Year in review 2022 - 2023 | Australian equities

Australian equity market conditions remain volatile, with relatively high levels of inflation and rising interest rates – although there are indications that we’re getting close to the peak for both. In terms of interest rates, the Reserve Bank of Australia (RBA) could continue to increase rates but there’s now a more balanced case to pause. 

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Volatility in markets, I always think, is the market struggling to value companies in a changing economic environment. If we move into a ‘pause’ environment, markets are likely to become less volatile. Higher interest rates are also the key catalyst for concerns around a recession. Our view is that global developed markets will likely head into recession this year.

Australia, however, will likely avoid recession but grow at a slower rate. This view is consistent with bond yield curves around the world. Australia’s links to better performing Asian countries, as well as higher population growth from immigration will likely put us in a much better position. And while the consumer will remain vulnerable, commodities and, in particular, critical minerals are positive from a structural growth perspective.

As an investor, my job isn’t to try to eliminate risk, but rather to correctly price it. In fact, within the portfolio, I need to take on risk – but at the right price. I’ve been thinking quite a lot about this concept over the last 12 months as more and more risk has entered markets. Today, markets need to consider geopolitical risk, financial contagion risk, interest rate and inflation risk, risk from recession and regulatory risk, as well as the risk from increased taxation – much of which has now been priced in. 

But with this as a backdrop, equity markets now present a much more interesting opportunity. History teaches us that when significant risks are priced into equity markets, they’re more likely to provide better longer-term investment returns. There’s plenty to worry about, but that also presents better
opportunities for the future. 

In my view, you always want to invest in equities for at least a five to seven-year investment horizon, preferably 10. If you need the cash in 12 months, or even three years, there’s too much volatility in equity markets for short-term investments. But as we worry over the short term, I can’t help but get excited that I can now buy the market at a much better risk-adjusted price, which will likely deliver much better longer-term returns.

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