Oliver’s insights – 2023 saw the return of Goldilocks, but what’s in store for 2024 for investors?

Key takeaways

The five key themes for 2023 were: better than feared growth; disinflation; peak interest rates (probably in Australia too); lots of geopolitical threats but not as bad as feared; and AI hit the big time. This boosted shares and helped bonds with solid superannuation fund returns.

2024 is likely to see positive returns helped by falling rates but they are likely to be more constrained given likely volatility associated with the high risk of a recession.

Expect the RBA cash rate to fall to 3.6%, the ASX 200 to rise to 7500 and balanced super funds to return around 5.3%.

Australian residential property prices will likely see falls as high rates resume their impact after prices rose in 2023.

Things to keep an eye on: inflation; interest rates; recession risk; China risks; US politics; and the Australian consumer.

Despite lots of angst at the start of the year, 2023 turned out far better than feared.

Shane Oliver Banner

Key big-picture themes of relevance for investors were:

1.  Stronger than feared growth.  Despite fears that recession was inevitable, on the back of multiple rate hikes and a rough reopening in China, it’s been avoided so far, including in Australia, helped by saving buffers, reopening boosts, particularly to eating out & travel and some labour hoarding. Economic growth in 2023 looks to have been around 3% globally and around 1.9% in Australia which was helped by a population surge partly offsetting severe mortgage pain for some.

2.  Disinflation. Inflation across major countries has fallen sharply from peaks of 8 to 11% last year to around 2 to 5%. Australia lagged on the way up and is doing the same on the way down, but it’s falling too.

Inflation Falling As Fast As It Went Up

3.  Peak interest rates. It took longer to get there and there was a “high for longer” scare on rates but most major central bank policy rates look to have peaked and this probably includes the RBA’s cash rate.

4.  Geopolitical threats proved not to be as worrying as feared – the war in Ukraine remained contained, conflict in Israel flared again but so far has not spread to key oil producers (oil prices actually fell a bit) & the Cold War with China thawed a bit. A lack of major elections helped.

5.  Artificial intelligence hit the big time after the launch of Chat GPT with hopes it will boost productivity. The immediate beneficiaries were key (mostly US) tech stocks – which helped them reverse the 2022 slump.

The return of Goldilocks

There were lots of bumps along the way – notably in the seasonally weak August to October period on the back of the sticky inflation/high for longer rates scare.

But for diversified investors 2023 turned out okay with okay growth & falling inflation.

The next table shows investment returns.

Investment Returns For Major Asset Classes

  • Global shares had a strong year as investors looked through more rate hikes and focussed on still strong profits and prospects for rate cuts.
  • Chinese shares underperformed again on economic and property worries and this weighed on emerging market shares. Japanese shares outperformed followed by US shares with their high-tech weight.
  • After outperforming in 2022, Australian shares underperformed on the back of worries about China & interest rate-sensitive consumers.
  • Government bonds slumped into October as yields rose to new highs but then rallied in anticipation of rate cuts giving modest returns.
  • Real estate investment trusts remained constrained by higher bond yields and worries about reduced space demand.
  • Unlisted assets were constrained by the valuation effect of high bond yields with property seeing losses from reduced space demand.
  • Australian home prices rebounded as a supply shortfall with booming immigration swamped the negative effect of higher mortgage rates.
  • Cash and bank term deposit returns improved substantially.
  • The $A fell with higher US interest rates versus Australian rates and China growth worries before a partial recovery from October.
  • Reflecting all this, balanced super funds had solid returns, continuing a zig-zag pattern of strong, weak, strong, etc, years since 2017.

Four big worries for 2024

The worry list remains long:

  • Inflation is still too high in most major countries – so central banks could still have another hawkish turn if it proves sticky above targets.
  • The risk of recession is high reflecting the lagged impact of rate hikes. It’s hard to see how the biggest rate hiking cycle won’t have a major impact and the risks are already evident in tighter lending standards in the US, falling lending in Europe and stalling consumer spending in Australia. And unlike a year ago many are no longer worried about a recession which is negative from a contrarian perspective.
  • Risks around the Chinese economy and property sector remain high.
  • Geopolitical risk is high: with half the world’s population seeing 2024 elections including the US, the EU, India, Russia & South Africa; the US Government could have a shutdown starting 19 January & could have another divisive Biden v Trump presidential election with a Trump victory running the risk of weakening US democracy & US alliances & another trade war; the result of Taiwan’s 13 January election could see an easing or an escalation of tensions with China depending who wins; the war in Ukraine is continuing; and there is a high risk that the Israel/Hamas war could spread,  eg to Iran, threatening oil supplies.

The recession risk suggests a high risk of a sharp pullback in shares.

Three reasons for optimism

However, there is reason for optimism.

First, inflation has eased sharply to around 3% in major industrial countries and around 5% in Australia and is likely to continue to fall as:

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