Economics

Basing an investment strategy on the goldilocks investment markets of the last 35 years gives rise to considerable risk, writes Michael Block, and now might be the time to get out of growth assets.

Although more Australian companies are paying dividends in 2023, many have reduced payouts, with the year-to-date total slightly behind 2022’s figures, according to CommSec research. The big miners are leading the cuts, while energy producers are lifting dividends to reflect record high gas prices.

“Gradually, and then suddenly”, the old Hemingway quote goes. The same could be said for corporate earnings, which Ruffer’s Jasmine Yeo believes are in danger of taking a sharp southerly turn.

Shifting market dynamics mean some of the investment themes that worked in recent years are set to give way to new opportunities. Man Group’s Andrew Swan and Prime Value’s Richard Ivers recently discussed the promising outlook for Asia and small-cap stocks, where it’s all about fundamentals.

The uncertainty now blanketing the global banking sector adds to the risk of recession, but it comes with a silver lining, AMP’s Shane Oliver told The Inside Network’s Growth Symposium: it’s a sign that central banks’ battle against surging inflation may be nearing its end.

The US Federal Reserve may have guaranteed deposits at the failed bank, but its collapse constitutes a major scare for venture capital outfits and private equity purveyors with outsized technology exposure.

Growth in superannuation drove Australia’s managed fund industry to near-record levels in the December 2022 quarter. While most asset classes delivered positive returns and Australian equities outperformed, investors are looking more to offshore assets for portfolio diversification.

Australia can still avoid a recession, RBA Governor Philip Lowe told Parliament in dual grilling sessions in Canberra – while he was keen to remind the country of the need for further belt-tightening and a drop in inflation expectations to keep the path to a soft landing open.

Lending specialist Daniel Zwirn spoke candidly about investor “credit myths”, and the misunderstandings that hold people back in the selection and movement of assets in portfolio construction.

While avoiding recession is possible, the continuation of restrictive macroeconomic policies for the near term is needed to fight inflation, according to the IMF’s annual economic report card for Australia – and tax reform and stronger housing policies would also help.

Highly anticipated new consumer price data showed the inflation rate in Australia hit its highest level since 1990 in the December quarter. But analysts are mixed on whether inflation will moderate later this year or become more entrenched.

Credit and equity markets both suffered a very bad 2022, as the collapse of negative correlation between stock and bond prices left no safe haven for investors. But 2023 could be a big year for bonds, with analysts warning investors waiting on the sidelines that they risk missing out.