and spitting them out during the bad times when all hope seems lost. Investors need to recognise this.

“Markets can remain irrational longer than you can remain solvent.” John Maynard Keynes, economist

A key is to respect the market and recognise that it can be fickle rather than try and take big bets that can send you bust if you get the timing wrong. For example, by heavily selling shares short if you think a crash is about to happen or gearing in too heavily via margin debt when the market is strong. Such approaches can often undo investors and send them bust as they are too dependent on accurately timing the market.

Investment cycles and contrarian investing

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die of euphoria.” John Templeton, investor

This is one of the best characterisations of how the investment cycle unfolds. It follows that the point of maximum opportunity in terms of prospective return is around the time most investors are pessimistic and bearish and the point of maximum risk is when most investors are euphoric and bullish, but unfortunately many don’t realise this because it involves going against the crowd.

“The four most dangerous words in investing are: ‘this time it’s different’.” John Templeton

History tells us that that there are good times and bad and assuming that either will persist indefinitely is a big mistake. Whenever you hear talk of “new paradigms”, “new eras”, “new normals” or “new whatevers” it’s usually getting time for the cycle to go in the other direction.

“History doesn’t repeat but it rhymes.” Often attributed to Mark Twain (although it’s not sure he actually said it), author

No two cycles are the same, but they do have common elements which make them rhyme. In upswings investment markets are pushed to the point where the relevant asset has become overvalued, over loved (in that everyone is on board) and over bought and vice versa in downturns.

Recognising these common elements is necessary if you are to get a handle on cyclical swings in investment markets.

“If it’s obvious, it’s obviously wrong.” Joe Granville, investment author

This doesn’t apply to everything (e.g. if it is obviously sunny outside according to the usual definition, then it is!), but investing can be perverse. When everyone is saying “it’s obvious that the recession will continue” or “it’s impossible to see a recession as things are obviously good” then maybe the crowd is already on board and the cycle will soon turn.

,b>“I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.” Warren Buffett

This is another great quote on contrarian investing that follows on from those above.

“Sell in May and go away, buy again on St Leger’s Day.” Anon

Shares have long been observed to have a seasonal pattern that sees strength from November through to May and then relative weakness through to around October. This can be seen in seasonal indexes for US and Australian shares in the next chart. (St Leger’s Day in terms of the UK horse race on the second Saturday in September may be a bit early, but not to worry!)

The seasonal pattern in US and Australian shares

Source: Bloomberg, AMP

The reasons vary and relate to tax loss selling associated with a September tax year end for US mutual funds, a wind down in new equity raisings around December/January, New Year cheer and the investment of bonuses, but may have its origins in crop cycles. The point is that buying in May, might not be the best time, nor selling in September or October.

Investor pessimism

“To be an investor you must be a believer in a better tomorrow.” Benjamin Graham

This is a pre-requisite. If you don’t believe the bank will look after your term deposits, that most borrowers will pay back their debts, that most companies will see rising profits over time, that properties will earn rents etc then there is no point investing. This is flippant but true – to be a successful investor you need a favourable view of the future.

“More money has been lost trying to anticipate and protect from corrections than actually in them.” Peter Lynch, investor, fund manager

Preserving capital is important, but this can be taken too far and often is in the aftermath of bad times with the result that investors end up so focused on trying to avoid capital losses in share markets that they miss the returns they offer.

“I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” J.S. Mill, economist

It invariably seems that higher regard is had for pessimists predicting disaster than for optimists seeing better times. As the US economist JK Galbraith once observed “we all agree that pessimism is a mark of a superior intellect.” And we all know that bad news sells. There may be a neurological reason for this as the human brain evolved in the Pleistocene era when the key was to dodge woolly mammoths and sabre tooth tigers, so it has been hard wired to be always on guard and so naturally attracted to doom sayers. But for investors, giving too much attention to pessimists doesn’t pay over the long term.

Risk

“There is nothing riskier than the widespread perception that there is no risk.” Howard Marks (I think), investor, co-founder of Oaktree Capital

Many like to measure risk by looking at measures of volatility, but the riskiest time in markets is invariably when the common view is that there is no risk for it’s often around this point that everyone who wants to invest has already done so leaving the market vulnerable to bad news.

Debt

“It’s not what you own that will send you bust but what you owe.” Anon

Always make sure that you don’t take on so much debt that it may force you to sell all your investments and potentially send you bust, just at the time you should be buying.

The right mindset for an investor

“The investor’s chief problem and even his worst enemy is likely to be himself.” Benjamin Graham

This may sound perverse as surely it is events which drive investment markets down and destroy value. But the trouble is that events and bear markets are normal. Rather what causes the greatest damage is our reaction to events – selling after markets have already plunged and only buying back in after euphoria has returned. Smart investors have an awareness of their psychological weaknesses and their tolerance for risk and seem to manage them.

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen then you’re not ready, you won’t do well in the markets.” Peter Lynch

If you can’t handle volatility associated with investment markets, then either they are not for you or you should just take a long term approach and leave it to someone else to manage and advise on the investment of your funds.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital March 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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Seven key charts for investors to watch – where are they now?

Posted On:Feb 27th, 2024     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Introduction

Share markets have pushed up to record highs this year, but can it continue? For some time now we have been monitoring seven key charts that are critical for the investment outlook. This note provides an update.

Chart 1 – global business conditions PMIs

A big driver of how shares perform this year will be whether major economies including Australia slide into

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Introduction

Share markets have pushed up to record highs this year, but can it continue? For some time now we have been monitoring seven key charts that are critical for the investment outlook. This note provides an update.

Chart 1 – global business conditions PMIs

A big driver of how shares perform this year will be whether major economies including Australia slide into recession and, if so, how deep that is. While it’s not our base case we would concede that the risk of a mild recession is still high given the big monetary tightening since 2022 and it’s noteworthy that the UK and Japan have already fallen into a technical recession with Europe stagnating. But even if the US and Australia slide into recession too at least a deep recession should be avoided as we have not seen the sort of spending excesses that often precede deep recessions. Global business conditions indexes (PMIs) – which are surveys of purchasing managers at businesses – will be a key warning indicator.

Global Composite PMI vs World GDP

Source: Bloomberg, AMP

Right now they are soft but at levels consistent with okay growth.

Chart 2 (and 2b) – inflation

A lot depends on what central banks do with interest rates and inflation is still the key here. While the ride has been bumpy lately and will likely remain so, the good news is that inflation in major countries is well down from its highs of 8 to 11% and now around 3 to 4%. So central banks are likely at the top on interest rates with many (the Fed and ECB) starting to debate when to cut rates.

Our US Pipeline Inflation Indicator has picked up slightly this year partly reflecting higher global shipping costs but these appear to be stabilising and the Indicator appears to reflect normal volatility around the 2% Fed target level and so it’s still consistent with lower US inflation. Services inflation remains sticky but is likely to slow reflecting cooling wages growth and rising productivity growth. We expect the Fed to start cutting rates in June.

AMP Pipeline Inflation Indicator

Source: Bloomberg, AMP

Australian inflation is lagging the US by 6 months, but our Australian Pipeline Inflation Indicator is continuing to trend down pointing to a further fall in inflation. While the RBA retains a mild tightening bias awaiting “sufficient confidence that inflation [will] return to target in a reasonable time frame” our assessment is that the cash rate has peaked and that the RBA will start cutting from around mid-year.

Australia Pipeline Inflation Indicator

Source: Bloomberg, AMP

Chart 3 – unemployment and underemployment

Labour market tightness remains critical as it determines wages growth which is the biggest component in most business costs. Tight labour market conditions post the pandemic have seen wages growth pick up and this is now the main driver of sticky service sector inflation. The risk is that high wages growth locks in high inflation making it harder to get inflation back down without a deep recession. However, while labour markets remain tight – evident in still low unemployment – they appear to be cooling with falling job openings and hiring plans and a gradual rising trend in unemployment and underemployment now evident in both the US and Australia. As a result, wages growth looks to have passed the peak in the US, Europe and UK and is likely at the peak in Australia. However, central banks including the RBA would like to see more evidence that this is the case and so labour market underutilisation will be watched closely.

Labour market underutilisation rates

Source: Bloomberg, AMP

Chart 4 – longer term inflation expectations

The 1970s tells us the longer inflation stays high, the more businesses, workers and consumers expect it to stay high and then they behave in ways which perpetuate it – in terms of wage claims, price setting and tolerance for price rises. The good news is that short term inflation expectations have fallen sharply, and longer-term inflation expectations remain low. This is very different from 1980 when US inflation expectations were around 10% and deep recession was required to get inflation back down.

US University of Michigan Consumer Inflation Expectations

Source: Macrobond, AMP

Chart 5 – earnings revisions

Consensus US and global earnings growth expectations for this year are running around 8%, whereas Australia is expected to see a 5% or so fall in earnings this financial year.

Earnings Revision Ratio

Source: Reuters, AMP

The main risk is a recession resulting in an earnings slump like those seen in the early 1990s, 2001-03 in the US and 2008 but recently revisions to earnings expectations have been around average.

Chart 6 – the gap between earnings and bond yields

Since 2020, rising bond yields weighed on share market valuations. As a result, the gap between earnings yields and bond yields (which is a proxy for shares’ risk premium) has narrowed to narrowed to its lowest since the GFC in the US and Australia. Compared to the pre-GFC period shares still look cheap relative to bonds, but this is not the case compared to the post GFC period suggesting valuations may be a bit of a constraint to share market gains given uncertainties around interest rates, economic and earnings growth and various geopolitical issues. Australian share valuations look a bit more attractive than those in the US though helped by a higher earnings yield (or lower PEs). Ideally bond yields need to decline.

Equity risk premium over bonds

Source: Reuters, AMP

Chart 7 – the US dollar

Due to the relatively low exposure of the US economy to cyclical sectors (like manufacturing) and the high use of US dollar denominated debt, the $US is a “risk-off” currency. It tends to go up when there are worries about global growth and down when the outlook brightens. An increasing $US is also bad news for those with $US denominated debt in the emerging world. So, moves in it bear close watching as a key bellwether of the investment cycle. 2022 saw a surge in the $US with safe haven demand in the face of worries about recession, war and aggressive Fed tightening. Since its high it has fallen back which is a positive sign – but the decline has stalled over the last year suggesting a degree of caution. A further downtrend in the $US would be a positive sign for investment markets this year, whereas a sustained new upswing would suggest they may be vulnerable. So far though it looks stuck, which also partly explains the softness in the $A which is a cyclical currency.

The $A and the $US v major currencies

Source: Bloomberg, AMP

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital February 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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Investment outlook Q and A – recession risks, rates and inflation, valuations, geopolitics, the US election and Swiftonomics

Posted On:Feb 15th, 2024     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Introduction

Last year shares climbed a “wall of worry” as inflation fell leading to prospects for lower interest rates ahead. But can it continue? After participating in a webinar on the investment outlook this note takes a look at the main questions investors have in a simple Q&A format.

Are high interest rates working to cut inflation?

The evidence of this is overwhelming.

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Introduction

Last year shares climbed a “wall of worry” as inflation fell leading to prospects for lower interest rates ahead. But can it continue? After participating in a webinar on the investment outlook this note takes a look at the main questions investors have in a simple Q&A format.

Are high interest rates working to cut inflation?

The evidence of this is overwhelming. Inflation has fallen from highs around 8 to 11% in major developed countries, including Australia, to now around 3-4%. This reflects a combination of the improved supply of goods and services as well as cooler demand (evident in cooling economic growth and slower labour markets) and higher interest rates have been a key driver. There has further to go and it will be bumpy as we saw with the January US CPI, but central banks are likely to start cutting interest rates in the June quarter with the Fed and ECB expected to cut 5 times this year (by 0.25% each time) and the RBA 3 times.

Global Inflation

Source: Bloomberg, AMP

But aren’t high rates unfair? Isn’t there a better way?

Relying on higher interest rates is not the only or fairest way to slow inflation because it particularly hits 25 to 45 year olds with big mortgages. Ideally the medicine should also involve a mix of tighter fiscal policy (tax hikes and public spending cuts) and structural policies to boost productivity and hence the supply of goods and services. But it’s clear governments don’t want to tighten fiscal policy because it’s not politically popular (if anything they want to provide “cost of living relief”) and supply side policies take time to work and aren’t popular these days either. So after the experience of high inflation in the 1970s, it was concluded that central banks are best placed to control inflation and they really only have one main tool – i.e. higher interest rates.

What is the risk of recession?

Global and Australian growth has held up far better than expected a year ago helped by a combination of savings buffers built up through the pandemic, reopening boosts, resilient labour markets and in Australia far stronger than expected population growth (which has masked a per capita recession). Consequently, while global and Australian growth has slowed it has remained positive. Our base case is for a further softening in growth but for it to remain positive ahead of lower interest rates providing a boost from later this year.

However, the risk of recession remains high after what has been the biggest rate hiking cycle since the 1980s and this being reflected in inverted yield curves (short term rates above long term bond yields), falling leading economic indicators and tighter bank lending standards all of which warn of the high risk of recession particularly as some of last year’s supports like saving buffers, reopening demand and very strong population growth in Australia start to fade. So we put the risk of recession at 40% in Australia and the US. Europe is already close to recession having been stagnant GDP over the last year. China is also a risk – see below. Fortunately, if a recession does occur it’s likely to be mild as most countries have not seen a boom in consumer spending, business investment or housing investment that needs to be unwound.

Will Taylor Swift shake off Aussie consumer gloom?

For the next two and half weeks it will certainly help for the roughly 630,000 concert goers and the retailers, hotels, and food outlets that will get some extra spending. If each attendee spends a total of $900 on average (which sounds generous) it will mean spending of $570m which is a lot of money. But it won’t take us out of the woods because Taylor is an import and so maybe only $400m of that will stay in the country. And $400m is just 0.02% of our economy. And as Governor Bullock implied it will likely come at the expense of other things. So maybe a two-week blip and then back to where we were. In other words, if you are all excited about Swiftonomics you need to calm down. That said I am excited about finally getting a ticket…even if it is one of the partially obscured seats.

What happened to US bank problems?

Quick action by US and Swiss authorities settled the banking problems seen last year and the tightening in lending standards associated with it has eased. In the US, the Fed’s December quarter bank lending survey showed less tightening in lending standards and loan demand becoming less negative, which suggests an easing in regional banking problems. But with monetary policy still tight and ongoing falls in commercial property values the problems could return – as seen with New York Community Bank and Japan’s Aozora Bank recently. So, it’s worth watching.

Loan Officer Surveys – Net % of Domestic
Respondents Tightening Standards

Source: Bloomberg, AMP

What about China and Evergrande’s liquidation?

China faces three big challenges: a falling population; trying to get consumer spending to take over as a key growth driver from capital investment and the property sector; and political tensions with the West. Taken together they imply a slowdown in China’s long term growth rate.

In the near term the property slump continues. But a Hong Kong court ordering the liquidation of property developer Evergrande is not going to trigger a Lehman moment that will turn China’s property downturn into a global crisis. First, it’s not a big surprise. Second, it’s doubtful that PRC courts will allow liquidators to sell Evergrande assets in China in a fire sale given the Chinese Government’s focus on protecting home buyers and completing more homes. Finally, the Chinese Government will continue offset any impact from the property downturn and Evergrande’s woes on the economy with property and economy wide stimulus measures.

Overall, we see Chinese growth as being constrained with downside risks – but it’s likely to be around 4.7% this year with the Government providing just enough stimulus. It’s hard to have a strong view on Chinese shares but their bear market may be nearing an end. After having nearly halved since October 2021 they are now undervalued (with a forward PE below 10x), oversold & underloved and due at least a further bounce.

How big a threat are geopolitical risks?

Geopolitical risk is high this year: with half the world’s population seeing elections; the US looking like another divisive Biden v Trump election on the way; tensions with China remaining high; the war in Ukraine continuing; and an ongoing escalation in the Israel/Hamas war to include other countries in the region including Houthi rebels disrupting Red Sea shipping with a risk that further escalation could threaten global oil supplies. Trying to quantify what these mean for the global economy and investment markets is impossible – as we saw last year geopolitical risks turned out to be less threatening. But odds are that they will contribute to a more constrained and volatile ride in investment market this year.

What about the US election?

A Trump victory could lead to considerable global uncertainty given his style of governing and trade policies but this may not be immediately apparent because the US election has a long way to go yet and both Biden and Trump could drop out, US presidential election years historically see average share market returns and after the 2016 Trump victory shares rallied with 2017 being a strong year because of Trump’s pro-business policies (the trade war didn’t start till 2018).

What about share valuations?

Shares are not cheap with above average forward PE’s and a lower risk premium on offer over bonds than seen over the last decade – which leaves shares a bit vulnerable given the high level of economic and geopolitical risks which will likely contribute to volatility. However, the risk premium is a bit higher than it was last October thanks to lower bond yields and shares should be okay providing central banks cut interest rates this year and the profit outlook improves.

Equity risk premium over bonds

Source: Bloomberg, AMP

What will happen to bond yields if interest rates fall?

If as we expect economic growth slows, inflation falls further and central banks cut interest rates then bond yields are likely to fall a bit this year. Of course if there is a recession, central banks are likely to cut interest rates more than we are allowing and bond yields will likely fall a lot pushing up bond values and see bonds be a good portfolio diversifier.

Will high levels of global debt de-rail things?

Global debt is now estimated to be around $US310trn or 340% of global GDP. This clearly poses a threat if bond yields resume rising which will be a big problem in emerging countries with $US debt but will also ramp up pressure for fiscal austerity in rich countries as debt interest payments rise. However, much of the rise in debt since the pandemic has been in the public sector where the risk of major problems is less (as governments can raise taxes), and most advanced country governments borrow in their own currency heading off foreign exchange crises.

How close is America to breaking?

It’s easy to look at the political polarisation, inequality and rising public debt in the US and get depressed. Then again people have long been looking at the US and getting depressed, but it seems to keep on keeping on. It has a very dynamic economy, its productivity growth is impressive, it continues to have world beating tech companies, its growth rate has been surprising on the upside, and it still has very low unemployment.

Why are rich countries running high immigration?

Part of this is a catch up after low immigration in the pandemic but it has been a bit out of control and does run the risk of a political backlash as it accentuates already expensive housing.

When will the $A get back to $US0.80-$US1?

We see upside in the $A to $US0.72 as the Fed cuts rates more than the RBA, commodity prices remain in a long-term upswing and the $US falls on hopefully reducing global uncertainty. However, a move much beyond that looks unlikely given slowing growth in China and geopolitical risks.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital February 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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Five problems with the Australian tax system – and the changes to Stage 3

Posted On:Feb 05th, 2024     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Introduction

The Government’s decision to revamp the Stage 3 tax cuts has stirred up a hornet’s nest. The move to reduce the size of the benefits for higher income earners (with those on $200,000 or more getting $4546 a year less) and redistribute them to lower and middle-income earners (with those earning between $50,000 and $130,000 now getting $804 a year

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Introduction

The Government’s decision to revamp the Stage 3 tax cuts has stirred up a hornet’s nest. The move to reduce the size of the benefits for higher income earners (with those on $200,000 or more getting $4546 a year less) and redistribute them to lower and middle-income earners (with those earning between $50,000 and $130,000 now getting $804 a year more) in order to provide cost of living relief is something that’s easy to understand.

The arguments against it though are a bit more esoteric.

  • First, is the politics around committing in the last election and until recently to proceed with the tax cuts as legislated (despite cost of living issues long being well known) only to then break the commitment.

  • Second, is the concern that the move treats the symptoms and not the causes of high inflation and risks backfiring. This is because by skewing them to low- and middle-income earners who consume a higher proportion of their income runs the risk that it will add to demand and hence inflation. This risks delaying interest rate cuts.

  • Finally, is the argument that it’s yet another backward step in terms of tax reform. This is critical as in recent years Australia’s productivity performance has deteriorated. This has driven a slump in growth in per capita GDP which means lower than otherwise living standards.

Australian Labour Productivity Growth

Source: ABS, AMP

To boost productivity growth we need to do a bunch of things (there is a short list here) but a key thing is to reform our tax system. The Stage 3 tax cuts were a step in that direction because they reduced the issue of bracket creep (where taxpayers jump into higher tax brackets never intended for them just by seeing average wages growth). It did this by having one flat 30% tax rate for earnings between $45,000 & $200,000. They were also part of a three-stage process with the first two focussed on low and middle income earners. The Stage 3 tax changes unravel this modest reform.

Why the need for tax reform?

The good news is Australia is a relatively low tax country. Total tax revenue as a share of GDP at 29% in 2022 was at the low end of OECD countries.

Total Tax Revenues, % of GDP

Source: OECD, AMP

The complication is that this does not tell the whole picture because it doesn’t include superannuation contributions. If adjustment is made for this then we are likely more in the middle of the pack. More fundamentally there are five key issues with our tax system:

#1 – It’s very reliant on income tax, either personal or corporate, as opposed to indirect tax like the GST

Income tax is 62% of tax collections versus the OECD average of 34%.

Income as % of total tax revenues

Source: OECD, AMP

The problem with this is that income tax is highly distortionary – as it impacts decisions to work and invest – whereas a GST levied at the same rate on all items is far less distortionary. So a GST is a far more efficient tax than income tax and a greater reliance on it versus income tax will likely lead to more productivity. The high reliance on income tax will also create equity issues as the aging population will see an increasing burden placed on younger workers to foot rising health and aged care bills. Of course, the GST is also more regressive hitting lower income earners harder, but this can be addressed by the setting of the tax scales and compensation.

#2 – It’s complicated with various “tax concessions”

Several “tax concessions” are often in the headlines: negative gearing, the capital gains tax discount, franking credits, superannuation and trust structures. The arguments put up for curtailing them are that they cost the government revenue, create distortions in the tax system and that the benefits fall mainly to high earners. It’s actually more complicated than this:

  • Negative gearing arises due to the way the tax system works in allowing deductions for expenses incurred in earning income. Removing or curtailing it for property investment as some want will create a distortion as it will still be available for investment in other assets. What’s more negative gearing is not the reason housing affordability is poor and removing or curtailing it could make the situation worse by reducing the supply of rental property. Finally, while the dollar value of negative gearing rises with income the majority of taxpayers that negatively gear property are middle-income earners. That said there may be a case for curtailing excessive use of this tax concession.

  • The capital gains tax discount allows investors to halve their taxable capital gain on an asset if they hold it for more than a year. The discount does appear excessive though and it provides an inducement to earn income as a capital gain as it’s taxed at half the rate. So there is a case to consider removing the capital gains tax discount and return to the pre-1999 approach of adjusting capital gains for price inflation.

  • Dividend imputation is a sensible concession that removes a bias against equities by removing the double taxation of earnings – once in the hands of companies and in the hands of investors as dividends. Therefore, it puts shares onto a level footing with corporate debt. So, it reduces the incentive of firms to excessively rely on debt and encourages firms to pay decent dividends as opposed to hoarding earnings. Curtailing dividend imputation would be a big mistake.

  • The case for super tax concessions to remain is strong in terms of boosting savings, supporting a large pool of patient capital, providing for self-funding in retirement and reducing reliance on the pension.

Finally, calls to end or curtail the various tax concessions need to be assessed in the context of the whole tax system in Australia.

#3 – The Australian tax system is highly progressive

In this regard, not only does the Australian tax system have a high reliance on income tax but it is highly progressive. The current top marginal tax rate at 47% (including Medicare) is above the median of comparable countries and kicks in at a relatively low multiple of average weekly earnings.

Global individual tax rates comparison

Source: OECD, AMP

As a result, the Australian individual tax system is highly progressive and this is reflected in the fact that the top 3.6% of tax payers earning more than $180,000 pay around 32% of income tax and the top 10% pay nearly 50% of income tax. ABS data also indicates that only the top 20% of income earners pay more tax than they receive in government transfers. This is likely working against Australia’s long-term interest to the extent that it discourages work effort and hence productivity.

Government benefits less taxes paid by household income groups, 2021-22

Source: ABS, AMP

Curtailing access to any or all of the “tax concessions” will only add to the burden on this relatively small group and act as a disincentive for work effort at a time when we should be doing the opposite. Ideally, we should be looking to reduce the reliance on income tax. If we did this the interest in strategies like negative gearing would likely decline.

#4 – Bracket creep is an ongoing issue

Just keeping up with inflation can see a worker pushed into a tax bracket that was never intended for them. Bracket creep has been a major contributor to the rise in income tax payments as a share of household income to a record level. Over the last two years increasing tax payments have been more of a drag on income than higher mortgage payments.

Household Payments, % of Gross Income

Source: ABS, AMP

The ideal solution is to index the tax brackets to inflation. This would keep the Government accountable by denying them the ability to give back bracket creep and claim it’s a tax cut and force them to pass higher tax rates through Parliament if they want more tax revenue.

#5 – The tax system has numerous anachronisms

Key issues are that: the GST applies to a diminishing share of consumer spending; states’ stamp duties grossly distort property decisions and worsen housing affordability and should be replaced with land tax; state payroll taxes discourage employment; car tariffs are still levied when there is no car industry to protect; and road user charges need to replace fuel excise to avoid a diminishing share of road users paying for roads.

So what to do?

What is needed by way of tax reform is simple: lower personal tax rates with higher thresholds; a lower corporate tax rate; a higher and more comprehensive GST; compensation of low income earners and welfare recipients for increasing the GST; the indexation of tax brackets to inflation; and the removal of stamp duty & its replacement with land tax.

This would take political courage as seen a generation ago. But failure to do so will only hamper productivity and living standards for all Australians.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP Capital February 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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Falling inflation – what does it mean for investors?

Posted On:Jan 17th, 2024     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Introduction

The surge in inflation coming out of the pandemic and its subsequent fall has been the dominant driver of investment markets over the last two years – first depressing shares and bonds in 2022 and then enabling them to rebound. But what’s driving the fall, what are the risks and what does it mean for interest rates and investors. This

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Introduction

The surge in inflation coming out of the pandemic and its subsequent fall has been the dominant driver of investment markets over the last two years – first depressing shares and bonds in 2022 and then enabling them to rebound. But what’s driving the fall, what are the risks and what does it mean for interest rates and investors. This note looks at the key issues.

Inflation is in retreat

Inflation appears to be falling almost as quickly as it went up. In major developed countries it peaked around 8 to 11% in 2022 and has since fallen to around 3 to 4%. It’s also fallen in emerging countries.

Global Inflation

Source: Bloomberg, AMP

What’s driving the fall in inflation?

The rise in inflation got underway in 2021 and reflected a combination of massive monetary and fiscal stimulus that was pumped into economies to protect them through the pandemic lockdowns that was unleashed as spending (first on goods then services) at a time when supply chains were still disrupted. So it was a classic case of too much money (or demand) chasing too few goods and services. Its reversal since 2022 reflects the reversal of policy stimulus as pandemic support measures ended, pent up or excess savings has been run down by key spending groups, monetary policy has gone from easy to tight and supply chain pressures have eased. In particular, global money supply growth which surged in the pandemic has now collapsed.

Why is Australian inflation higher than other countries?

While there has been some angst about Australian inflation (at 4.3%yoy in November) being higher than that in the US (3.4%), Canada (3.1%), UK (3.9%) and Europe (2.9%) this mainly reflects the fact that it lagged on the way up and lagged by around 3 to 6 months at the top. The lag partly reflects the slower reopening from the pandemic in Australia and the slower pass through of higher electricity prices. So we saw inflation peak in December 2022, whereas the US, for instance, peaked in June 2022. But just as it lagged on the way up it’s still following other countries down with roughly the same lag. In fact, with a very high 1.5% mom implied rise in the Monthly CPI Indicator to drop out from December last year, monthly CPI inflation is likely to have dropped to around 3.3 to 3.7%yoy in December last year, which is more in line with other countries.

Monthly CPI Indicator verus Quarterly CPI

Source: Bloomberg, AMP

What about profit gouging?

There has been some concern that the surge in prices is due to “price gouging” with “billion-dollar profits” cited as evidence. In fact, the Australian Government has set up an inquiry into supermarket pricing. There are several points to note in relation to this. First, it’s perfectly normal for any business to respond to an increase in demand relative to supply by raising prices. Even workers do this (eg, asking for a pay rise and leaving if they don’t get one when they are getting lots of calls from head-hunters). It’s the way the price mechanism works in allocating scarce resources. Second, national accounts data don’t show any underlying surge in the profit share of national income, outside of the mining sector. Finally, blaming either business or labour (with wages growth picking up) risks focussing on the symptoms of high inflation not the fundamental cause which was the pandemic driven policy stimulus & supply disruption. This is not to say that corporate competition can’t be improved.

Source: ABS, RBA, AMP

What is the outlook for inflation?

Our US and Australian Pipeline Inflation Indicators continue to point to a further fall in inflation ahead.

AMP Pipeline Inflation Indicator 

  

Australia Pipeline Inflation Indicator

Source: Bloomberg, AMP

This is consistent with easing supply pressures, lower commodity prices and slowing demand. We are not assuming recession, but it is a high risk and if that occurred it would likely result in inflation falling below central bank targets. Out of interest, the six-month annualised rate of core private final consumption inflation in the US, which is what the Fed targets, has fallen below its 2% inflation target. In Australia, we expect quarterly CPI inflation to have fallen to and around 3%yoy by year end. The return to the top of the 2-3% target is expected to come around one year ahead of the RBA’s latest forecasts.

What are the risks?

Of course, the decline in inflation is likely to be bumpy and some say that the “last mile” of returning it to target might be the hardest. There are five key risks to keep an eye in terms of inflation:

  • First, the escalating conflict in the Middle East has the potential to result in inflationary pressures. Disruption to Red Sea/Suez Canal shipping is already adding to container shipping rates due to extra time in travelling around Africa. So far this has seen only a partial reversal of the improvement in shipping costs seen since 2022 and commodity prices and the oil price remain down. The US and its allies are likely to secure the route relatively quickly such that any inflation boost is short lived. The real risk though is if Iran is drawn directly into the conflict threatening global oil supplies.

  • Economic activity could surprise on the upside again keeping labour markets tight fuelling prices & wages & hence sticky services inflation.

  • Central banks could ease before inflation has well and truly come under control in a re-run of the stop/go monetary policy of the 1970s.

  • In Australia, recent flooding could boost food prices and delays associated with industrial disputes at ports could add to goods prices. At present though the floods are not on the scale of those seen in 2022 and we expect any impact from both to be modest (at say 0.2%).

  • Finally, and also in Australia if productivity remains depressed, 4% wages growth won’t be consistent with the 2-3% inflation target.

What lower inflation means for investors?

High inflation tends to be bad for investment markets because it means: higher interest rates; higher economic uncertainty; and for shares, a reduced quality of earnings. All of which means that shares tend to trade on lower price to earnings multiples when inflation is high, and growth assets trade on higher income yields. We saw this in 2022 with bond yields surging, share markets falling and other growth assets pressured.

Australian shares – High Inflation = lower PEs & vice versa

Source: Bloomberg, AMP

So, with inflation falling much of this goes in reverse as we started to see in the last few months. In particular:

  • Interest rates will start to come down. We expect the Fed to start cutting in May & the ECB to start cutting around April both with 5 cuts this year. There is some chance that both could start cutting in March. We expect the RBA to start cutting around June with 4 cuts this year.

  • Shares can potentially trade on higher PEs than otherwise.

  • Lower interest rates with a lag are likely to provide some support for real assets like property.

Of course, the main risk is if economies slide into recession, which will mean another leg down in share markets before they start to benefit from lower interest rates. This is not our base case but it’s a high risk.

Concluding comment

Finally, while inflation is on the mend cyclically, it’s worth remembering that from a longer-term perspective we have likely now entered a more inflation-prone world than the one prior to the pandemic reflecting: bigger government; the reversal of globalisation; increasing defence spending; decarbonisation; less workers and more consumers as populations age. So short of a very deep recession, don’t expect interest rates to go back to anywhere near zero anytime soon.

Dr Shane OliverHead of Investment Strategy and Chief Economist, AMP

Source: AMP January 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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