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Investment cycles – why investors need to be aware and wary of them

Posted On:Aug 10th, 2022     Posted In:Rss-feed-oliver    Posted By:Provision Wealth

Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital

Like a circle in a spiral, like a wheel within a wheel, Never ending or beginning, on an ever spinning wheel. As the images unwind, like the circles that you find, In the windmills of your mind.

Introduction

Cycles are part of life. Whether it be the

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Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP Capital

Like a circle in a spiral, like a wheel within a wheel, Never ending or beginning, on an ever spinning wheel. As the images unwind, like the circles that you find, In the windmills of your mind.

Introduction

Cycles are part of life. Whether it be the cycle of day and night, seasons, tides, weather cycles from the almost weekly cycles of cold fronts that regularly blow across southeast Australia to the longer La Nina and El Nino cycles, fertility cycles, birth and death, etc. And so, cycles are also endemic to economies and investment markets. Some are regular, some just rhyme. Despite attempts to end or subdue them via economic policy and regulation the cycle lives on. Usually when we declare investment cycles dead they come back to bite us. Sometimes they bring much joy to investors but they can also bring much angst. But what are they? What causes them? And why do investors need to be aware of them?

Cycles within (investment) cycles

Cycles in investment markets invariably refer to swings between good and bad returns. They usually take their lead from fundamental economic/financial developments but tend to be magnified by waves of investor optimism and pessimism. There are three cycles of particular relevance to investors.

The long term or secular cycle – share markets go through long term or secular bull and bear phases, often lasting between 10 to 20 years. This is most clearly evident in the US share market and illustrated by the following chart. It shows the cumulative real value of $100 invested in 1900. Secular bull markets – or 10-20 year periods where the trend in shares is up – can be seen in the 1920s, 1950s and 60s, the 1980s and 90s and arguably over the past decade. In between in the 1930s and 1940s, 1970s and 2000s are secular bear markets – which are long periods where shares have poor and volatile returns.

Long term bull and bear phases in US shares

Source: Bloomberg, R.Shiller, AMP

Secular bull and bear phases are often related to what is known as Kondratiev waves, named after Russian economist Nikolai Kondratiev who identified them and received the death penalty for his conclusions as they didn’t align with Stalin’s views. Kondratiev waves take their lead from waves of technological innovation. Starting in the 1780s, water power, textiles and iron drove the first industrial revolution; steam, rail and steel drove the second industrial revolution; electricity, chemicals and the internal combustion engine drove a third Kondratiev wave into the 1920s; petro chemicals, electronics and aviation drove a fourth wave in the 1950s & 1960s; the IT revolution helped drive a fifth wave in the 1990s and another spurt more recently. These were associated with secular bull markets in the 1920s, the 1950s & 60s, the 1980s & 90s and over the last decade, although the move to ever lower interest rates & the search for yield & speculation it drove also played big roles in the last two.

At the end of each long-term upswing, share markets reached overvalued extremes and investors had become excessively exposed as optimism that good times would roll on forever reached extremes. This left shares vulnerable as excesses such as too much debt (1930s and 2000s), excessive inflation (1970s) and excessive speculation in tech shares and then housing in the late 1990s and 2000s became overwhelming, giving way to economic weakness and secular bear markets.

The business cycle – this is the best known economic cycle and has a duration of 3 to 5 years. It tends to relate to the standard economic cycle where after a few years of economic expansion, inflation or other imbalances build up which results in monetary tightening, which leads to a downturn or recession, then falling inflation and monetary easing, which then sets the scene for the next expansion. It tends to underpin a 3 to 5 year cycle in investment markets with the stylised link to share markets, property and government bonds shown in the next chart. Shares tend to lead the business cycle – bottoming several months before an economic trough and vice versa at the top. Property markets tend to be more coincident.

The standard 3 to 5 year investment cycle

Source: AMP

In terms of actual share market fluctuations, the 3-5 year investment cycle is evident in the swings in rolling 12 month changes in Australian share prices. Periods of poor returns are invariably followed by periods of strong returns (and vice versa) but trying to time this can be very hard. See the next chart.

Australian share returns over rolling 12 mth (& 20 yr) periods

Source: ASX, Bloomberg, AMP

Short term sentiment cycles – within the 3 to 5 year investment cycle there are also short-term swings (weekly, monthly) between overbought and oversold for things like shares and currencies driven by sentiment, but which can relate to the tendency for economic and profit data to run through hot and cold periods, particularly relative to market expectations. They often give rise to corrections in share markets.

Some observations

There are several points to note regarding investment cycles:

  • No two cycles are the same but they do have common features, usually being set off by economic or financial developments accentuated by swings in investor sentiment. As such, while history doesn’t repeat, it rhymes.

  • There are cycles within cycles. For example, even though US shares were in long-term secular bear markets in the 1970s and 2000s they still saw periodic investment cycle swings up and down in economies and share markets.

  • When several cycles combine the impact can be huge. For example, a business cycle downturn in 2000 coincided with an end to the secular boom of the 1980s & 1990s and saw 50% falls in global shares in 2000 to 2003.

  • Despite various attempts to smooth them out (via economic policies) or declare them dead, cycles live on.

  • Cycles can be self-limiting as economic downturns lead to lower inventories, pent up demand and lower interest rates, which sow the seeds of recoveries. Share slumps result in cheap shares which entice bargain hunters and sow the seeds of a new bull market.

  • Investment cycles provide opportunities for investors to vary their asset allocation through the cycle, eg, buying more shares into downturns and cutting exposure into upswings.

  • But timing investment cycles is difficult. No one rings the bell at the top or bottom. And given the natural psychological tendency of individual investors to project recent market moves into the future and find safety in what the crowd of other investors are doing, the main risk is that investors, in seeking to time investment cycles, end up wrong footed by selling after big falls & buying after big gains. So, for most investors its important to be aware of cycles and understand that they are normal, but then to take a long-term approach to investing that looks through them and makes the most of the compounding of returns over long periods.

Where are we now?

The surge in inflation and aggressive monetary tightening by major central banks have knocked us into the downturn phase of the investment cycle. Economic indicators have generally started to slow and recession is a high risk, with central banks continuing to raise interest rates. US and global shares have already seen greater than 20% falls into their lows in June (and Australian shares fell 16%) and have since recovered just over a third of their decline. It’s possible we have seen the low in shares (as they lead the economic cycle) but the risk of a resumption of the bear market is high given central banks are yet to stop raising rates and the risk of recession remains high, which would drive earnings downgrades.

The shift to higher inflation may see the US share market move into a weaker more volatile phase of its long-term investment cycle. Australian shares with their greater exposure to resources may be better placed in a longer-term context.

Other cycles of relevance

Political cycles – these are less relevant in countries with an irregular political cycle like Australia. However, the US has a precise four-year federal political cycle and this has given rise to a fairly regular pattern. This sees below average returns in the first two years after an election but well above average returns in the third year (as the President seeks to stimulate the economy to help his parties’ re-election), and to a lesser degree in the fourth year. Right now, we are in the second year which is known for sub-par returns – particularly prior to the mid-term elections. The US political cycle for share returns normally improves once the mid-terms are out of the way in November and as we move into the third year of the US presidential cycle.

Seasonal patterns – There is also a well-known seasonal pattern in shares that sees strength from November reflecting the ending of US tax loss selling, a wind down in new equity raisings, new year cheer and the reinvestment of bonuses – continue after a brief pause around February into mid-year, before weakness from around May to October. Right now, we are in a period of seasonal weakness that runs into October.

The seasonal pattern in US and Australian shares

Source: Bloomberg, AMP

Concluding comment

Being aware of investment cycles, and how they influence ones’ investment psychology, is of critical importance for investors.

Source: AMP Capital August 2022

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 reasons why the RBA cash rate is likely to peak (or should peak) with a 2 in front of it rather than a 3 (or more)

Posted On:Aug 03rd, 2022     Posted In:Rss-feed-oliver    Posted By:Provision Wealth

Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital

Introduction

As widely expected, the RBA has increased the cash rate again by 0.5% taking it to 1.85%. This is more than double the 0.75% rate that applied before the pandemic started. The 175 basis points in rate hikes since April is the fastest back-to-back series of rate

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Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP Capital

Introduction

As widely expected, the RBA has increased the cash rate again by 0.5% taking it to 1.85%. This is more than double the 0.75% rate that applied before the pandemic started. The 175 basis points in rate hikes since April is the fastest back-to-back series of rate hikes since increases of 0.25%, 0.75% and 1% in October, November and December 1994 respectively.

In justifying another 0.5% hike the RBA noted that: inflation is the highest its been since the early 1990s and set to rise further with strong demand and a tight labour market playing a role; the labour market remains tight and businesses are pointing to a lift in wages growth; and it is important that medium term inflation expectations remain “well anchored”. While the RBA downgraded its growth forecasts to 3.25% for this year and to 1.75% for the subsequent two years it revised up its inflation forecast for this year from 6% to 7.75% and to 4% in 2023.

The RBA’s rapid rate hikes reflect a desire to bring demand back into line with constrained supply and to contain inflation expectations by reinforcing its commitment to its inflation target. Containing inflation expectations is critical as the 1960s and 1970s experience tells us the longer high inflation persists the more inflation expectations will rise and get built into price and wage setting making it even harder to get inflation back down.

Australian interest rates on the rise

Source: RBA, Bloomberg, AMP

The RBA’s commentary remained hawkish reiterating that it will do “what is necessary” to return inflation to target and it indicated that it expects to raise interest rates further. Banks are likely to pass the RBA’s rate hike on in full to their variable rate customers and deposit rates will rise further.

Five reasons why the cash rate will likely peak with a 2 in front of it rather than a 3 or more

Getting inflation back under control is critical as a rerun of the 1970s experience of high inflation will be disastrous for Australians, the economy and investment markets. So the RBA is right to sound tough and act aggressively now. However, we remain of the view that the cash rate won’t have to go as high for the RBA to cool demand enough to take pressure off inflation and keep inflation expectations down as the futures market and some economists are expecting. The futures market has lowered its expectations for the cash rate from above 4% two months ago but it and the consensus of economists is still factoring in a rise over 3% and some economists see it rising to 3.6% next year. There are five reasons why this is too hawkish:

#1 Global supply bottlenecks are easing and this will take pressure off inflation. This is evident in various global business surveys showing reduced delivery times, falling work backlogs, lower freight costs, lower metal and grain prices, and falling input and output prices. As a result, our Pipeline Inflation Indicator for the US is trending down. Core inflation in the US is showing signs of having peaked and Australia appears to be following the US by about six months, pointing to a peak in inflation here later this year. A return to more normal weather after the floods should also help lower local food prices.

AMP Pipeline Inflation Indicator

Source: Bloomberg, AMP

Related to this, while global energy prices (for oil, coal and gas) are likely to remain high, they may be at or close to their peak so their contribution to ongoing inflation may go to zero later this year. In Australia, some pressure may also come off electricity prices next year as the number of generators offline due to maintenance and breakdowns decline.

#2 Don’t read too much into what the RBA is saying. Some have interpreted the RBA’s recent comments – describing households as a whole as being in a “fairly good position” to withstand higher interest rates based on scenarios involving a 3% rise in interest rates and rates being well below estimates of “neutral” – as consistent with the cash rate likely rising above 3%. While the RBA has to sound tough to keep inflation expectations down, there is a danger in reading too much into its commentary regarding the path for interest rates. RBA commentary late last year indicating that it did not expect the cash rate to start rising before 2024 based on their then forecasts was not so reliable as it changed tack quickly once it was clear that it was wrong on inflation. It could easily do the same again.

  • The neutral rate of interest concept – which is the rate at which monetary policy is neither expansionary nor contractionary – is fine in theory but has numerous problems. We won’t know where it really is until we have gone past it. Its impacted by things like the level of debt and it was of little use in the pre-pandemic period when rates were below estimates of neutral and yet growth slowed.

  • It’s hawkish rhetoric now is designed to reinforce its seriousness about getting inflation down, but will quickly change tack once its confident its getting what it wants. Just like it’s very dovish guidance from a year ago was designed to push up inflation expectations but then span on a dime.

  • Its sanguine comments on the financial health of the household sector sound just a bit too sanguine – see below.

The RBA is just another forecasting outfit – albeit with more resources, but this does not make it any more accurate than other commentators when it comes to interest rates. It also has a role in influencing expectations that other commentators don’t have. So reading too much into its guidance can be misplaced.

#3 Medium term Australian inflation expectations remain reasonably low. See “What are inflation expectations telling us?”. This makes the RBA’s task a bit easier – albeit it has to sound tough for a while to make sure it remains the case.

#4 Many households will see significant mortgage stress with a 3% or more rise in interest rates. On average, the household sector is in reasonable shape once the rise in wealth, a build up in excess saving and mortgage buffers (people being ahead on their repayments) is allowed for. But averages can be deceiving – a bit like having one arm in the freezer and one in the oven and saying on average you are okay. While RBA analysis shows that just over one third of households with a variable rate mortgage will see no increase in their payments with a 3% rise in interest rates, more than a third of all households with a mortgage – whether variable or fixed – will see a greater than 40% increase (and much more so for those on fixed rates). Roughly speaking, this is about 1.3 million households. This, at a time of falling real wages, will have a huge impact on spending in the economy and risk a significant rise in forced property sales. Coming at a time when home prices are already falling rapidly due the impact of rising rates on home buyer demand it will only add to home price falls, which will weigh further on consumer spending.

Looked at another way – a new borrower with an average $600,000 mortgage will have seen around a $600 a month increase in their monthly repayment since April once the latest rate hike is passed through. That is roughly an extra $7000 a year. Taking the cash rate to 3.1% would imply an extra $12,300 a year since April in mortgage payments. This is a huge hit to the household budget and spending power.

The surge in house prices and hence household debt levels over the last 30 years was made possible by falling interest rates. A rise in the cash rate to 3% or more would push total mortgage repayments (ie, interest and principal) to record highs relative to household income.

#5 It looks like the RBA is getting traction in slowing demand – far earlier than normal. While job indicators are still strong these are lagging indicators. By contrast consumer confidence is at recessionary levels & well below where it’s been at this point in past RBA rate hiking cycles.

Consumer confidence

Source: Westpac/MI, AMP

Likewise, national average home prices are falling with the pace of decline accelerating in July, with the 3-month rate of decline comparable to that seen in the GFC and the recessions of the early 1980s and 1990s. This will depress consumer spending via negative wealth effects.
Capital city home prices

Source: Core Logic, AMP

The earlier than normal hit to confidence and house prices reflects a combination of: higher household debt levels compared to what was the case in past rate hiking cycles; the fact that this tightening cycle started with the sharp rise in fixed mortgage rates that started last year; and cost of living pressures that have seen an unprecedented plunge in real wages. There is tentative evidence that this is starting to show up in slowing consumer spending with credit and debit card transactions looking like they are slowing, hotel and restaurant bookings looking like they are rolling over and July retail sales implying now falling retail sales in real terms. So, RBA monetary tightening appears to be getting traction earlier than would normally occur in an interest rate tightening cycle. All of which will start to take pressure off demand and hence inflation.

Concluding comment

For these reasons, our assessment remains that the RBA won’t need to raise the cash rate above 3% and that the peak will be around 2.6% either later this year or early next. By late next year rates are likely to be falling. This implies a slowing in the pace of rate hikes ahead which should help head off worst case scenarios for the property market and the economy.

Source: AMP Capital August 2022

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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The good news in the plunge in markets

Posted On:Jul 26th, 2022     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
– higher medium term return potential (assuming inflation is tamed)

Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital

Introduction

The start of this year has been painful for investors with sharp losses in shares and bonds, dragging most superannuation funds into negative returns for the last financial year. And yet despite this setback and rough patches in

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– higher medium term return potential (assuming inflation is tamed)

Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP Capital

Introduction

The start of this year has been painful for investors with sharp losses in shares and bonds, dragging most superannuation funds into negative returns for the last financial year. And yet despite this setback and rough patches in 2015, 2018 and in early 2020 with pandemic lockdowns, median balanced growth superannuation funds returned 8.4% pa over the 10 years to June after fees and taxes. While dull compared to the double digit returns of the 1980s and 1990s, it’s pretty good once low average inflation of 2% pa over the last decade is allowed for.

Balanced/growth superannuation fund returns

Source: Mercer Investment Consulting, Morningstar, AMP

However, returns have been boosted for decades by a “search for yield” as interest rates collapsed with falling inflation. This pushed down investment yields (bond yields, earnings yields on shares, rental yields on property, etc) and so pushed up asset values. But the sting in the tail was that ever lower yields meant an ever lower return potential for when yields eventually stopped falling. The good news in the recent fall in markets is that it’s pushed potential medium term returns back up a bit.

Lower yields = lower return potential & vice versa

Investment returns have two components: yield (or income flow) and capital growth. What gets confusing though is that the price of an asset moves inversely to its yield all other things being equal. For example, suppose an asset pays $5 a year in income and its price is $100 – this means an income flow or yield of 5%. If interest rates on bank term deposits are cut from say 3% to 1% this will likely encourage increased investor interest in the asset as investors will like its relatively high yield. Its price will then be pushed up – to say $120, which given the $5 annual income flow means that its yield will have fallen to 4.2% (ie, $5 divided by $120). This is great for investors who were already in the asset as its value has gone up by 20%. But its yield is now pointing to lower potential returns going forward (ie, 4.2% which is down from 5%), unless the yield continues to fall further boosting capital growth. But of course, there is a limit to this & it also works in reverse as maybe we are now starting to realise with the surge in inflation over the last year, which is pushing up interest rates, bond yields & yields on other assets.

The plunge in yields since the early 1980s

In the early 1980s, the RBA’s “cash rate” was around 14%, 1-year term deposit rates were nearly 14%, 10-year bond yields were around 13.5%, commercial and residential property yields were around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally. This meant investments were already providing very high income so only modest capital growth was needed for growth assets to generate good returns. And then with the shift from very high inflation in the early 1980s to very low inflation up until recently, the last 40 years saw a collapse in yields. This was led by falling interest rates and then yields on other assets were pushed down too. See the next chart. Consistent with the explanation in the previous section this led to strong average returns for diversified investors through the last 30 or 40 years, despite periodic setbacks like the 1987 crash, the tech wreck and the GFC.

Australian investment yields

Source: Bloomberg, REIA, JLL, AMP

At their recent low point the RBA’s official cash rate fell to 0.1%, average bank 1-year term deposit rates fell to 0.25%, 10-year bond yields fell to 0.6%, gross residential property yields fell to 2.2%, commercial property yields fell below 5%, dividend yields fell below 4% for Australian shares (with franking credits) and just 2% for global shares. The problem was that with the cash rate and bond yields around zero there wasn’t much further for yields to keep falling. This saw our assessment of nominal medium term return projections for a balanced growth mix of assets fall below 5%. The good news is that with yields on cash, bonds and shares now up and asset prices down their return potential has improved.

Medium-term (ie, 5 to 10 year) return projections

Our approach to get a handle on medium-term return potential of major asset classes is to start with current yields and apply simple and consistent assumptions regarding capital growth. We also prefer to avoid forecasting and like to keep it simple.

  • For bonds, the best predictor of future medium-term returns is current bond yields – as can be seen in the next chart. If a 10-year bond is held to maturity its initial yield (3.3% right now in Australia) will be its return over 10 years. This is still low historically but well up from a low of just 0.6% in 2020.

Australian bonds – the higher the bond yield the better the return

Source: RBA, Bloomberg, AMP Capital

  • For equities, current dividend yields plus trend nominal GDP growth (a proxy for capital growth) does a good job of predicting medium-term returns.i The Australian dividend yield is up by more than 1% from late last year.

  • For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth. The surge in online spending and “work from home” means greater than normal uncertainty around these returns at present.

  • For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation.

  • In the case of cash, the current rate is of no value in assessing its medium-term return. So, we allow for our forecast cash rate over medium term.

Our latest return projections are shown in the next table. The second column shows each asset’s current income yield, the third shows their 5-10 year growth potential, and the final column shows their total return potential. Note that:

  • We assume inflation averages around 2.5% pa, and this has been revised up from 1.5% pa (after years of low inflation pre-pandemic). We are assuming that central banks are successful in bringing inflation back to around target and keeping it there on average over the next 5-10 years.

  • We have cautious real economic growth assumptions reflecting the: retreat from globalisation, deregulation and small government in favour of populist, less market friendly policies; rising geopolitical tensions between the West and China/Russia; and aging populations and slowing population growth – resulting in slowing labour force growth. All of which will likely constrain capital growth for growth assets.

Projected medium term returns, %pa, pre-fees and taxes

 

Current Yield #

Growth

= Return

World equities

2.8^

4.7

7.5

Asia ex Japan equities

2.3^

7.4

9.7

Emerging equities

0.1^

7.3

7.4

Australian equities

5.0 (6.5*)

3.7

8.7 (10.2*)

Unlisted commercial property

4.8

2.5

7.3

Australian REITS

4.7

2.5

7.2

Global REITS

3.9^

2.5

6.4

Unlisted infrastructure

3.7*^

3.0

6.7

Australian bonds (fixed interest)

3.2

0.0

3.2

Global fixed interest ^

3.2

0.0

3.2

Australian cash

2.5

0.0

2.5

Diversified Growth mix *

 

 

6.8

# Current dividend yield for shares, distribution/net rental yields for property and duration matched bond yield for bonds. ^ Includes forward points. * With franking credits added in. Source: AMP

Key observations

  • After falling for many years due to the fall in starting point yields for major assets the medium-term return potential using this approach fell below 5% in late 2020 but has improved this year to nearly 7%. This is partly due to a 1% higher medium term inflation assumption, but the rest is due to the rise in interest rates, bond yields and yields on assets including shares over the last year. This is the silver lining to the cloud (or rather storm) that has hit investment markets.

Projected medium term returns

Source: AMP

  • The return potential from commercial property and infrastructure has not improved much because their yields have not risen unlike those for bonds and shares (as their valuations lag). There is also greater uncertainty in the demand for office and retail space as the full impact from working from home and on-line retail is yet to impact rents.

  • The return potential of bonds is still poor but with now higher bond yields its well up from the lows of the last two years.

  • Australian shares stack up well on the basis of yield and Asian shares stack up well for growth potential.

  • The main downside risk to our medium-term projections is that inflation trends even higher driving a further trend rise in interest rates, bond yields and yields on other assets (including property & infrastructure) resulting in an ongoing drag on capital growth (ie, further reversing the “search for yield” driven surge in values over the last 30 years or so).

Implications for investors

  • First, bear markets are painful and are hard to predict, but they do push up the medium-term return potential of shares and so provide opportunities for investors

  • Second, have reasonable return expectations. Interest rates and investment yields are still historically low so its unreasonable to expect sustained double-digit returns.

  • Finally, focus on assets with decent sustainable income flow as they provide confidence regarding future returns.

Source: AMP Capital July 2022

i Adjustments can be made for: dividend payout ratios (but history shows retained earnings often don’t lead to higher returns so the dividend yield is the best guide); the potential for PEs to move to some equilibrium level (but forecasting the equilibrium PE can be difficult and dividend yields send valuation signals anyway); and adjusting the capital growth assumption for some assessment regarding profit margins (but this is hard to get right). So, we avoid forecasting these things.

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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Inflation in the 70s – baby boomer fantasy or nightmare?

Posted On:Jul 13th, 2022     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
Why central banks must focus on getting inflation back down

Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital

Introduction

I grew up in the 1970s and it was fun – Abba, Elvis, Wings, JPY, flares, cool cars, etc. But economically it was a mess. Inflation surged and so did unemployment. And it was bad for investors too.

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Why central banks must focus on getting inflation back down

Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP Capital

Introduction

I grew up in the 1970s and it was fun – Abba, Elvis, Wings, JPY, flares, cool cars, etc. But economically it was a mess. Inflation surged and so did unemployment. And it was bad for investors too. After years of economic pain voters turned to economically rationalist political leaders – like Thatcher, Reagan and Hawke & Keating – to fix it up. Their policies to boost productivity ultimately culminating in independent inflation targeting central banks along with the help of globalisation, more competitive workforces and the IT revolution got inflation under control from the 1980s and 1990s. So much so that there was even talk of “the death of inflation”. The experience of the last year when inflation has surged tells us that unlike the parrot in Monty Python it really wasn’t dead but just resting. Initially its rise was seen as “transitory”. And many are still questioning why central banks need to do much – what will RBA rate hikes do to bring high lettuce prices back down? – and that central bank worries about wages growth picking up causing a wage price spiral are just a baby boomer fantasy. So just sit it out. The 1970s experience suggests otherwise.

So what happened in the 1970s?

Many associated the inflation of the 1970s with the oil shocks of 1973 and 1979 but it actually got underway before that.

US inflation, 1960 to 1990

Source: Bloomberg, AMP

From around the mid-1960s inflation started moving up, notably in the US and then later in Australia reflecting a combination of:

  • A big expansion in the size of government and welfare.

  • Disruption associated with the Vietnam War.

  • Tight labour markets (with unemployment falling to 3.4% in 1969 in the US and spending most of the 1960s below 2% in Australia) led to more militant workers and surging wages.

  • Easy monetary policies which supported high inflation.

  • Social unrest & industry protection also played a role.

From 1965 to 1969 US inflation rose from below 2% to above 6%. US monetary policy was tightened driving a recession in 1969-70 which saw inflation dip. Monetary policy was then eased but before inflation came under control so it bottomed well above 1960’s lows and started up again forcing a return to monetary tightening. In 1973 inflation had already increased to 8% before the OPEC shock. The same whipsaw happened after another recession in 1974-75 which saw inflation bottom out above its previous high only to take off again. The process only ended with the deep recessions of the early 1980s.

US inflation, wages grth & unemployment, 1960-90

Source: ABS, AMP

It was pretty much the same story in Australia, although here it started more in the early 1970s and was made worse by 20% plus wages growth and massive fiscal stimulus in 1974.

Australian inflation, wages grth & unemployment, 1960-90

Source: ABS, AMP

And in Australia, the automatic indexation of wages to inflation from 1975 just helped lock in high inflation (as wages add to costs) with only the 1983 Accord breaking the nexus by trading off wage increases for tax cuts and social benefits.

The end result was a decade of high inflation and high unemployment. The problem was that policy makers were too slow to realise the extent of the inflation problem initially and then were too quick to ease which enabled inflation to quickly pick up again and move higher. The longer inflation persisted the more inflation expectations rose – with wage growth rising – making it harder to get inflation back down.

Why the concern today?

There are several reasons for concern about a return to the sustained high inflation of the 1970s today:

  • Labour markets are very tight once again. Wages growth in the US has already increased to around 5%.

  • Demand has been strong suggesting that the problem is not just due to supply disruptions.

  • We are seeing a run of supply shocks – with notably the war in Ukraine, another energy crisis & repeated floods locally.

  • Government policy has swung away from the economic rationalist approaches of the 1980s – with more tolerance for bigger more interventionist government – as median voters have swung back to the left.

  • The globalisation that followed the end of the USSR and trade with China is under threat and appears to be reversing, not helped by a desire to onshore supply chains.
  • This is being reinforced by geopolitical tensions which are boosting defence spending which adds to metal demand.

  • Decarbonisation will boost near term costs & metal demand.

  • The ratio of workers to consumers is falling and the entrance of millennials to the workforce replacing retiring baby boomers will depress productivity (just as the boomers did in the 1970s).

  • Policy makers were caught focussing on the last war of disinflation coming out of the pandemic just as they were in the 1960s when the big fear was a return to 1930s deflation. This saw massive fiscal stimulus and money supply growth.

  • Inflation is now very high at around 9% in the US, Europe and UK and an estimated 6% in Australia and as we saw in the 1970s the longer it remains high the more businesses and workers will expect it to remain high and they will plan accordingly. That is, inflation expectations will move up, which will make it harder to get inflation back down.

So while central banks can’t do much to boost the supply of lettuces and lower petrol prices they are right to have moved to a more aggressive strategy as it will slow demand and by stressing that they are committed to returning inflation to target will help keep inflation expectations down.

Why high inflation is bad news for investors?

The 1970s experience warns it’s in investors long term interest to get inflation under control even if it involves a bit of short term pain. For investment markets high inflation is bad as it means:

  • Higher interest rates – which makes cash more attractive and other assets relatively less attractive.

  • Higher economic volatility and uncertainty – the period from 1969 to 1982 saw four recessions in the US and three recessions in Australia. This means that investors will demand a higher risk premium to invest.

  • For shares, a reduced quality of earnings as firms tend to understate depreciation when inflation is high.

The first two mean rising bond yields which means capital losses for investors in bonds. This tends to unfold gradually.

All three mean shares tend to trade on lower price to earnings multiples when inflation is high, and real growth assets (like property) generally tend to trade on higher income yields. This was seen in the high inflation 1970s when shares struggled. It means that the boost to earnings (or say rents in the case of property or infrastructure) from inflation tends to be offset by a negative valuation effect as investors demand lower PEs/higher yields. See here for a deeper explanation.

So the bottom line is that a sustained period of high and rising inflation can be a problem for bonds, shares and other growth assets. As can be seen in the next chart, the high inflation 1970s was one of the few decades to see poor real (ie after inflation) returns from bonds and shares.

The 1970s saw poor returns from shares and bonds

Source: Global Investment Return Yearbook ABN/AMRO, Bloomberg, AMP

So, it’s in investors’ interest that inflation is kept low and stable.

Reason for optimism a return to the 1970s is unlikely

While many of the structural forces that drove the disinflation of the last few decades are reversing and suggest higher inflation over the decade ahead than seen pre-pandemic, sustained 1970s style high inflation appears unlikely:

  • Central banks understand the problem and the need to keep inflation expectations down, and are now committed to bringing inflation back to target with Fed saying the commitment is “unconditional” (even if it means a recession) and the RBA saying it will do “what is necessary”.

  • While inflation is high, longer term inflation expectations remain low (at 3.1% in the US compared to nearly 10% in 1980) and wages growth is still relatively low suggesting it should be easier to bring inflation down than it was in 1980.

US University of Michigan Consumer Inflation Expectations

Source: Macrobond, AMP

  • Related to this labour markets are far more competitive today with much lower levels of unionisation. In Australia, only 14.3% of employees (including me) are in a union whereas in 1976 it was at 51% of employees.

  • Finally, as we noted here there are signs of easing cyclical inflation pressure in the US & its leading by about 6 months.

So, while inflation may not go back to pre-pandemic lows and the longer-term tailwind for investment markets from ever lower inflation and interest rates may be behind us, a full on return to the 1970’s malaise looks unlikely.

Source: AMP Capital July 2022

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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2021-22 saw poor investment returns – the bad news and the good

Posted On:Jul 06th, 2022     Posted In:Rss-feed-oliver    Posted By:Provision Wealth

Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital

Key points

2021-22 was a rough year for investors as high inflation, rising interest rates and recession fears impacted.

Shares could still fall further as interest rates continue to rise and recession risks are high. However, inflation pressures are showing some signs of easing which may take pressure off

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Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP Capital

Key points

  • 2021-22 was a rough year for investors as high inflation, rising interest rates and recession fears impacted.

  • Shares could still fall further as interest rates continue to rise and recession risks are high. However, inflation pressures are showing some signs of easing which may take pressure off central banks from later this year.

  • Some key things for investors to keep bearing in mind are that: share pullbacks are healthy and normal; selling shares after a fall locks in a loss; share pullbacks provide opportunities for investors to buy them more cheaply; and to avoid getting thrown off a long-term investment strategy it’s best to turn down the noise.

Introduction

The past financial year was poor for investors as inflation, rising interest rates and recession fears hit investment markets. This note reviews the past 12 months and looks at the outlook.

Inflation and recession worries

While inflation was on the rise in the six months to December pushing up bond yields the impact for share markets was swamped by economic recovery from the pandemic and surging share markets so overall returns slowed but were still positive. The last six months have been a lot tougher though:

  • The surge in shares from their pandemic lows in 2020 into late 2021 had left them vulnerable to a pullback.

  • Inflation rose to its highest levels in decades reaching 8.6% in the US and Europe and an estimated 6% in Australia, reflecting distortions to demand and supply bottlenecks due to the pandemic. This was made worse by the war in Ukraine and lockdowns in China along with the electricity crisis and floods in Australia.

  • This pushed central banks to start raising interest rates aggressively to slow demand and stop inflation expectations rising (which would make it even hard to get inflation down).

  • This in turn led to increasing concerns of a recession.

  • The war in Ukraine and tensions with China have added to uncertainty.

  • A surge in bond yields (with Australian 10 year bond yields rising from 1.55% to 3.66%) on the back of surging inflation and interest rates added to downwards pressure on share markets by pushing price to earnings multiples lower.

Poor returns

The net result has been poor investment returns over the last financial year for most listed assets as can be seen in the next chart.


2021-22 – major asset class returns

Source: Bloomberg, AMP

Bonds have had their worst 12 month return in decades as the surge in bond yields resulted in capital losses for investors. Australian bonds lost 10.5% over the last 12 months which is worse than their losses in the “bond crash” of 1994 and looks to be their worst 12 month loss since the 1973 or the 1930s. The severity of the loss reflects the low starting point yield and the speed of the rise in bond yields.

Returns from Australian bonds over rolling 12 month periods

Source: Bloomberg, RBA, AMP

Global shares lost 11.1% in local currency terms. A fall in the growth sensitive Australian dollar saw this reduced to a loss of 6.5%. Bear in mind this followed gains of 37% and 28% respectively in the previous financial year.

Naturally the most speculative assets like tech stocks (with Nasdaq losing 24%) and crypto currencies (with Bitcoin down 46%) were hit the hardest. But commodities returned 22.5% in US dollars due to strong demand, supply shortages & the war.

Australian shares were also dragged down – particularly as the RBA got more aggressive in raising rates in June – with a loss in the last financial year of 6.5%.

High bond yields and falling share markets also weighed on real estate investment trusts.

Unlisted commercial property and infrastructure provided solid returns although these often lag returns from listed assets. Australian residential property prices rose 11% but price gains progressively slowed and have now started to fall as poor affordability and rising mortgage rates hit the property market.

Combined, this drove an estimated average loss on balanced growth superannuation funds of -3 to -5% after fees & taxes.

Balanced/growth superannuation fund returns

Source: AMP

It’s worth putting this in context though as in the 2020-21 financial year balanced growth super funds returned around 18.5% and over the last five years they returned 5.8% pa which is solid given that inflation averaged 2.6% pa.

Conservative superannuation funds are likely to have had a similar or worse loss in the financial year reflecting the hit to bond returns. Normally bonds are a safer less volatile asset class than shares, and so conservative funds tend to have a higher exposure to them than shares. However, every so often bonds have a rough ride at the same time as shares – usually when inflation is a big problem and central banks are raising interest rates which pushes up bond yields rapidly resulting in negative returns from both fixed income (as bonds suffer a capital loss when yields rise) & shares. The result is that both conservative and balanced growth funds can have poor returns in such environments as we have seen over the last year.

The last time we saw something similar with poor returns from conservative and balanced funds was in the bond crash of 1994 when inflation fears saw central banks including the RBA raise interest rates aggressively from emergency levels after the early 1990s recession. This time around inflation has been much higher and bond rates have increased from even lower levels and so it’s been even more severe for bonds.

The big lesson from 2021-22

The big lesson from 2021-22 was that inflation – long thought to be dead and a baby boomer nightmare from the 1970s – was just resting and can raise its ugly head when the circumstances are right. And the last year showed just how much damage it can do to assets like bonds and shares if it gets out of control. The good news is that central banks are taking the threat seriously providing confidence that permanently much higher inflation will avoided (and that bonds may go back to being a good diversifier for shares). Given the disaster the 1970s was for economies and investments I would rather endure the short-term pain of putting the inflation dragon back in its cave than let it continue to roam free torching economies and investments.

The bad news – shares may still fall further

The bad news is that inflation is still rising (and expected to rise to 7%yoy in Australia this year) and where it’s not it’s still too high for comfort (eg with core private consumption deflator inflation in the US at 4.7%yoy), inflation expectations still risk breaking higher which would make it even harder to get inflation back down and central banks “unconditional” (in the words of Fed Chair Powell) focus on keeping inflation expectations down and returning inflation to target means even higher interest rates which is resulting in a rising risk of recession. And risks remain high around the war with Ukraine particularly with Russia seemingly starting to reduce gas flow to Germany.

So the bottom line remains that until there is clear evidence inflation is falling central banks will continue tightening, keeping recession risk high. And if a recession eventuates shares likely have more downside as earnings start to fall, because the falls in markets so far mainly reflect a valuation adjustment (ie lower PEs) in response to higher bond yields. Given the uncertainties it’s still too early to say that shares have bottomed. The September quarter is traditionally weak for shares which suggests shares could still fall into September or October.

The good news

Slowing economic data globally, as highlighted by a decline in the US ISM index, signs that US core inflation and wages growth may have peaked and a continuing decline in our US Pipeline Inflation Indicator as upstream price pressures ease – with falling work backlogs, freight rates, metal prices and grain prices – are positive signs in that they suggest pressure may come off central banks later this year enabling them to ease up on the interest rate brake in time to avoid a recession.

AMP Pipeline Inflation Indicator

The Inflation Pipeline Indicator is based on commodity prices, shipping rates and PMI price components. Source: Macrobond, AMP

In Australia, low consumer confidence and falling home prices indicate monetary tightening is already starting to get traction reflecting higher household debt levels and that the tightening started last year with rising fixed rates as the RBA ended its yield target. This in turn is likely to limit how much the RBA needs to, and will, raise rates to well below the 3.5% plus cash rate that the futures market has factored in. We continue to see the cash rate peaking around 2.5% in the first half next year.

So while share markets could fall further in the next few months, cooling demand and reduced supply bottlenecks hence cooling inflation pressures could start to take pressure off central banks later this year thereby avoiding recession (or at least a severe recession) and enabling share markets to move higher on a 12 month view.

Things for investors to keep in mind

Of course, short term forecasting is fraught with difficulty and it’s best to stick to sound long term investment principles in times of uncertainty. Several things are worth keeping in mind at present: setbacks in shares are normal; selling shares or switching to a more conservative super 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 versus bank deposits; shares and other assets often bottom with maximum bearishness; & 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.

Source: AMP Capital July 2022
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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Australia’s Achilles’ heel – high household debt and rising interest rates

Posted On:Jun 28th, 2022     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
…it’s not as bad as it looks, but it’s still an issue

Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital

Introduction

If Australia has an Achilles’ heel it’s the high level of household debt that has accompanied surging home prices over the last 30 years. Of course, in the absence of a major trigger for debt servicing

Read More

…it’s not as bad as it looks, but it’s still an issue

Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP Capital

Introduction

If Australia has an Achilles’ heel it’s the high level of household debt that has accompanied surging home prices over the last 30 years. Of course, in the absence of a major trigger for debt servicing problems – either from a surge in unemployment or a surge in interest rates – it hasn’t so far caused a major problem for the economy. Fears that the pandemic would deliver a trigger in the form of higher unemployment were quickly headed off by JobKeeper and record low interest rates. But a potential trigger is now upon us again with rising interest rates.



At one extreme some see rising interest rates and high household debt as setting the scene for a perfect storm of a surge in mortgage stress, forced selling and a crash in property prices causing a big hit to the economy. At the other extreme some point out that the household sector is actually in good shape given a surge in wealth including a big rise in bank deposits so there is no need for concern. The truth is probably in between these two extremes. And much depends on how high interest rates go. This note looks at the main issues.

Australia – from the bottom to the top in debt

The next chart shows the level of household debt relative to annual household disposable income for major countries.

Household debt to income ratios

Source: OECD, ABS, RBA, AMP

While rising household debt has been a global phenomenon, debt levels in Australia have gone from the bottom of the pack to near the top. In 1990, there was on average $69 of household debt for every $100 of average household income after tax. Today, its $187 of debt for every $100 of after-tax income.

What’s driven the rise in debt?

The increase in debt reflects four things. First, increased competition amongst lenders following financial deregulation in the 1980s which made debt more available. Second, progressively lower interest rates since the late 1980s have made debt seem more affordable. Third, attitudes to debt have become more relaxed as memories of wars and severe economic downturns have faded so debt seems less risky at the same time that modern society encourages instant gratification as opposed to saving for what you want. So, each successive generation since the Baby Boomers have been progressively more relaxed about taking on debt. And finally, it’s become somewhat self-feeding in that rising debt has enabled home buyers to pay more for homes which in turn has necessitated rising debt levels to get into the property market.

The rise in household debt has gone hand in hand with higher home prices relative to incomes in Australia

Source: ABS, CoreLogic, AMP

It’s not quite as bad as it looks

There are several reasons why it’s not quite as bad as it looks:

  • First, the rise in debt partly reflected a rational adjustment to lower rates and greater credit availability since the 1980s.

  • Second, household debt has been trending up since credit was invented. It is unclear what a “safe” level is.

  • The rise in debt has been exceeded by a rise in wealth. Thanks to a surge in the value of houses and financial wealth, we are far richer. In particular, thanks to low rates & recovery from the pandemic total household wealth rose 32% over the two years to the March quarter with the value of dwellings up 40%, super up 30% and bank deposits up 26% (as income and government payments were saved during the pandemic). The value of average household wealth has gone from 5 times average after-tax household income in 1990 to 11.4 times in the March quarter.

Aust household wealth and debt relative to income

Source: ABS, RBA, AMP

So, while average household debt for each Australian has risen from $11,779 in 1990 to $107,318 now, average wealth per person has surged from $87,489 to $655,894.

Australian per capita household wealth and debt

Source: ABS, RBA, AMP

As a result, Australians’ household balance sheets, as measured by net wealth (assets less debt), are healthy. Net wealth relative to income has surged over the last 30 years and is high relative to comparable countries.

Aust household balance sheet in reasonable shape

Source: OECD, ABS, RBA, AMP

  • Fourthly, Australians are not having big problems servicing their loans with low non-performing loans. This may reflect record low mortgage rates until recently.

Household interest payments relative to disposable income

Source: RBA, AMP

  • Fifthly, the dollar value of debt is concentrated in higher income households who have a higher capacity to service it, particularly in relation to investment property loans.

  • Finally, lending standards did not deteriorate to the same degree in Australia as they did in the US prior to the GFC and were tightened from mid last decade with banks having to assess each new borrower’s ability to pay mortgage rates 2.5 percentage points above the borrowing rate up to October last year and 3 percentage points above since then.

But high debt has likely still increased the vulnerability of the household sector

While this analysis indicates that the rise in household debt in Australia is not as bad as it appears, its rise still leaves many households more vulnerable to rising interest rates (& higher unemployment) than in the past. After all, “it’s not what you own that might send you bust but what you owe.”

  • While the rise in wealth is good news it does not mean that there is no reason for concern. Debt has to be serviced out of income as opposed to out of wealth (as a colleague pointed out it’s not possible for a homeowner to sell off a bedroom to make higher interest payments). What’s more the surge in wealth, particularly for dwellings, flowed partly from low interest rates and is now coming under pressure as rates rise. We expect home prices to fall 10-15% which risks driving negative equity for recent low deposit home buyers.

  • The rise in debt means that moves in interest rates are now nearly three times as potent compared to 30 years ago. Just a rise in the cash rate to 2.5% will see a near doubling in debt interest payments as a share of household income (see last chart) and take them to where they were in 2013 (after which economic growth was relatively sluggish in Australia). A rise in the cash rate to around 4% (which is the money market’s expectation for next year) will push interest payments from around 5.2% of income to around 12%.

  • Coming at a time of falling real incomes due to cost-of-living pressures this implies a significant hit to household spending power.

  • While many households have built up cash buffers and are ahead on their mortgage payments and the household saving rate remains high, RBA analysis also indicates there is a significant group who would see a sharp rise in their mortgage payments if mortgage rates rose by 2% and most economists and the market expect more than this.

  • This group is likely to include those who bought into the property market more recently who have had less time to get ahead on their mortgages. While the dollar value of debt is concentrated amongst higher income households, its high amongst 30-40 year olds – ie, recent buyers with young families – and it’s this group who are most likely to be the marginal consumers who will likely have to cut their spending in response to rising interest rates and costs.

  • Rising unemployment should the economy fall into recession would add to debt servicing problems.

  • Poor consumer confidence and accelerating home price declines in Sydney and Melbourne (and other cities seeing a rapid slowing) far earlier in this rate hiking cycle than normal warn of the household sector’s increased vulnerability.

Concluding comment

This all sounds rather gloomy. The key though is that the RBA only needs to raise interest rates far enough to cool demand to take pressure off inflation and keep inflation expectations down. While the household sector in aggregate is stronger than a focus on household debt alone would suggest, the rise in household debt has made monetary policy more potent than it was in the past which in turn will limit how much the RBA will need to raise interest rates by. While the RBA is hiking more aggressively now to reinforce its commitment to the 2-3% inflation target, the greater sensitivity of the household sector to rising interest rates is likely to become evident fairly quickly which will mean the RBA won’t have to raise interest rates as far as the 4% or so cash rate that the money market is assuming. We continue to see the cash rate topping out at around 2.5% in the first half next year.

Source: AMP Capital June 2022

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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