September Market Update
The September quarter to date has seen a small recovery in certain pockets of equity and bond markets, particularly in Australia, however challenges remain as central banks continue to tackle inflation.
For now the US Fed is sticking to its hawkish tone on rate rises, as US labour market inflation measures remain stubborn. Fortunately however the RBA appears to be softening its stance somewhat in the face of east coast house price concerns, with domestic rate rises likely to be less aggressive going forward.
The RBA’s dovishness twinned with domestic inflation not rising as strongly as projected has significantly improved the outlook for Australian government bonds. Although we remain cautious on other areas of fixed income, such as corporate debt, in the face of rising company costs and refinancing costs.
In terms of share markets, we expect some ongoing volatility in the short term, as company profit projections feel the impact of rate rises. Inevitably rising mortgage payments and cost of living expenses are also likely to bite. However the Australian equity market is not looking expensive based on current valuations, and certainly cheaper than other global developed markets. Company reporting season in August showcased strength in Australian corporate earnings, even in areas which were expected to be weaker, such as those exposed to a struggling consumer. In fact 3 out of 5 companies reported numbers which exceeded analyst expectations. While rising costs were something of an issue, especially labour and energy costs, most companies have thus far managed to maintain strong margins, suggesting Australian companies have been able to successfully pass these rising costs onto consumers.
The chart below shows the 1 year forward price earnings (P/E) ratio, which is considered a key indicator of share market value, of the Australian share market vs the global share market. As you can see the Australian market in light blue looks better value and not overly expensive vs its long-term average.
In summary, while we expect some heightened market volatility in the short term, longer term we remain confident that central banks will ultimately bring inflation under control. Further, market valuations on the whole are now more accurately reflecting the new macroeconomic environment, which was not the case only a few months ago.
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